Week 3 Flashcards
How can banks be differentiated from other financial intermediaries?
If most of the liabilities on the SoFP are deposits, it’s a bank
Why are banks called ‘monetary financial institutions’?
Because deposits are effectively money
What transformations do banks perform?
- Size transformation
- Maturity transformation
- Risk transformation
How is the credit multiplier obtained?
1 / required reserve ratio, e.g. RRR = 10% -> credit multiplier = 1/0.1 = 10
How is the credit multiplier used?
original deposit x credit multiplier = new money supply
True or false: banks have high leverage, low capital
True
What are banks’ main profits?
Net interest income i.e. difference between lending & deposit interest
Why do banks hold capital?
To absorb losses & protect depositors
What are examples of modern/universal banking activities?
- Insurance
- Pensions
- Securities / investment banking
- Other financial & non-financial services
Why did banks branch out into universal banking?
- Low interest rates
- Tech = cheaper delivery
- Increased globalisation/competition
What are features of universal banking?
- Demand-led
- Focused on creating shareholder value
What are the advantages of universal banking?
- Economies of scale & scope
- Diverse revenue sources = more resilient to shocks
When was ring-fencing regulation introduced in the UK?
After the 2008 financial crisis
What does ring-fencing regulation require?
Keep loans & deposits isolated from other activities
What is the advantage of ring-fencing?
Protects repayment of deposits – other activities can fail without threatening core banking services
