Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Banking > Week 6 > Flashcards

Week 6 Flashcards

1
Q

What are a bank’s key financial statements?

A
  1. Balance sheet (stocks)
  2. Income / P/L statement (flows)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why are retail banks exposed to liquidity risk?

A

Because their liabilities are more liquid than their assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What characterises an investment bank’s balance sheet?

A

Securities make up most assets and liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the difference between revenues & costs?

A
  • Revenues generated by assets
  • Costs generated by liabilities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the main costs for a bank?

A
  • Interest paid on deposits & debts
  • Provision for loan losses & taxes
  • Dividends to shareholders
  • Staffing & operating costs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is ‘reclassifying’ an income statement?

A

Scaling / adjusting it for the size of the bank

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How do you reclassify an income statement?

A
  1. Subtract PLL to get net interest income after PLL
  2. Calculate net non-interest income
  3. Combine to get pre-tax net operating profit
  4. Add/subtract securities gains/losses to get profit before taxes
  5. Account for extraordinary items e.g. M&As
  6. After tax you get net profit
  7. After dividends you get retained prodit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is PLL?

A

Provision for loan losses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the categories of financial ratios?

A
  1. Profitability
  2. Asset quality
  3. Liquidity
  4. Solvency
  5. Efficiency
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What ratios measure profitability?

A
  1. ROE
  2. ROA
  3. NIM
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What ratios measure asset quality?

A

NPL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What ratios measure liquidity?

A

Liquidity ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What ratios measure solvency?

A

Capital ratio / EM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What ratios measure efficiency?

A

C/I

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is ROE?

A
  • Return on equity
  • Profitability measure for shareholders
  • ROE = net income/total equity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is ROA?

A
  • Return on assets
  • General profitability measure
  • ROA = net income/total assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is EM?

A
  • Equity multiplier/capital ratio
  • Solvency/leverage measure
  • EM = total assets/total equity
18
Q

What is NIM?

A
  • Net interest margin
  • Profitability ratio
  • NIM = net interest income/earning assets
19
Q

Should NIM ideally be high or low?

A

High

20
Q

What is C/I?

A
  • Cost to income ratio
  • Efficiency measure
  • C/I = non-interest expenses/total income
21
Q

What is the liquidity ratio?

A

core deposits/total assets

22
Q

What is NPL?

A
  • Non-performing loans
  • Not yet written off
  • But in doubt/problematic
23
Q

What is capital adequacy?

A
  • Total risk-based capital ratio
  • Measures soundness
24
Q

What is the difference between liquidity & solvency?

A
  • Liquidity = cash flow
  • Solvency = stock
25
Q

What is ALM?

A

Asset & liability management

26
Q

What is the purpose of ALM?

A

Maximise profits & shareholder value

27
Q

What is included in ALM?

A
  • Investment (asset) decisions
  • Financing (liability) decisions
  • Monitoring performance
28
Q

Why is ALM different for banks than other companies?

A

Loans & deposits are more complex than other assets & liabilities

29
Q

When is shareholder value created?

A

When ROC > cost of capital

30
Q

What is one measure of shareholder value?

A

EVA (economic value added)

31
Q

How is EVA calculated?

A

NOPAT - (CI x K)
- net op profit after tax
- capital invested
- cost of capital

32
Q

In ALM, what is included under asset management?

A
  • Maximise loan/security returns
  • Minimise risks
  • Adequate liquidity
33
Q

In ALM, what is included under liability management?

A
  • Maximise interbank market returns
  • Minimise cost of deposits
34
Q

What must be balanced in ALM?

A
  • Long-run (2-5yr) strategic objectives
  • Flexibility to respond to shocks
35
Q

Why is flexibility especially important for global banks?

A

Shocks could come from anywhere in the world

36
Q

What are the types of reserves?

A
  • Required reserves
  • Excess reserves
37
Q

If banks are illiquid, what steps do they take, in order?

A
  1. Borrow from other banks
  2. Sell securities
  3. Sell loans
  4. Borrow from central bank (if solvent)
38
Q

Why was Northern Rock nationalised?

A

It was still solvent despite liquidity crisis

39
Q

Why do shareholders prefer low capital?

A

high leverage = low capital = high ROE

40
Q

What are the advantages of holding capital?

A
  • ex ante - can loan when demand is high
  • es post - protects bank when it incurs losses

Banking (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions