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Flashcards in Depository institutions Deck (26)
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Why are banks important

Payments and settlements services.
• Key financial intermediaries (maturity, risk transformation
e.g. credit & liquidity transformation & denomination/size
intermediation = asset transformation & economies of
• Transmission of government monetary policy


What is a off balance sheet (OBS) agreement?

it is when banks enter into OBS
agreements that don’t appear on balance sheet until
transaction occurs- they are services that earn banks income


key features of current deposits

– Funds in cheque accounts
– Highly liquid funds
– May be interest or non-interest bearing (level of
interest rate compared to other types?)


key features of fixed term deposits

– Offer choice of terms of investment
– Loss of liquidity (fixed maturity) – break penalty
– Higher rates of return –more maturity risk
– Generally, a fixed interest rate.


key features of Negotiable Certificates of Deposit (CDs)

– S/T discount security issued by a bank in its own name directly into money market
– Repayment of face value of the CD at maturity by the
issuing bank
– Highly negotiable, wholesale security
– S/T (30 to 185 days)
– Useful as S/T funding as the yield adjusted quickly


key feature of non deposit source of funds

-Fees from bill acceptance e.g. company borrowing S/T funds via discount security


key features of debt liabilties source of funds1

From money markets-
- issue negotiable certificates of deposits (CDs)

From capital markets-
- issues of notes- generally unsecured,
- debentures (bonds with collateral backing)
- Transferable certificates of deposit (TCDs) 3 to 5 years
- Covered bonds


key features of Loan capital &
shareholders’ equity source of funds

banks have issued/sourced funds by:
- ordinary shares listed on exchange
- retained earnings from profits
- preference shares (equity) e.g. ASB Capital No. 2 –
features- perpetual, resettable interest rate
- bonds &
- subordinated notes (hybrid security) & debentures (debt)


key features of banks commercial lending

• Loans to business sector & other institutions
• Examples:
– Term loans – fixed or floating rates
– Overdraft facilities
– Commercial bills- bank bills held, rollover facilities
– Lease finance


the 3 uses of funds by banks

1) Notes, coins & balances held at central bank
2) Lending:
-to govt by buying govt securities
- to businesses- commercial loending
-to individuals - personal finance
3) Other bank assets e.g. property


Features of lending to Govt

• Buying (investing in) Treasury bills & Govt bonds
Note in NZ
• Number of reasons they hold govt. securities:
• They hold Govt securities for liquidity reasons
• As investment alternative
• Collateral as part of borrowing
• Income stream
• Manage interest rate risk


features of personal finance lending

Categorised into:
• Owner-occupied housing finance (Mortgages) with
fixed or floating interest rates & other housing finance
Fixed loans e.g.
• Overdrafts
• Credit cards


feature of other bank assets use of funds

• Foreign currency assets


What is securitisation?

it is when non-liquid assets are sold into special vehicles (trusts)
• Then trustees issues new collaterised securities
• Cash flows from original securities are used to repay the
new securities


in relation to a banks balance and this
C + S + L + MA = D + NDB + EC
what does C + S + L + MA stand for?

C = cash in vault & deposits held at other depository FIs
S = Security holdings- backup source of liquidity (about 10%-20%)
L = Loans made to supply income (about 60% of their assets)
MA = miscellaneous assets (plant & equipment)


n relation to a banks balance and this
C + S + L + MA = D + NDB + EC
what does D + NDB + EC stand for?

D = deposits - main source of funding
NDB = nondeposit borrowing
EC = equity capital = long-term base of financial support


What are the 4 OBS transactions?

1. Direct credit substitutes
2. Trade & performance-related items
3. Commitments
4. Market-rate related transactions.


Features of direct credit substitutes

• The bank acts as guarantor on behalf of client for fee.
• Client has financial obligation to a third party.
• So bank ensures client gets funds, say directly from
• Bank is only required to make payment if the client
defaults on payment to third party.


Features of trade and performance related items

• Banks act as guarantor.
– Documentary letters of credit where exporter will
require importer to arrange with its bank to provide
documentary letter of credit for trade transactions
• Client has non-financial obligation (agreement) to a third
party, e.g. for goods & services
– Bank pays compensation if client fails to fulfil the


features of commitments

• Bank undertakes to advance funds, or make a purchase
of assets at some time in future.
• Examples include:
– forward purchases such as buying foreign currency
– Repurchase agreements –banks sells securities


features of market related transactions

Examples include the derivatives:
– Futures (usually on interest rates) & forwards
– Options (usually on interest rates)
– foreign exchange contracts
– Swaps e.g. currency swaps
– forward rate agreements (FRAs)
• Used for hedging


sources of funds for depository institutions credit unions

-from public who sign up as members
-Low cost financial services as operate under special controls


Uses of funds for depository institutions credit unions

- Most loans - for relatively small sums & for
S/T although some of larger ones also lend on house


Sources of funds for Savings Institutions

ccept public savings in shares &
deposits (liabilities)


uses of funds for Savings Institutions

are used mainly for housing loans (assets).


Why is specialised regulation needed?

1. Markets work efficiently & competitively
2. Consumers are protected
3. Adverse consequences of breaching financial promises
4. Mechanisms exist for low-cost means to resolve disputes