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Flashcards in Depository institutions Deck (26)
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1
Q

Why are banks important

A

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

2
Q

What is a off balance sheet (OBS) agreement?

A

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

3
Q

key features of current deposits

A

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

4
Q

key features of fixed term deposits

A

– 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.

5
Q

key features of Negotiable Certificates of Deposit (CDs)

A

– 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

6
Q

key feature of non deposit source of funds

A

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

7
Q

key features of debt liabilties source of funds1

A

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
8
Q

key features of Loan capital &

shareholders’ equity source of funds

A

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)

9
Q

key features of banks commercial lending

A

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

10
Q

the 3 uses of funds by banks

A

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

11
Q

Features of lending to Govt

A

• 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

12
Q

features of personal finance lending

A

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

13
Q

feature of other bank assets use of funds

A

• Foreign currency assets

14
Q

What is securitisation?

A

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

15
Q

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

A
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)
16
Q

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

A
D = deposits - main source of funding
NDB = nondeposit borrowing
EC = equity capital = long-term base of financial support
17
Q

What are the 4 OBS transactions?

A
  1. Direct credit substitutes
  2. Trade & performance-related items
  3. Commitments
  4. Market-rate related transactions.
18
Q

Features of direct credit substitutes

A

• 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
markets.
• Bank is only required to make payment if the client
defaults on payment to third party.

19
Q

Features of trade and performance related items

A

• 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
obligation

20
Q

features of commitments

A

• 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
temporarily

21
Q

features of market related transactions

A
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
22
Q

sources of funds for depository institutions credit unions

A
  • from public who sign up as members

- Low cost financial services as operate under special controls

23
Q

Uses of funds for depository institutions credit unions

A
  • Most loans - for relatively small sums & for
    S/T although some of larger ones also lend on house
    mortgage.
24
Q

Sources of funds for Savings Institutions

A

ccept public savings in shares &

deposits (liabilities)

25
Q

uses of funds for Savings Institutions

A

are used mainly for housing loans (assets).

26
Q

Why is specialised regulation needed?

A
  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