Topic 2 - Financial Institutions – Commercial Banks Flashcards Preview

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Flashcards in Topic 2 - Financial Institutions – Commercial Banks Deck (68)
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Main Activities of Commercial Banks

Provide full range of financial services:
Financial advise on wealth management
Provides superannuation products
Creates employment


Main Activities of Commercial Banks (Provide full range of financial services)

Identify the main sources and uses of funds for commercial banks
Takes deposits and then invests these deposits by making loans
Include both balance-sheet and off-balance-sheet transactions


Banking Activities prior to deregulation

asset management dominated banking activities by tailoring the loan portfolio to the deposit base.


Asset Management

A bank restricts growth in its lending to the level of funds available from its depositor base


When did deregulation of commercial banks occur

mid 1980s


Banking Activities after deregulation

No longer dependent on deposit-base for lending activities - they actively engage in liability management by accessing capital markets (national and international).


Liability Management

A bank actively manages its sources of funds (liabilities) in order to meet future loan demand (assets)


The main sources of commercial bank funds include

1. Current account deposits
2. Call or demand deposits
3. Term deposits
4. Negotiable certificates of deposits
5. Bills acceptance liabilities
6. Debt liabilities
7. Foreign currency liabilities
8. Loan capital and shareholders' equity


Current account deposits:

Funds held in a cheque account;
- Highly liquid;
- Given the high liquidity, the level of interest paid is quite low.


Call or demand deposits:

Funds held in a savings account that can be withdrawn on demand


Term deposits

Funds lodged in an account for a predetermined period at a specified interest rate


Negotiable certificates of deposit (CDs):

- Paper issued by a bank in its own name Issued at a discount to face value;
- Specifies repayment of the face value of the CD at maturity;
- Highly negotiable security;
- Short term (30 to 180 days).


Bill acceptance liabilities

Bill of exchange and acceptance


Bill of exchange

A security issued into the money market at a discount to the face value. The face value is repaid to the holder at maturity



- Bank accepts primary liability to repay face value of bill to holder.
- Issuer of bill agrees to pay bank face value of bill, plus a fee at maturity date.
- Acceptance by bank guarantees flow of funds to its customers without using its own funds.


Debt liabilities

Medium- to longer-term debt instruments issued by a bank
eg - Debenture and Unsecured Note



A bond supported by a form of security, being a charge over the assets of the issuer (e.g. collateralised floating charge).


Unsecured note

A bond issued with no supporting security


Foreign currency liability

Debt instruments issued into the international capital markets that are denominated in a foreign currency.


Benefits of Foreign Currency liability

- Allows diversification of funding sources into international markets;
- Facilitates matching of foreign exchange denominated assets;
- Meets demand of corporate customers for foreign exchange products.


Loan capital and shareholders’ equity

Sources of funds that have characteristics of both debt and equity (e.g. subordinated debentures and subordinated notes);


Define Subordinated

means the holder of the security has a claim on interest payments or the assets of the issuer, after all other creditors have been paid (excluding ordinary shareholders).


Uses of Funds for Commercial banks

Personal and housing finance
Commercial lending
Lending to government
Other bank assets


Types Personal and housing finance

Home loans;
Investment property loans;
Fixed-term loan;
Credit card.


Types of Commercial Lending

Fixed Term Loans
Overdraft Facilities
Bills of Exchange


Fixed Term Loan

a loan with negotiated terms and conditions with respect to:
- Period of the loan
- Interest rates (Fixed or variable rates)
- Timing of interest payment
- Repayment of principal



A facility allowing a business to take its operating account into debit up to an agreed limit.
- The bank charges fees and interest for this flexible arrangement
- The bank also expects that the firm will bring the overdraft back into credit as revenues are received by the business.


Bills of exchange types

Commercial bills
Bank bills held
Rollover facility


Commercial bills

Banks - accepts, discounts and generally sold into the money market.


Bank bills held

Bills of exchange accepted and discounted by a bank and held as assets on its balance sheet.