CISI > 3- Banking > Flashcards

3- Banking Flashcards

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1
Q

What 2 things do you mainly need to know about banking?

A

Know the difference between retail and commercial banking and the types of customer - individuals/corporates

Know the nature and types of borrowing available to retail customers : from banks - loans, mortgage loans, overdrafts

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2
Q

What does the financial services industry link?

A

financial services industry links those with surplus money to those with a need to borrow money

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3
Q

What are retail banks?

A

RETAIL BANKS are banks that specialise in taking deposits and providing loans to individuals (the public)

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4
Q

What are corporate banks?

A

CORPORATE BANKS are banks that specialise in taking deposits and providing loans to businesses

in parts of the world outside the US, these are often referred to as commercial banks (focused on businesses)

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5
Q

What are corporate banks called in the UK?

A

corporate banks are called COMMERCIAL banks in the UK

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6
Q

What is the US definition of commercial banks?

A

all banks that take deposits and grant loans

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7
Q

Explain the purpose of retail banks in bullet points?

A

-individuals are the retail customers
-banks that provide these customers with services are known as retail banks
-the purpose of the bank is to attract deposits from savers and lend to borrowers

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8
Q

Explain the purpose of commercial banks in bullet points?

A

-this term is mainly used in the US
-in the US it encompasses all banks that engage in attracting deposits and giving out loans
-in other countries ‘commercial’ bank may refer solely to banks who provide such services to businesses only (not individuals)
-this is also known as corporate banking, since the bank is mainly dealing with corporate entities

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9
Q

In the UK, are many retail banks also corporate banks?

A

Yes

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10
Q

Give some reasons for why people borrow money?

A

To buy a house

Fund a wedding

Pay bills

For a holiday

Emergency

To study / for courses

To pay off other loans

To buy a personal item e.g. phone

To start a business

For purchasing a car

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11
Q

Explain the concept of a bank loan?

A

a form of debt where a borrower receives a certain amount from a lender, in this case a bank

the borrower agrees to pay a contracted rate of interest to the lender and also agrees a date on which the loan will be repaid

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12
Q

Give 3 typical features of a normal loan?

A

-for a set period that is generally less than five years
-at a set rate of interest
-with a defined repayment schedule

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13
Q

What is an unsecured loan?

A

UNSECURED LOAN is a loan provided to a borrower where the lender takes no security

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14
Q

Explain what a mortgage loan is?

A

a MORTGAGE LOAN is a long-term loan used to finance the purchase of real estate (e.g. a house) - under the Mortgage Agreement, the borrower agrees to make a series of payments back to the lender

the money lent by the bank (or building society) is secured against the value of the property : if the payments are not made by the borrower, the lender can take back the property

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15
Q

Give some typical features of mortgages?

A

-for a set period (usually 25-35 years)
-at a fixed or variable (it increases or decreases to stay in line with the general interest rates) rate of interest
-with a defined repayment schedule (e.g. monthly)
-secured on the property the loan is used to buy
-cheapest form of borrowing

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16
Q

What is a secured loan situation?

A

a SECURED LOAN is the situation where a lender takes something of value (asset) as security for a loan

if the borrower fails to repay the debt, the lender is able to keep and sell the asset

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17
Q

What is overdraft?

A

OVERDRAFT is a form of borrowing from a bank where the lending bank can demand repayment at any time

the account holder can withdraw money from the account when they have a zero balance

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18
Q

Give some features of bank overdrafts in general?

A

-FLEXIBLE - able to be drawn, repaid, drawn again up to the overdraft limit
-at a variable rate of interest
-an arrangement fee may also be payable
-unsecured and repayable on demand

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19
Q

What do you have to be aware of about overdrafts?

A

BEWARE that unauthorised overdrafts can be VERY expensive

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20
Q

Explain what a payday loan is?

A

It is a very short term loan used- when an individual needs to pay for something urgently

It needs to be repaid on the borrower’s next payday -usually by the end of the month

Very quick decision on whether an individual can have the money

Such loans are often VERY EXPENSIVE

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21
Q

What is the definition of a pay day loan?

A

PAY DAY LOAN - marketed as a loan that enables a borrower to get hold of cash before the next time they are paid by their employer

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22
Q

What are the 3 regulations that a payday lender must abide by?

A

-conduct comprehensive affordability checks on all borrowers
-limit the number of loan roll-overs to two
-display clear risk warnings on all adverts and promotions

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23
Q

What did the Financial Conduct Authority (FCA) do in 2014?

A

in 2014 the Financial Conduct Authority (FCA) took over regulation of the consumer credit market

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24
Q

What are the 3 main changes the FCA implemented to the price structure of short-term loans/credits to protect borrowers?

A

-reduce the maximum daily interest rates to 0.8% per day
-cap default fees at 15GBP to protect customers who struggle to pay back the loan
-cap the maximum total cost of a payday loan at 100% so customers will never have to pay interest that exceeds the loan amount

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25
Give some typical features of credit cards?
-flexible - able to be used up to the credit limit -at a variable rate of interest, which tends to be expensive -repayments of at least a minimum amount are required monthly
26
Where are credit cards available?
credit cards are available from banks as well as specialist providers like Visa and MasterCard and even through supermarkets, football clubs and charities
27
What is the 5 step process of getting a credit card for an individual?
1) an individual applies for a credit card, and if successful, is granted a card with a certain borrowing limit (this is known as the credit limit) 2) the individual can make purchases with the card and with each transaction the borrowed amount increases 3) the borrowed amount that is not paid off, incurs a high interest charge, e.g. 20% per annum 4) at least part of the borrowed money needs to be repaid monthly 5) it is best to pay off the WHOLE AMOUNT borrowed each month
28
What is a pawnbroker?
a PAWNBROKER is a business that provides loans to individuals the pawnbroker takes and item of security (such as jewellery) in exchange for the loan the loan needs to be repaid for the borrower to reclaim the item
29
Give 5 features of typical pawnbroker loans?
-the item pawned must hold monetary value -the item pawned might hold sentimental value e.g. a wedding ring -it is a secured loan, as the pawnbroker can keep the item if the loan is not returned on time or in full -the decision is usually made immediately by the pawnbroker on whether the loan will be issued or not -borrowers can avoid a lengthy approval process compared to other methods such as overdraft or credit card
30
What type of loan is a pawnbroker loan?
it is a SECURED loan
31
Give 2 reasons for why a loan from a pawnbroker is more expensive than a loan or overdraft from the bank, or borrowing on a credit card?
1) the pawnbroker knows little about the borrower meaning they may never return the money so this is a BIG RISK for the pawnbroker 2) the borrower is obviously very desperate and needs the money immediately, and cannot find it elsewhere, therefore they are forced to pay a higher rate of interest
32
Why is a loan from a pawnbroker more expensive?
this is due to the RISK taken on by the pawnbroker, combined with the DESPERATION of the borrower
33
Explain a secured loan in terms of the borrower and lender?
An asset is ‘secured’ or tied to the loan If the borrower cannot repay the loan, the asset is taken by the lender instead This provides MORE CERTAINTY to the lender and therefore LESS RISK is take - borrower pays LOWER INTEREST RATES
34
Explain an unsecured loan in terms of the borrower and lender?
The loan does not have an asset ‘tied’ to it If the borrower cannot repay the loan, it makes it much more difficult for the lender to get their money back This means LESS CERTAINTY for the lender and therefore MORE RISK to lend the money - borrower will pay HIGHER INTEREST RATES
35
Give 3 forms of borrowing?
Credit cards Pawnbrokers Payday loans
36
What are all 6 methods of borrowing that you should know?
Bank loan Mortgage Overdraft Credit cards Pawnbroker Payday loan
37
What two phrases can interest be defined as?
‘the COST of borrowing’ ‘the REWARD for saving’
38
What 2 elements when repaying a loan is the total amount paid back by the borrower split into?
CAPITAL (amount of money borrowed) + INTEREST (the cost to borrow the money calculated on the capital amount)
39
What is an interest gernally expressed as?
a % rate over a period e.g. 5% per annum
40
What does EAR stand for?
Effective Annual Rate
41
What is a quoted or advertised rate?
This is normally the interest rate lenders advertise to customers By law, lenders have to show this rate to customers It is used so that customers can easily compare financial products It shows the cost of borrowing if interest is charged on an annual basis
42
What is an EAR (effective annual rate)?
Takes the quoted/advertised rate and adjusts it to take into account the frequency of interest charges Often, interest is not charged once a year but on a quarterly or monthly basis The EAR is higher than the quoted rate
43
Is the EAR higher than the quoted rate?
Yes
44
What are the 5 steps for calculating EAR (effective annual rate)?
1) take the quoted rate and divide it by the frequency with which interest is charged 2) turn the interest rate into a decimal 3) add 1 to the decimal 4) multiply this number to the power of the number of times interest is charged 5) minus the 1 and turn the number back into a percentage %
45
Is it generally cheaper to borrow on a secured basis than on an unsecured basis?
Yes *if there is less risk, the lender will accept less reward*
46
What connects companies and corporate finance?
CAPITAL RAISING
47
What connects corporate finance and stock markets?
MERGERS & ACQUISITIONS
48
What connects stock markets and corporate finance?
LISTING & BOND ISSUES
49
What connects corporate finance and companies?
ADVISORS
50
How do companies support corporate finance through capital raising?
They support with large scale capital raising for corporates starting from around $5million and upwards to around 100B GBP Capital could be raised in the form of DEBT or EQUITY
51
How do investment banks help companies raise capital and execute major transactions like mergers and acquisitions?
The investment bank will provide advice to a business looking to raise long-term finance (corporate finance) The investment bank will EXECUTE THE DEAL, if the business decides to act upon the advice given - they will organise all the paper work and market the deal to potential investors
52
How do investment banks provide strategic support to business/companies seeking growth?
Investment banks may provide strategic advice to businesses who are seeking growth Growth can take place in two forms including mergers with other businesses, or acquisitions of other businesses This is known as M&A (Mergers & Acquisitions)
53
What does M&A stand for?
Mergers & Acquisitions
54
What is proprietary trading?
PROPRIETARY TRADING is when a financial institution trades on its own account rather than on behalf of a customer *the aim is to make money for the institution (SPECULATION)*
55
What is the aim of proprietary trading?
the aim is to make money for the institution (SPECULATION)
56
Can proprietary trading be high risk?
yes it can be HIGH RISK, with institutions trading shares, bonds, derivatives and commodities
57
What 6 main things do retail banks do?
Provides credit cards for customers Provides personal loans for customers Currency exchange for people travelling Mortgage lending for people to buy homes Provides savings and current accounts for individuals Arranges overdraft facilities for customer accounts
58
Give 2 examples of retail banks?
HSBC NatWest
59
What 5 main things do investments banks do?
Advise businesses wanting to borrow money in bond markets (debt) Advise businesses wanting to issue shares (equity) Advise businesses on strategy and growth (mergers and acquisitions) Buy and sell financial assets to make a profit
60
Give 4 examples of investment banks?
JP MorganChase Goldman Sachs UBS Investec
61
What 10 main things do central banks do?
Provides a depositors’ protection scheme Issues notes and coins Acts as a banker to the banking system i.e. commercial banks Acts as a banker to the government Regulates the domestic banking system Holds the nation’s gold and money supply Influences the value of a nation’s currency Sets the official short-term rate of interest (base or bank rate) Manages the national debt Controls the money supply
62
What is the monetary policy?
the MONETARY POLICY is the adjusting of interest rates (to control inflation) and the money supply to manage fluctuations in economic activity MONETARY POLICY is often the responsibility of a country’s Central Bank
63
What is the fiscal policy?
the FISCAL POLICY is when governments attempt to manage fluctuations in economic activity through taxation and expenditure these measures are known as STABILISATION POLICIES categorised as FISCAL POLICY
64
Give some information on The Bank of England (BoE)?
UK Central Bank - Threadneedle Street, London Founded in 1694 Since 1694 - bankers to the government Since the late 18th century - banker to the banking system Manages the UK foreign exchange and gold reserves
65
What 2 things does The Bank of England NOT do?
It does NOT: -manage the National Debt (this is the Debt Management Office in the UK) -provide a depositors protection scheme (this is the Financial Service Compensation Scheme in the UK)
66
What are the 3 strategic priorities of Monetary Stability?
1) keep inflation on track to meet the government’s 2% target 2) ensure the Bank has policies, tools are infrastructure in place to implement monetary policy and issue banknotes 3) sustain public support for the monetary policy framework and benefits of low inflation
67
What are the 2 strategic priorities of Financial Stability?
1) deliver macroprudential policy, operating through the Financial Policy Committee 2) complete the transition of microprudential supervision and infrastructure oversight
68
What does MPC stand for?
Monetary Policy Committee
69
Explain the Monetary Policy Committee (MPC)?
The MPC’s main focus is to meet the inflation target set by the Chancellor each year The MPC holds monthly meetings Gauges all factors that influences inflation: -exchange rates -rate of economic growth -consumer borrowing and spending -wage inflation The MPC makes a decision about whether to raise or lower the ‘base rate’ of interest based on the factors above
70
What does FPC stand for?
Financial Policy Committee
71
Explain the Financial Policy Committee (FPC)?
Established in June 2011 as a response to the 2007/8 financial crisis Monitors the stability and resilience of the UK financial system and its powers to tackle risks It gives directions and recommendations tot he Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)
72
Is there a reluctance for interest rates to fall below 0%?
Yes
73
What does QE stand for?
Quantitative Easing
74
What can be done as an alternative instrument to lowering interest rates?
Quantitative Easing
75
What are the 4 outcomes of quantitative easing (QE)?
Banks hold more reserves which might mean they lend more to consumers and businesses Buying assets means higher demand and therefore higher asset prices and lower yields brings down the cost of borrowing for businesses, and households, encouraging further spending Private sector institutions and government may buy other assets so prices are boosted and liquidity is improved - people feel better off so they spend more Private sector institutions and government have more money to spend as a result
76
What are the 2 methods of which quantitative easing (QE) can be done?
1) Bank of England injects money into the economy 2) Bank of England uses this money to buy assets such as government and corporate bonds - this increases the amount of money the government and private sector institutions have
77
What can you say proprietary trading is?
‘trade for own gain’ - Investment Banks
78
Is capital long-term finance?
Yes
79
What are the 3 main activities of Central Banks?
Banker to the Banks -banks hold accounts within the central bank Banker for the Government -the government gathers tax receipts, spends on defence and welfare -many governments also hold money in other currencies - foreign exchange reserves Regulatory Role -many central banks regulate other banks -set interest rates in accordance with government policy
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