Banking and Financial Institutions Lecture
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Questions and Answers

What is the primary characteristic of savings deposits?

  • They require a fixed maturity length.
  • They have higher penalties for early withdrawal.
  • Funds can be added or withdrawn at any time. (correct)
  • They cannot be withdrawn until maturity.

    • What do small denomination time deposits primarily earn compared to savings deposits?

  • Lower interest rates
  • Similar liquidity
  • Higher interest rates (correct)
  • No interest rates

    • What is primarily represented on a bank's balance sheet?

  • A record of all bank transactions
  • A summary of the bank's profitability
  • A list of the bank’s assets and liabilities (correct)
  • Only the bank's income-generating assets

    • Which of the following is NOT a method of borrowing for banks?

    <p>Loans from stockholders</p> Signup and view all the answers

    What is the primary focus of liquidity management in a bank?

    <p>To ensure the bank has sufficient cash to meet deposit outflows</p> Signup and view all the answers

    Which of the following liabilities is NOT a source of funds for a bank?

    <p>Income-earning assets</p> Signup and view all the answers

    How is bank capital defined?

    <p>Total assets minus total liabilities</p> Signup and view all the answers

    Which principle involves minimizing the risk of asset defaults for a bank?

    <p>Asset management</p> Signup and view all the answers

    Which type of deposit allows owners to write checks to third parties?

    <p>Checkable deposits</p> Signup and view all the answers

    Which statement about large denomination time deposits is true?

    <p>They can be sold in the secondary market before maturity.</p> Signup and view all the answers

    Which of the following is considered a non-transaction deposit?

    <p>Time deposits</p> Signup and view all the answers

    What does capital adequacy management in a bank involve?

    <p>Determining and obtaining the necessary capital for operations</p> Signup and view all the answers

    What do reserves represent in a bank's assets?

    <p>Funds kept in vaults or at the central bank</p> Signup and view all the answers

    What is considered a liability for a bank?

    <p>Deposits from customers</p> Signup and view all the answers

    What is the characteristic feature of a bank's balance sheet?

    <p>Total assets equal total liabilities plus capital</p> Signup and view all the answers

    Which of the following accurately describes overnight loans?

    <p>Short-term loans made by one bank to another bank.</p> Signup and view all the answers

    What is a major advantage of checkable deposits for banks?

    <p>They do not incur interest expenses for banks.</p> Signup and view all the answers

    Which risk relates to fluctuations in interest rates affecting bank earnings?

    <p>Interest-rate risk</p> Signup and view all the answers

    What is the significance of retained earnings for a bank's capital?

    <p>Retained earnings increase a bank's net worth.</p> Signup and view all the answers

    What distinguishes non-transaction deposits from checkable deposits?

    <p>Non-transaction deposits do not allow check writing.</p> Signup and view all the answers

    Which of the following is NOT a primary concern of bank management?

    <p>Market share growth</p> Signup and view all the answers

    What is a common benefit of diversifying asset holdings?

    <p>Reducing credit risk</p> Signup and view all the answers

    What are the primary types of non-transaction deposits a bank may offer?

    <p>Savings accounts and time deposits</p> Signup and view all the answers

    Which of the following describes an asset in the context of bank management?

    <p>Real estate loans</p> Signup and view all the answers

    Study Notes

    Banking and Financial Institutions

    • The lecture is about banking and managing financial institutions
    • The lecturer is Dr. Rania Anis, a lecturer of economics at the Faculty of Economic Studies and Political Science, Alexandria University.

    Lecture Outline

    • Summarize the features of a bank balance sheet
    • Identify ways in which banks can manage assets and liabilities to maximize profit

    What do we mean by "The Bank Balance Sheet"?

    • A list of the bank's assets and liabilities
    • Total assets equal total liabilities plus capital
    • The balance sheet shows sources of bank funds (liabilities) and how they are used (assets)

    The Bank Balance Sheet (Liabilities)

    • A bank acquires funds by issuing (selling) liabilities (e.g., deposits)

    • The funds are used to purchase income-earning assets

    • Checkable deposits (transaction deposits, or demand deposits):

      • Bank accounts allowing account holders to write checks to third parties.
      • Include all deposits that can be drawn on with a check (e.g. checking account)
      • The lowest-cost source of funds because banks do not pay interest
      • A medium of exchange, considered part of M1.

    • Non-transaction deposits (e.g., savings accounts & time deposits):

      • Owners cannot write checks; non-transaction deposits are the primary source of bank funds
      • Typically pay a higher interest rate than checkable deposits
      • Savings accounts: most common type, funds can be withdrawn or added at any time; interest and transactions recorded in a passbook
      • Time deposits (CDs): fixed maturity (several months to over five years)
        • Earliest withdrawals before maturity subject to penalties
        • Small denomination: less liquid, under $100,000, earn higher interest but high-cost funding source
          • Larger denomination: over $100,000, liquid, bought by banks & corporations and sold in secondary market before maturity

    • Borrowing:

      • Represents 30% of bank liabilities
      • Banks borrow from: central banks (discounted loans), other banks, corporations (repurchase agreements).
      • Overnight loans in the federal funds market ensure banks satisfy reserve requirements at the central bank.

    • Bank capital:

      • The bank’s net worth (total assets minus total liabilities)
      • Increased by selling new equity or retained earnings
      • Acts as a cushion against asset value declines, preventing insolvency (liabilities exceeding assets).

    The Bank Balance Sheet (Assets)

    • Bank assets are the uses of funds. Interest earned on assets enables banks to profit

    • Reserves:

      • Funds held in bank vaults or at the central bank
      • Deposits + currency held by banks
      • Low-interest rate, held for liquidity reasons
      • Two types:
        • Required reserves: held due to regulations (e.g., 10% of checkable deposits)
        • Excess reserves: most liquid, used to meet obligations.

    • Cash items in process of collection:

      • Checks written on an account at another bank, not yet collected
      • Considered an asset as a claim on another bank

    • Deposits at other banks:

      • Small banks hold deposits at larger banks for various services (e.g. checking, FX, securities).
      • Part of the correspondent banking system
      • Collectively, reserves, cash items in process of collection, and deposits are called cash items

    • Securities:

      • Important income-earning assets for banks
      • Commercial banks cannot hold stock; securities are debt
      • Classification:
        • U.S. government and agency securities (highly liquid, secondary reserves)
        • State and local government securities (less marketable, higher risk)
        • Other securities

    • Loans:

      • Commercial and industrial loans
      • Real estate loans
      • Account for over 50% of bank revenue-assets(for bank), liability (for borrower)
      • Less liquid, cannot be turned into cash until maturity

    • Other assets:

      • Physical capital (bank buildings, computers, other equipment)

    General Principles of Bank Management

    • A bank manages its assets and liabilities to maximize profit. There are four primary concerns:
    1. Liquidity Management: maintaining sufficient cash for depositors' withdrawals
    2. Asset Management: acquiring assets with low default risk and diversifying holdings.
    3. Liability Management: acquiring funds at the lowest possible cost.
    4. Capital Adequacy Management: maintaining and acquiring sufficient capital to cover potential losses.
    • Additional concerns of bank management:
      • Credit risk: risk that borrowers might default
      • Interest-rate risk: risk that changes in interest rates affect bank earnings.

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    Banking and Financial Institutions Management PDF

    Description

    Explore key concepts in banking and financial institutions with a focus on bank balance sheets. Learn about assets, liabilities, and how banks manage these to maximize profit. This lecture, delivered by Dr. Rania Anis, provides practical insights into the financial workings of banks.

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