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Questions and Answers
What is a bank?
What is a bank?
A financial institution engaged in lending funds obtained from deposits.
Which of the following is a major function of banks? (Select all that apply)
Which of the following is a major function of banks? (Select all that apply)
Banks reduce transaction costs by bringing savers and borrowers together.
Banks reduce transaction costs by bringing savers and borrowers together.
True
What does liquidity refer to?
What does liquidity refer to?
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The _____ function is concerned with the transfer of funds to another party and for the safekeeping of funds.
The _____ function is concerned with the transfer of funds to another party and for the safekeeping of funds.
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What is the role of advisory banks?
What is the role of advisory banks?
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Which type of banks can exercise powers of an investment house? (Select all that apply)
Which type of banks can exercise powers of an investment house? (Select all that apply)
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What is liquidity mismatch?
What is liquidity mismatch?
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Study Notes
Introduction to Banking
- Banking involves financial institutions that lend funds obtained from deposits.
- Banks operate as entities governed by statutory rights and corporate powers granted by the state.
- Major banking stakeholders include government, depositors, borrowers, investors, and creditors.
Concepts of Banking
- A bank functions to provide liquidity, allowing asset conversion with ease.
- Liquidity mismatch occurs when there is inconsistency in scheduled cash inflows and outflows.
- Banks create liquidity for depositors while offering long-term loans that may be illiquid.
Key Functions of Banks
- Deposit Function: Safeguards funds and facilitates their transfer to others.
- Loan Function: Banks lend money acquired from deposits after credit evaluations.
- Exchange Function: Facilitates local and international transactions.
- Trust Function: Acts as an agent managing funds or properties for clients.
Reducing Transaction Costs
- Banks minimize search costs that borrowers and savers incur in finding each other.
- Search costs encompass both explicit (contractual, credit investigation costs) and implicit costs.
Block Lending and Diversification
- Banks pool small deposits to provide substantial loans to borrowers, spreading risk.
- Diversification reduces overall risk by investing in various assets instead of a single venture.
Universal Banks
- Universal banks possess the capabilities of both commercial and investment banks.
- They can invest in diverse enterprises and require higher capitalization standards.
- Examples of Universal Banks in the Philippines include BDO, Metrobank, Landbank, BPI, and others.
Commercial Banks
- Commercial banks primarily engage in deposit-taking and lending.
- They serve as a crucial intermediary in the financial system, facilitating resource allocation.
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Description
This quiz covers the foundational concepts of banking, including its history, the role of banks in relation to money, and advisory services provided by banks. It aims to enhance your understanding of what banking institutions do and their importance in the financial system.
