Banking and Financial Institutions
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Questions and Answers

Which of the following best describes the primary focus of Savings and Loan Associations (S&Ls)?

  • Investing in high-risk assets to maximize returns for stockholders.
  • Providing commercial banking services to large corporations.
  • Accumulating savings from depositors and granting mortgage loans. (correct)
  • Managing the cash reserves of universal banks.

What is the main difference between mortgage banks and universal banks?

  • Mortgage banks offer a wider range of commercial banking functions.
  • Universal banks specialize exclusively in granting mortgage loans.
  • Mortgage banks do not accept deposits, while universal banks do. (correct)
  • Universal banks primarily serve small businesses and individuals with low incomes.

Which of the following is the MOST ACCURATE definition of 'bank reserve'?

  • The profit generated by a bank's loan portfolio.
  • A bank's total investment in the stock market.
  • A fund used for day-to-day operational expenses.
  • The amount of money a bank is required to hold and cannot use for lending or spending. (correct)

What does 'Capital Adequacy' refer to in the context of banking?

<p>The bank's cash reserve or bank reserve. (D)</p> Signup and view all the answers

In the acronym 'M-A-C-R', what aspect of a bank does the 'M' represent?

<p>Management (B)</p> Signup and view all the answers

If a bank is considered to have poor 'Asset Quality', what does this MOST likely indicate?

<p>The bank's loans and investments are of questionable value or at high risk of default. (B)</p> Signup and view all the answers

A bank with strong Risk Management capabilities is better prepared to do which of the following?

<p>Identify, assess, and mitigate potential threats to its financial health. (B)</p> Signup and view all the answers

Which of the following statements is TRUE regarding Savings and Mortgage Banks?

<p>Focuses on accumulating savings from depositors and granting mortgage loans. (D)</p> Signup and view all the answers

From the perspective of a depository institution, which of the following statements best describes the nature of loans and deposits?

<p>Loans are assets because they generate future cash inflows, while deposits are liabilities representing obligations to depositors. (D)</p> Signup and view all the answers

How does indirect finance, as illustrated by the relationship between a bank's depositors and borrowers, primarily benefit investors (surplus units)?

<p>By pooling funds from many depositors to finance larger projects, diversifying risk. (B)</p> Signup and view all the answers

For a non-financial institution, why are loans considered liabilities?

<p>Loans represent borrowed money that must be repaid. (B)</p> Signup and view all the answers

Which of the following best describes the fundamental difference between direct and indirect finance?

<p>Direct finance involves transactions directly between borrowers and lenders, while indirect finance involves financial intermediaries. (D)</p> Signup and view all the answers

If a depository institution anticipates a recession leading to increased loan defaults, how would this likely affect its balance sheet?

<p>Loans, considered assets, would decrease in value due to higher risk. (A)</p> Signup and view all the answers

In the context of depository institutions, what is the significance of loans being sold in secondary markets?

<p>It allows institutions to immediately recover funds and reduce risk. (A)</p> Signup and view all the answers

How do interest rates primarily affect the balance sheets of both depository and non-financial insitutions?

<p>Interest rates affect the value and profitability of loans (assets) and the cost of deposits or borrowed funds (liabilities). (B)</p> Signup and view all the answers

Consider a scenario where a bank's deposits sharply increase. What immediate adjustments might the bank make to its balance sheet in response?

<p>Increase lending activity to generate more interest income, increasing assets. (D)</p> Signup and view all the answers

Which type of insurance primarily protects against financial losses resulting from damage to one's home, business, or car?

<p>Property/Casualty Insurance (D)</p> Signup and view all the answers

A bank's decision to invest in private securities directly affects which component of the Savings and Measure for Banks (SOCAME)?

<p>Asset Quality, as it reflects the risk profile of the bank's holdings. (A)</p> Signup and view all the answers

A homeowner's policy includes liability coverage. What does this type of insurance cover?

<p>Legal liabilities resulting from injury or damage to the property of others (C)</p> Signup and view all the answers

How does a bank's Operating Result (O) within the SOCAME framework primarily contribute to its ability to grant loans?

<p>It assesses the bank's efficiency and profitability, influencing available capital. (B)</p> Signup and view all the answers

What is the primary function of pension fund companies?

<p>To provide income to policyholders during their retirement years (B)</p> Signup and view all the answers

Which of the following scenarios would MOST directly impact a bank's Liquidity (L) as assessed by the SOCAME framework?

<p>A large portion of the bank's assets being tied up in illiquid infrastructure projects. (C)</p> Signup and view all the answers

An individual is considering purchasing life insurance. What is a primary purpose of life insurance?

<p>To protect against financial losses resulting from death (B)</p> Signup and view all the answers

Which event is least likely to be covered by property/casualty insurance?

<p>Death of the policyholder (C)</p> Signup and view all the answers

If a Development Bank is focused on providing reasonable rate loans for medium and long-term purposes to agriculture and industry, which aspect of the SOCAME framework is MOST directly addressed?

<p>Supporting the bank's role in catering to specific economic sector needs. (C)</p> Signup and view all the answers

Which type of insurance specifically covers damage caused by hurricanes and tornadoes?

<p>Windstorm Insurance (A)</p> Signup and view all the answers

What distinguishes auto insurance from homeowners insurance?

<p>Auto insurance covers vehicle damage, theft, and liability, while homeowners insurance covers home damage and liability risks. (C)</p> Signup and view all the answers

What is the primary function of financial intermediaries in the securities market?

<p>Pooling investors' money to finance large portfolios. (A)</p> Signup and view all the answers

A bank's decision to lower interest rates on loans for small businesses, in line with its development objectives will have a direct impact on?

<p>Operating Result, as it affects the ratio of income and expenses. (C)</p> Signup and view all the answers

An individual seeks liability coverage exceeding the limits of their standard insurance policies. Which type of insurance would best address this need?

<p>Umbrella Liability Policy (B)</p> Signup and view all the answers

A business owner seeks insurance to protect against property losses and potential legal liabilities. Which type of insurance would be most suitable?

<p>Property/Casualty Insurance (B)</p> Signup and view all the answers

What is the relationship between a bank's 'Earnings' (E) within the SOCAME framework, and its ability to invest in developing projects and infrastructure?

<p>Higher earnings directly enhance the bank's capacity to invest in development projects. (A)</p> Signup and view all the answers

Which of the following strategies would MOST directly improve a bank's 'Asset Quality' (A) rating under the SOCAME framework?

<p>Implementing more rigorous risk assessment processes for loan applications. (B)</p> Signup and view all the answers

A person wants to ensure their family receives financial support upon their death. Which type of insurance would best meet this need?

<p>Life Insurance (A)</p> Signup and view all the answers

Profit-oriented institutions borrow and lend funds to households and businesses. What are these institutions categorized as?

<p>Banks/Houses/Companies (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of investment companies?

<p>Covering losses due to flooding (A)</p> Signup and view all the answers

A bank's 'Management' (M) practices, as measured by SOCAME, MOST directly influence the bank's:

<p>Effectiveness in identifying, managing, and mitigating risks across all operations. (D)</p> Signup and view all the answers

How do securities dealers and brokers primarily function within the financial system?

<p>By acting as intermediaries, connecting investors with borrowers. (A)</p> Signup and view all the answers

What is the core function of pawnshops in the financial services sector?

<p>Offering loans to individuals and small businesses using assets as collateral. (B)</p> Signup and view all the answers

In what scenario would credit insurance be most beneficial to both borrowers and lenders?

<p>When a borrower faces potential risks of death, disability, or job loss. (D)</p> Signup and view all the answers

What is the primary role of trust companies?

<p>Managing and executing trusts and estates for individuals and organizations. (C)</p> Signup and view all the answers

A doctor is concerned about potential lawsuits arising from alleged negligence in her professional practice. Which type of insurance would best protect her?

<p>Professional liability insurance. (B)</p> Signup and view all the answers

What constitutes the fundamental distinction between consumer finance companies and commercial finance companies?

<p>Consumer finance companies offer financial services to individuals, whereas commercial finance companies cater to businesses. (D)</p> Signup and view all the answers

If an individual needs financial assistance, what type of company would let them pawn their assets as collateral in exchange for a smaller amount of money than the asset is worth?

<p>Pawnshop. (A)</p> Signup and view all the answers

What would be an example of how sales finance companies can help other companies?

<p>Unknown, since there is no given information about how sales finance companies can help other companies. (D)</p> Signup and view all the answers

Flashcards

Depository Institutions

Financial institutions accepting deposits from savers and providing loans.

Indirect Finance

A financial relationship where banks lend to borrowers using deposits from savers.

Loans as Assets

Loans are assets for banks because they generate future cash inflows.

Deposits as Liabilities

Deposits are liabilities for banks since they must be returned to depositors.

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Principal + Interest

Total amount payable on a loan including borrowed money and interest charges.

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Income as an Asset

Income expected from loans is considered an asset for the lender because it indicates future cash.

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Direct Finance

When borrowers directly receive funds from savers without involving banks.

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Loans and Collateral

Loans may be secured with collateral, allowing banks to use them as assets in secondary markets.

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Commercial Banks

Financial institutions that provide a wide range of banking services including accepting deposits and granting loans.

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Savings and Loan Associations (S&Ls)

Banks that specialize in accepting savings deposits and making mortgage loans.

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Asset Quality

The assessment of the quality of loans and investments made by a bank.

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Capital Adequacy

The measure of a bank's capital in relation to its risks, ensuring it can absorb losses.

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Bank Reserve

Funds that a bank holds in reserve to meet withdrawals and regulatory requirements.

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Risk Management

The process of identifying, assessing, and controlling threats to a bank's capital and earnings.

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Credit Standing

An evaluation of an individual's or entity’s creditworthiness, often used by lenders to gauge risk.

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Mortgage Banks

Financial institutions that primarily provide mortgage loans rather than accepting deposits.

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Operating Result

The measure of profitability and efficiency of a bank's operations.

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Management

The effectiveness and quality of the bank's management in guiding operations and strategy.

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Earnings

The profit generated by the bank from its operations and investments.

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Liquidity

The ability of the bank to quickly convert assets into cash when needed.

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Development Banks

Financial institutions that provide loans to support projects in agriculture, industry, and small businesses.

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Loans for Medium and Long Term

Financing options provided by banks to support larger projects or purchases over a longer duration.

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Flood Insurance

Covers losses due to flooding, not included in homeowners insurance.

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Windstorm Insurance

Covers damage from hurricanes, tornadoes, and strong winds.

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Umbrella Liability Policy

Provides extra liability protection beyond standard policies.

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Investment Companies

Financial intermediaries that pool small amounts to manage large investments.

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Investment Banks

Profit-oriented institutions that borrow and lend funds to households and businesses.

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Life Insurance

A policy providing financial protection against premature death or serious injury.

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Claims Unpredictability

The nature of insurance claims, which can be unexpected and variable.

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Property and Casualty Insurance

Insurance covering property losses and liability for damages to others.

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Homeowners Insurance

Insurance that covers home damage and liability risks related to the property.

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Auto Insurance

Insurance that covers vehicle damage, theft, and liability in accidents.

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Pension Fund

A financial plan providing income during retirement for policyholders.

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Mutual Fund

An investment vehicle allowing companies to pool money from investors.

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Liability Risks

Legal risks stemming from injury or damage caused to someone else's property.

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Health Insurance

Covers medical expenses and healthcare costs.

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Professional Liability Insurance

Protects professionals from claims of negligence or malpractice.

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Credit Insurance

Covers loan payments due to death, disability, or job loss.

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Pawnshops

Agencies where assets are pawned for loans smaller than asset value.

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Consumer Finance Companies

Companies that provide loans directly to consumers.

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Commercial Finance Companies

Companies that provide financial services to businesses.

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Securities Dealers and Brokers

Intermediaries that connect investors with funding opportunities.

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Trust Companies

Corporations handling trusts and executing related services.

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Study Notes

Banking and Financial Institutions

  • Financial institutions offer financial services, supporting the flow of capital and savings for individuals, businesses, and governments.
  • Financial intermediaries act as a bridge between savers (surplus units) and borrowers (deficit units), reducing the cost of moving funds.
  • Examples of financial intermediaries include commercial banks and pension funds.
  • Direct finance involves a direct relationship between borrowers and lenders, skipping intermediaries.
  • Indirect finance uses intermediaries like banks to facilitate borrowing and lending.
  • Depository institutions act as intermediaries, primarily accepting deposits and offering loans.
  • Depository institutions are categorized as commercial banks (ordinary and expanded/universal)
  • Non-depository institutions do not rely on deposits but secure funds through other means like issuing securities or offering insurance.
  • Financial institutions, such as life insurance companies, perform vital services and generate significant revenue through interest and fees.
  • Bank supervision and regulation are crucial to ensuring stability and safety of the banking system.

Financial Intermediaries

  • Intermediaries reduce the cost of moving funds and reduce risks for investors.
  • They perform important services like accepting deposits, granting loans, and managing investments.
  • Intermediaries manage risks like interest rate fluctuations, market price fluctuations, reinvestment risk, and default risk.

Depository Institutions

  • These institutions are the primary source for deposits and loans. They are categorized as commercial banks (ordinary, expanded/universal) and others.
  • Commercial banks offer various accounts (checking/current, savings, and time deposits) and loan services to clients.
  • Some depository institutions are also engaged in other businesses.
  • Financial regulations such as those from the Philippine Deposit Insurance Corporation protect depositors' funds.

Non-Depository Institutions

  • These institutions do not accept deposits but secure funds by issuing securities or offering insurance products.
  • Examples include pension funds, mutual funds and life insurance companies.

Bank Management

  • Effective management of assets and liabilities is essential to maintain profitability and stability.
  • Risk management is critical to mitigating losses and maintaining solvency in the banking business.
  • Capital adequacy ensures sufficient capitalization to absorb potential losses.
  • Strong management and a sound risk strategy are critical for optimal performance.

Insurance Classifications

  • Insurance companies offer protection against various risks.
  • They provide financial compensation in case of uncertain events, such as property damage or loss of life.

Lending Investors

  • Lending investors act as creditors by providing funds to borrowers.
  • They typically receive interest payments and the return of the principal amount as compensation.

Risks of Financial Intermediation

  • Several factors can pose risk to financial institutions or investors.
  • Interest rate and market price, reinvestment, refinancing, and default risk are common examples.

Roles of Financial Intermediaries

  • Financial intermediaries play a crucial role in socio-economic development by channeling savings into investments and diversifying risks.
  • They also improve liquidity and facilitate credit allocation, encouraging financial inclusion.

Economic Bases of Financial Intermediation

  • Transaction costs and information asymmetry influence the demand and pricing of financial services.

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Banking and Financial Institutions PDF

Description

Explore the role of financial institutions in facilitating capital flow and connecting savers with borrowers. Learn about financial intermediaries, including depository and non-depository institutions. Understand direct and indirect finance, and the functions of entities like commercial banks and insurance companies.

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