Banking Principles and Practices Quiz

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Questions and Answers

What is the primary responsibility of bankers and government banks?

To invest in stocks and bonds

To supervise only commercial banks

To provide insurance services

To manage monetary policy and macroeconomic factors (correct)

Which type of financial institution primarily collects deposits and grants loans?

Insurance companies

Pension funds

Investment banks

Commercial banks (correct)

What distinguishes universal banking from specialized banking?

Universal banks only handle short-term loans

Universal banks offer a wider range of services including investment activities (correct)

Specialized banks handle both commercial and investment banking

There is no difference between the two

What is one of the primary roles of authorities that supervise banks?

Ensuring bank probity, liquidity, and solvency (A) Signup and view all the answers

What is one function that commercial banks perform aside from granting loans?

Offering payment services (A) Signup and view all the answers

Which statement is true regarding the variation in activities of commercial banks?

The scope of activities for commercial banks varies by country. (C) Signup and view all the answers

Which of the following types of financial firms primarily channel funds to investors?

Investment banks (A) Signup and view all the answers

What recent trend is noted in the financial sector regarding banks and other financial institutions?

Blurring of the boundaries between banks and other financial institutions. (A) Signup and view all the answers

What is a significant factor contributing to the fragility of the banking system?

Asset-liability mismatch (A) Signup and view all the answers

Why do banks issue illiquid assets despite the risks involved?

To earn a higher profit from loans. (C) Signup and view all the answers

What is the primary reason depositors are typically willing to keep funds in banks?

They usually do not withdraw their deposits all at once. (A) Signup and view all the answers

Which of the following describes a characteristic of a risky asset portfolio in banking?

Assets that may vary in reliability over time. (B) Signup and view all the answers

Which consequence arises as a result of a bank run?

Costs to the banking system. (A) Signup and view all the answers

What is a consequence of low capital to assets in banks?

Increased susceptibility to insolvency. (A) Signup and view all the answers

How does the interest rate structure benefit banks?

The interest rate on deposits is lower than on loans. (D) Signup and view all the answers

What inherent feature of the banking system contributes to its vulnerability?

Long-term liabilities with short-term assets. (D) Signup and view all the answers

What is the primary focus of micro-prudential supervision?

Promoting the safety and soundness of banks (A) Signup and view all the answers

Which stage is NOT part of the micro-prudential supervision process?

Public relations management (D) Signup and view all the answers

What does the authorisation process primarily aim to ensure?

A safe and sound financial system (D) Signup and view all the answers

Which Basel core principle is emphasized in relation to banking supervision?

The primary objective is to promote the safety and soundness of banks (B) Signup and view all the answers

What describes the nature of supervision in a narrow sense?

Oversight of firms’ behavior and risk monitoring (C) Signup and view all the answers

What is a potential downside of micro-prudential supervision?

It can be resource and personnel intensive (D) Signup and view all the answers

What can be described as a 'thankless task' in the context of supervision?

Executing day-to-day supervision (B) Signup and view all the answers

What is a characteristic of the authorisation process in micro-prudential supervision?

It must ensure that entry barriers are neither too lax nor too restrictive (A) Signup and view all the answers

What does inadequate systemic risk control refer to in the context of financial crises?

A lack of focus on overall financial system stability (A) Signup and view all the answers

Which of the following is a key feature of the Core Principles for Effective Banking Supervision?

Requiring system-wide perspectives for systemic bank risks (B) Signup and view all the answers

How is financial stability defined?

As the safety and soundness of the financial system (D) Signup and view all the answers

What does the term 'systemically important banks' refer to?

Banks that play a crucial role in the financial system (D) Signup and view all the answers

What is the purpose of crisis management in the context of banking?

To be prepared for potential bank failures (A) Signup and view all the answers

What is an aspect of financial stability that can be described in negative terms?

The absence of instability or crisis (A) Signup and view all the answers

Which approach has been adopted by financial authorities globally in response to past financial crises?

Macro-prudential supervision (C) Signup and view all the answers

What is the purpose of a white paper in an ICO?

To serve as a preliminary document outlining the ICO’s goals. (C) Signup and view all the answers

What is the primary function of a consensus mechanism within DLT?

To verify the legitimacy of new transactions. (C) Signup and view all the answers

How does cryptography contribute to the functions of DLT?

By guaranteeing immutability and non-repudiation. (C) Signup and view all the answers

What characteristic defines immutability in DLT?

Validated transactions cannot be changed retroactively. (A) Signup and view all the answers

Which statement accurately describes the role of nodes in DLT?

They reach consensus to validate data entries. (D) Signup and view all the answers

What does non-repudiation in DLT ensure?

Transactions cannot be disputed by participants. (A) Signup and view all the answers

In the context of DLT, what is the significance of asymmetric cryptography?

It provides users with public and private key pairs. (A) Signup and view all the answers

Why is consensus mechanism critical in a decentralized environment?

It helps prevent hacking and misuse of the network. (B) Signup and view all the answers

Which characteristic is NOT associated with public blockchains?

Restricted access (D) Signup and view all the answers

What is the primary focus of private distributed ledgers?

Control and tailored functionalities (D) Signup and view all the answers

In permissioned ledgers, who is allowed to validate transactions?

Identified and authorized participants (C) Signup and view all the answers

What is a key feature of permission-less ledgers?

All users can join as validators (D) Signup and view all the answers

How are access rights further restricted in a private ledger?

By authorizing users only for read access (A) Signup and view all the answers

What type of consensus method is typically used in a permission-less distributed ledger?

Proof-of-Work (B) Signup and view all the answers

Which statement best describes the concept of unrestricted access in private ledgers?

Any user can submit transactions if they have access. (A) Signup and view all the answers

What type of ledger relies on trust among participants?

Permissioned ledger (C) Signup and view all the answers

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Study Notes

Emerging Technologies Law - Unit 1: Principles of Banking

Financial Intermediation: Savings are channeled through intermediaries, like banks, to borrowers. Banks collect deposits, lend money, and generate revenue from loan interest. This is different from the UK, where businesses issue equity without bank involvement.
Advantages of Financial Intermediation:
- Expertise: Banks develop expertise in loan selection and borrower assessment, reducing default risk compared with peer-to-peer platforms.
- Lower Transaction Costs: Banks benefit from economies of scale in transaction costs.
- Risk Diversification: Banks can diversify risk through diverse loan portfolios.
- Maturity Transformation: Short-term deposits are converted to longer-term loans, managing liquidity.
- Economic Growth: Financial intermediation fuels economic activity by providing capital to businesses and consumers.

Types of Banks

Commercial Banks: Collect deposits and provide loans to individuals and businesses. They are the most common type of bank.
Investment Banks: Focus on underwriting securities (stocks and bonds) for companies and managing portfolios.
Central Banks: Responsible for monetary policy and managing the overall financial system. These are not involved in loans to the general public.

Other

Risk Diversification and Portfolio Diversification: Reducing risk through diversification is a central function of banks.
Maturity Transformation: Banks convert short-term deposits into longer-term loans.
Risk Management: Maintaining a risk-appropriate portfolio is crucial for banks.
Financial expertise: Skilled professionals for a successful loan portfolio.

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Description

Test your knowledge on the primary responsibilities and functions of banks and financial institutions. This quiz covers topics such as universal banking, bank supervision, and the implications of bank runs. Perfect for finance students and enthusiasts!