Financial System Stability
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Questions and Answers

Which banking service is specifically designed for helping medium-sized businesses with financial growth?

  • Investment banking
  • Private banking
  • Business banking (correct)
  • Corporate banking

    • What type of banking is characterized by facilitating mergers and acquisitions for large corporations?

  • Corporate banking (correct)
  • Offshore banking
  • Universal banking
  • Private banking

    • Which risk involves the possibility of a borrower defaulting on a loan?

  • Credit risk (correct)
  • Liquidity risk
  • Market risk
  • Operational risk

    • What is the primary concern of liquidity risk for banks?

    <p>Inability to fulfil withdrawal requests from customers</p> Signup and view all the answers

    Which risk could result from a bank being involved in a scandal or having poor practices?

    <p>Reputational risk</p> Signup and view all the answers

    What type of banking service involves managing assets and providing investment advice to wealthy individuals?

    <p>Private banking</p> Signup and view all the answers

    Which risk is associated with unexpected changes in interest rates or stock prices affecting a bank's investments?

    <p>Market risk</p> Signup and view all the answers

    What is the main feature of universal banking?

    <p>Offering a wide range of financial services including commercial and investment banking</p> Signup and view all the answers

    What is the primary function of the Inter-Participant Settlement System within the LankaSettle System?

    <p>To transfer and settle funds between banks using RTGS.</p> Signup and view all the answers

    Which of the following best describes scripless securities?

    <p>Securities recorded electronically without paper certificates.</p> Signup and view all the answers

    What does the Scripless Securities Settlement System (SSSS) do?

    <p>Manages the buying and selling of government bonds electronically.</p> Signup and view all the answers

    What is the purpose of the Delivery vs Payment (DvP) mechanism in the LankaSecure System?

    <p>It ensures simultaneous exchange of money and securities.</p> Signup and view all the answers

    Which statement accurately reflects a feature of the LankaSecure System?

    <p>It integrates both securities settlement and depository functions electronically.</p> Signup and view all the answers

    What kind of transactions does the Sri Lanka Interbank Payment System (SLIPS) facilitate?

    <p>Same-day transfers of up to Rs. 5 million using a paperless process.</p> Signup and view all the answers

    What risk does the use of scripless securities eliminate?

    <p>The risk of loss or damage associated with physical documents.</p> Signup and view all the answers

    How does SLIPS primarily serve member banks?

    <p>By processing same-day transfers for bulk payments.</p> Signup and view all the answers

    What was one of the main causes of the 1998 financial crisis in Russia?

    <p>Low productivity</p> Signup and view all the answers

    What action did the Russian government take in response to the financial crisis?

    <p>Devalued its currency</p> Signup and view all the answers

    What role does the central bank play as a 'Lender of Last Resort'?

    <p>It provides loans to struggling banks</p> Signup and view all the answers

    What is the function of deposit insurance in the SLDILSS?

    <p>It protects depositors' funds in case of bank failure</p> Signup and view all the answers

    How is the Capital Adequacy Ratio (CAR) calculated?

    <p>Available capital after adjustments divided by risk-weighted assets</p> Signup and view all the answers

    What does the Liquidity Coverage Ratio (LCR) assess?

    <p>A bank's capacity to handle sudden cash needs</p> Signup and view all the answers

    The Leverage Ratio helps assess which financial aspect of a bank?

    <p>The amount of debt relative to capital</p> Signup and view all the answers

    What happens if the central bank cannot assist a failing institution?

    <p>The International Monetary Fund may step in</p> Signup and view all the answers

    What is a key characteristic of a stable financial system?

    <p>Encouraging investment and economic growth</p> Signup and view all the answers

    Which of the following is a sign of financial instability?

    <p>Sharp asset price volatility</p> Signup and view all the answers

    What does leverage refer to in the context of investments?

    <p>Borrowing to finance investments</p> Signup and view all the answers

    How can governments and banks help maintain financial stability?

    <p>Improving risk management</p> Signup and view all the answers

    What can be a consequence of excessive leverage in a financial system?

    <p>Credit downgrades due to uncontrolled debt</p> Signup and view all the answers

    What typically happens during a financial crisis?

    <p>Sudden loss of value in financial assets</p> Signup and view all the answers

    How does high credit growth impact property prices?

    <p>Property prices initially increase, then collapse</p> Signup and view all the answers

    Which of the following is NOT a way to ensure financial stability?

    <p>Allowing free reign of market forces</p> Signup and view all the answers

    What is the primary benefit of credit unions for their members?

    <p>Better interest rates on loans</p> Signup and view all the answers

    What is a key characteristic of leasing companies?

    <p>They allow use of equipment without immediate ownership costs.</p> Signup and view all the answers

    Which of the following best describes a financial instrument?

    <p>A contract creating an asset for one entity and a liability for another.</p> Signup and view all the answers

    Which type of deposit allows for unlimited withdrawals but does not earn interest?

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

    What is one potential option at the end of a lease agreement?

    <p>Buy the leased equipment or lease a new one</p> Signup and view all the answers

    What is the main purpose of a credit union’s profits?

    <p>To provide members with better financial benefits</p> Signup and view all the answers

    What distinguishes fixed or time deposits from other types?

    <p>They do not allow withdrawals at any time.</p> Signup and view all the answers

    Which of the following is NOT a type of deposit?

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

    Study Notes

    Financial System Stability

    • A stable financial system fosters a secure environment for depositors and investors, promoting effective functioning of financial institutions and markets.
    • Stability in the financial system ensures that it can withstand significant economic shocks, keeping the economy operational by instilling confidence in banks and investors.

    Financial System Instability

    • Key indicators of instability include the collapse of critical financial institutions, high asset price volatility, liquidity shortages, disruptions in payment systems, and eroded consumer confidence.
    • Instability can lead to significant failures in the banking sector and a loss of trust, resulting in market turmoil.

    Ensuring Financial Stability

    • Maintaining stability involves enhancing risk management practices, regulatory oversight, financial sector reforms, and effective corporate governance.
    • Governments and banks must ensure banks are well-equipped to manage risks, adhere to regulations, and maintain sound leadership practices.

    Financial Crisis

    • A financial crisis occurs when financial assets abruptly diminish in value, disrupting markets and causing economic declines.
    • Such crises can lead to significant financial losses for individuals and stunted economic growth.

    Causes and Consequences of Financial Crises

    • Leverage refers to borrowing for investments; uncontrolled debt can lead to rating downgrades.
    • Excessive credit growth can inflate asset prices, leading to market crashes.
    • Russia's 1998 financial crisis stemmed from low productivity, an unsustainable fixed exchange rate, and significant fiscal deficits, culminating in currency devaluation and national default.

    Financial Safety Measures and Practices

    • Lender of Last Resort (LOLR): Central banks provide emergency loans to struggling banks to prevent systemic collapse, with institutions like the IMF as potential fallback options.
    • Deposit Insurance and Liquidity Support Scheme: Banks in Sri Lanka must insure deposits to protect customer funds in case of bank failures, with a coverage limit of Rs. 1,100,000 per depositor.

    Key Financial Ratios for Stability

    • Capital Adequacy Ratio (CAR) assesses a bank's capital against its risk-weighted assets, acting as a buffer for risk management.
    • Tier 1 Capital Ratio measures core capital relative to risk, indicating financial strength.
    • Liquidity Coverage Ratio (LCR) assesses liquid assets against short-term liabilities, ensuring timely cash availability.
    • Leverage Ratio evaluates a bank's debt against its capital, signaling the risk of insolvency.

    LankaSettle System

    • Consists of two main components:
      • Inter-Participant Settlement System facilitating real-time fund transfers among banks through RTGS.
      • LankaSecure System managing electronic ownership records of government securities.

    Scripless Securities Settlement System (SSSS)

    • Scripless securities eliminate paper certificates, recorded electronically, improving efficiency and minimizing risks like damage or delays in security trading.

    LankaSecure System

    • Encompasses SSSS and Scripless Securities Depository System (SSDS), facilitating the issuance of government securities in electronic format and ensuring simultaneous transfer of securities and payment.

    Sri Lanka Interbank Payment System (SLIPS)

    • An online platform enabling same-day transfers up to Rs. 5 million among member banks, often used for routine payments.
    • Supports various banking services tailored for different customer segments, including business, corporate, private, investment, offshore, and universal banking.

    Key Risks Faced by Banks

    • Credit risk arises when borrowers default, impacting the bank's income.
    • Liquidity risk occurs when banks are unable to meet withdrawal demands.
    • Market risk involves asset value degradation due to price fluctuation in financial markets.
    • Operational risk stems from internal system failures or errors.
    • Reputational risk from scandals can deter customers and affect business.
    • Macroeconomic risk encompasses broader economic downturn impacts.
    • Cyber risk involves potential disruptions from online threats.

    Leasing Companies

    • Provide financial solutions by purchasing and leasing equipment or property, allowing businesses to operate without substantial upfront investments.
    • Leasing is a viable option for acquiring essential assets while maintaining financial flexibility.

    Financial Instruments

    • Represent contracts creating a financial asset for one party and a liability or equity for another.
    • Common types include cash and ownership interests like company shares.

    Deposits

    • Defined as money placed in financial institutions; they can take various forms:
      • Demand deposits: Withdrawable anytime without earning interest.
      • Savings deposits: Earn interest and are also withdrawable.
      • Fixed/Time deposits: Locked for a specified duration, offering higher interest rates.

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    Description

    This quiz explores the concept of financial system stability, emphasizing its importance for depositors, investors, and overall economic growth. It discusses how a stable financial environment allows financial institutions and markets to operate efficiently and withstand challenges. Test your knowledge on the vital role of a resilient financial system.

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