Podcast
Questions and Answers
Which banking service is specifically designed for helping medium-sized businesses with financial growth?
Which banking service is specifically designed for helping medium-sized businesses with financial growth?
What type of banking is characterized by facilitating mergers and acquisitions for large corporations?
What type of banking is characterized by facilitating mergers and acquisitions for large corporations?
Which risk involves the possibility of a borrower defaulting on a loan?
Which risk involves the possibility of a borrower defaulting on a loan?
What is the primary concern of liquidity risk for banks?
What is the primary concern of liquidity risk for banks?
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Which risk could result from a bank being involved in a scandal or having poor practices?
Which risk could result from a bank being involved in a scandal or having poor practices?
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What type of banking service involves managing assets and providing investment advice to wealthy individuals?
What type of banking service involves managing assets and providing investment advice to wealthy individuals?
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Which risk is associated with unexpected changes in interest rates or stock prices affecting a bank's investments?
Which risk is associated with unexpected changes in interest rates or stock prices affecting a bank's investments?
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What is the main feature of universal banking?
What is the main feature of universal banking?
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What is the primary function of the Inter-Participant Settlement System within the LankaSettle System?
What is the primary function of the Inter-Participant Settlement System within the LankaSettle System?
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Which of the following best describes scripless securities?
Which of the following best describes scripless securities?
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What does the Scripless Securities Settlement System (SSSS) do?
What does the Scripless Securities Settlement System (SSSS) do?
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What is the purpose of the Delivery vs Payment (DvP) mechanism in the LankaSecure System?
What is the purpose of the Delivery vs Payment (DvP) mechanism in the LankaSecure System?
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Which statement accurately reflects a feature of the LankaSecure System?
Which statement accurately reflects a feature of the LankaSecure System?
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What kind of transactions does the Sri Lanka Interbank Payment System (SLIPS) facilitate?
What kind of transactions does the Sri Lanka Interbank Payment System (SLIPS) facilitate?
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What risk does the use of scripless securities eliminate?
What risk does the use of scripless securities eliminate?
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How does SLIPS primarily serve member banks?
How does SLIPS primarily serve member banks?
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What was one of the main causes of the 1998 financial crisis in Russia?
What was one of the main causes of the 1998 financial crisis in Russia?
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What action did the Russian government take in response to the financial crisis?
What action did the Russian government take in response to the financial crisis?
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What role does the central bank play as a 'Lender of Last Resort'?
What role does the central bank play as a 'Lender of Last Resort'?
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What is the function of deposit insurance in the SLDILSS?
What is the function of deposit insurance in the SLDILSS?
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How is the Capital Adequacy Ratio (CAR) calculated?
How is the Capital Adequacy Ratio (CAR) calculated?
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What does the Liquidity Coverage Ratio (LCR) assess?
What does the Liquidity Coverage Ratio (LCR) assess?
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The Leverage Ratio helps assess which financial aspect of a bank?
The Leverage Ratio helps assess which financial aspect of a bank?
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What happens if the central bank cannot assist a failing institution?
What happens if the central bank cannot assist a failing institution?
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What is a key characteristic of a stable financial system?
What is a key characteristic of a stable financial system?
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Which of the following is a sign of financial instability?
Which of the following is a sign of financial instability?
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What does leverage refer to in the context of investments?
What does leverage refer to in the context of investments?
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How can governments and banks help maintain financial stability?
How can governments and banks help maintain financial stability?
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What can be a consequence of excessive leverage in a financial system?
What can be a consequence of excessive leverage in a financial system?
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What typically happens during a financial crisis?
What typically happens during a financial crisis?
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How does high credit growth impact property prices?
How does high credit growth impact property prices?
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Which of the following is NOT a way to ensure financial stability?
Which of the following is NOT a way to ensure financial stability?
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What is the primary benefit of credit unions for their members?
What is the primary benefit of credit unions for their members?
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What is a key characteristic of leasing companies?
What is a key characteristic of leasing companies?
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Which of the following best describes a financial instrument?
Which of the following best describes a financial instrument?
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Which type of deposit allows for unlimited withdrawals but does not earn interest?
Which type of deposit allows for unlimited withdrawals but does not earn interest?
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What is one potential option at the end of a lease agreement?
What is one potential option at the end of a lease agreement?
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What is the main purpose of a credit union’s profits?
What is the main purpose of a credit union’s profits?
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What distinguishes fixed or time deposits from other types?
What distinguishes fixed or time deposits from other types?
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Which of the following is NOT a type of deposit?
Which of the following is NOT a type of deposit?
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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.
