ICADE International Financial Markets Quiz
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Questions and Answers

What is a significant challenge in estimating the size of the shadow banking system?

  • It is solely based on bank activities.
  • Many entities do not report to government regulators. (correct)
  • Most shadow banks are publicly traded.
  • The system is uniformly regulated across countries.

Which region's shadow banking system is currently the largest globally?

  • United States
  • Japan
  • China
  • Euro area (correct)

How do banks primarily generate revenue from lending activities?

  • From the interest earned minus the cost of funding. (correct)
  • Through government subsidies.
  • By acquiring other financial institutions.
  • Through transaction fees charged to clients.

What underlies the banking industry's ability to create credit?

<p>The belief that only a minority of deposits will be drawn in cash. (D)</p> Signup and view all the answers

What was the peak value of the global shadow banking system in 2007?

<p>$62 trillion (D)</p> Signup and view all the answers

Why do governments and central banks seek to control the creation of credit?

<p>Due to its implications for inflation. (B)</p> Signup and view all the answers

Which statement regarding shadow banking entities is incorrect?

<p>They report to government regulators strictly. (C)</p> Signup and view all the answers

What is a key factor that banks must assess when creating credit?

<p>The risks associated with lending activities. (A)</p> Signup and view all the answers

What distinguishes shadow banks from traditional banks?

<p>Shadow banks do not have traditional depositors whose funds are insured. (A)</p> Signup and view all the answers

Which of the following is NOT a key aspect of financial intermediation performed by shadow banks?

<p>Customer service transformation (A)</p> Signup and view all the answers

Which type of financial entity is considered a shadow bank?

<p>Broker-dealers funding assets using repurchase agreements (B)</p> Signup and view all the answers

Shadow banks primarily raise funds in which of the following markets?

<p>Money markets (C)</p> Signup and view all the answers

What is liquidity transformation in the context of shadow banking?

<p>Using cash-like liabilities to purchase harder-to-sell assets. (C)</p> Signup and view all the answers

Which of the following describes leverage in a shadow banking context?

<p>Using borrowed money to magnify potential investment returns. (C)</p> Signup and view all the answers

Why can shadow banks create systemic risks in the financial system?

<p>They are unable to borrow in emergencies like traditional banks. (A)</p> Signup and view all the answers

What is a significant drawback of shadow banking compared to traditional banking?

<p>Limited ability to manage credit risk effectively. (B)</p> Signup and view all the answers

What is the primary function of financial intermediaries in the banking system?

<p>To facilitate the transfer of funds from savers to borrowers (C)</p> Signup and view all the answers

Which of the following accurately describes shadow banking?

<p>It involves financial entities that operate outside standard banking regulations. (C)</p> Signup and view all the answers

Which statement is NOT true regarding the origins of banking?

<p>The concept of shareholding companies began in the 15th century. (A)</p> Signup and view all the answers

What does the term 'financial intermediation' refer to?

<p>The process by which financial institutions aggregate and channel funds. (C)</p> Signup and view all the answers

What key function does a central bank serve in the financial market?

<p>To regulate the money supply and ensure financial stability. (D)</p> Signup and view all the answers

What is one characteristic that distinguishes shadow banking from traditional banking?

<p>Shadow banking does not accept deposits from the public. (D)</p> Signup and view all the answers

Which organization is known for influencing monetary policy in Europe?

<p>European Central Bank (ECB) (A)</p> Signup and view all the answers

What is a primary purpose of interbank markets?

<p>To facilitate short-term borrowing and lending among banks. (B)</p> Signup and view all the answers

Flashcards

Shadow Banking System Size Estimation

Difficult to estimate due to many shadow banking entities not reporting to government regulators.

Shadow Banking System US Dominance

Historically large in the US before the global financial crisis, but now smaller.

Shadow Banking System Global Growth

Global shadow banking reached a peak ($62 trillion) in 2007 and rebounded to $92 trillion by end-2015.

Euro Area Shadow Banking System

Currently the largest globally, comprising 33% of the total.

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Bank Activities

Licensed financial institutions collecting deposits and lending to individuals and businesses.

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Bank Funding

Banking relies on a portion of deposits not being withdrawn as cash.

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Bank Revenue Source

Net Interest Income (NII) from the difference between lending income and funding costs.

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Bank Balance Sheet

Shows banks' assets and liabilities, including loans, deposits, and other financial instruments.

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Shadow Banking

Non-bank financial institutions that engage in maturity transformation, borrowing short-term funds to invest in long-term assets, but are not subject to traditional bank regulations.

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Maturity Transformation

The process of using short-term deposits to fund long-term loans (or assets).

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Liquidity Transformation

Using cash-like liabilities to buy assets that are difficult to sell, like loans.

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Leverage

Using borrowed money to increase the potential return on an investment but also the risk involved.

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Credit Risk Transfer

Shifting the risk of a borrower defaulting to a different party.

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Commercial Paper

Short-term IOUs (instruments) of corporations used to raise funds.

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Broker-Dealers (in Shadow Banking)

Financial institutions funding assets through repurchase agreements (repos).

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Money Market Mutual Funds (Shadow Banking)

Funds pooling investors' money to buy short-term assets like commercial paper or mortgage-backed securities.

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Financial Markets

Systems where financial assets are traded.

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Financial Intermediaries

Institutions that connect borrowers and lenders.

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Central Banks

Institutions that control a country's money supply and credit conditions.

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Monetary Policy

Actions undertaken by a central bank to manipulate money supply and credit.

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Interest Rates

The cost of borrowing money.

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Yield Curve

A graph showing relationship between interest rates and the time to maturity of debt securities.

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Banking Crisis

A period of significant instability in the banking industry.

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Capitalism

An economic system based on private ownership and free markets.

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Study Notes

ICADE International Financial Markets - Credit & Depositary Institutions - October 2024

  • The course covers the function of financial markets and financial intermediaries, financial instruments, understanding financial markets, and evolution of financial systems.
  • Includes an overview of financial risks.
  • Topics include Central Banks (origins, structures, and functions), the ECB and Monetary Policy, money creation, supply and demand, the monetary base, monetary policy concepts, interest rates, yield curves (risk and term structure), interbank markets, and commercial paper and repos.
  • Banking history traces the origins of capitalism, specifically exploring Italian merchant banking, early associations, the claim to the oldest bank (Monte Paschi di Siena), the first banking crises, and the relationships between Italian bankers and the British crown.
  • Early banking instruments like bills of exchange and foreign exchange conversion are examined.
  • The role of goldsmiths in early banking and their development of receipts for deposits is highlighted.
  • The lecture differentiates between commercial banks (retail and wholesale), private banks, and investment banks, emphasizing their functions.
  • Savings banks, cooperative banks, and Islamic banks are discussed, noting their differences from traditional commercial banks.
  • The lecture defines shadow banking - financial institutions functioning similarly to banks but outside regulated banking systems and performs credit intermediation, maturity transformation, and liquidity transformations.
  • The challenges posed by shadow banking, including increased risks to the financial system, fire sales, and lack of clear regulation, during the global financial crisis are detailed.
  • The evolution and function of credit are explored. Banking activities include collecting deposits, channeling them into investments, lending, and how confidence impacts the system. The various functions of Banks and the role of government in regulating banks through setting internal and external controls are addressed.
  • Balance sheets of credit institutions, bank risks like liquidity, credit, market, interest rate, foreign exchange, reputational, operational, exposure, investment, country, and legal risks are explored, along with strategic risk and how they are managed, drawing a focus on the concept of capital and Basel regulations.
  • The history and evolution of Basel regulations (Basel I and Basel II & III) are presented, including their objectives, criteria, and limitations.

Types of Credit Institutions

  • Banks, savings banks, and credit cooperations. Credit cooperatives are linked to the rural or professional environment within the Spanish context.
  • ICO (Spanish public entity) that aims to finance projects with interest rates below average market rates.

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Related Documents

Credit & Depositary Institutions PDF

Description

Test your knowledge on the function of financial markets, financial instruments, and the roles of credit and depositary institutions. This quiz covers topics such as central banks, monetary policy, and the evolution of banking systems throughout history, focusing on crucial financial concepts. Prepare to explore the interconnections between early banking practices and modern financial systems.

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