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Questions and Answers
What is a bank?
A financial institution engaged in lending of funds obtained from deposits.
Savers want liquidity while borrowers want illiquid loans.
True
Which of the following is NOT a major function of banks?
Banks reduce transaction costs by bringing savers and _______ together.
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What is liquidity?
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What do universal banks do?
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What is the purpose of diversification in banking?
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Which of the following is an example of a universal bank in the Philippines?
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Study Notes
Introduction to Banking
- Banking is defined as a financial institution involved in lending funds obtained from deposits.
- Liquidity refers to the ease and cost of converting one asset into another, crucial for financial operations.
- Liquidity mismatch occurs when cash inflows and outflows do not align in terms of amounts and timing.
Role of Banks
- Banks provide liquidity to depositors while authoring long-term loans, balancing the needs of savers and borrowers.
- They reduce transaction costs associated with finding parties for financial transactions, minimizing search and contractual costs.
Major Functions of Banks
- Deposit Function: Facilitates fund transfer and safekeeping for individuals and businesses.
- Loan Function: Offers loans funded by deposits, subject to credit evaluations.
- Exchange Function: Manages local and international transactions to facilitate commerce.
- Trust Function: Acts as an agent to administer funds and properties under their custody.
Lending Practices
- Involves aggregating small savings to lend to larger borrowers, improving access to credit.
- Banks promote diversification, helping savers mitigate risks by spreading investments across various assets.
Types of Banks
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Universal Banks:
- Can function as investment houses, investing in a range of enterprises.
- Require the highest capitalization, allowing them to offer diversified financial services.
- Prominent examples in the Philippines include BDO, Metrobank, Landbank, BPI, ChinaBank, RCBC, PNB, Security Bank, UnionBank, and DBP.
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Commercial Banks:
- Focus primarily on accepting deposits and granting consumer and business loans.
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Description
This quiz covers the essential concepts of banking, including the definition of banks, the importance of liquidity, and the major functions banks perform. Learn about how banks balance the needs of depositors and borrowers, and their role in facilitating financial transactions. Test your knowledge on the fundamental operations that underpin banking systems.
