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28 Cards in this Set
- Front
- Back
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Financial institutions carry out 2 types of financing...
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Direct- issue securities
Indirect- deposits and loans |
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ADI's main activities
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1. provide payment services
2. flow of funds 3. provide risk-transfer products |
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ADIs' source of funds
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LIABILITIES: deposits and securities issuing
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ADIs offer deposits that provide savers...(3)
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Liquidity, security, interest revenue
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3 types of deposits
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1. Current: cheques facility, transaction accounts
2. Savings: interest paying, no cheques 3. Term Deposits: agreed fixed amount & term |
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ADIs use funds to acquire 2 types of assets:
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Securities and loans
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Securities include .. (3) and their aims
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1. Cash (to satisfy withdrawals)
2. Liquid assets eg. ES funds, repos securities, payments due from other ADIs 3. Trading & investment securities (short/long, govt./non govt, domestic/foreign) |
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Securities earn lower/higher return than loans?
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Lower
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Loan interest rates reflect... (2)
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i/r = r (risk free) + r (risk premium)
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Housing loans (long term assets) are secured by a ________ for 4 purposes....
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- mortgage
1. Help lenders deal w/ info asymmetry 2. Reduces CR risk for ADI 3. Reduces losses in case of default 4. Lowers i/r on loans |
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Mortgage brokers roles (2) and source of income?
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1. Assess loan apps
2. Manage cash flows 3. Earn commission on loans they originate |
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Process of 'securitisation' (2)
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1. Establish a 'special purpose vehicle' (SPV)
2. Use these funds to purchase assets (loans) from bank, reducing assets on bank's balance sheet |
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Define SPV
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Asset-backed, or mrtgage-backed securities that earns fees
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Role of financial manager (2)
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Appointed to
1. Receive & minister repayments by borrowers 2. Make payments to investors in securities |
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Other loans to households include.. (3)
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1. Secured/unsecured personal loans (up to 10 yrs, fixed i/r, for durable assets)
2. Personal overdrafts (floating i/r, secured by mortgage) 3. Credit cards |
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Process of the flow of funds thru ADIs
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1. ADIs accept deposits and make loans
2. Transform different preferences of surplus & deficit units (size, maturity, risk) |
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Wholesale lending to corporations include (3)
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1. Term loans (up to 10 yrs, fixed/floating i/r)
2. Revolving credit facilities (access to short term funds) 3. Standby facilities (offered when needed upon conditions) |
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How are i/r established for wholesale lending?
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1. Risk of loan
2. Institution's prime/reference rate 3. ADIs may impose loan covenants |
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Risks faced by ADIs (6)
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1. Liquidity: can't meet obligation
2. Funding: unable to fund its assets for term 3. Credit: borrower defaulting 4. Market & i/r: averse movements in markets 5. Operating: failed internal processes, external events 6. I/r: timing of i/r changes mismatch |
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Why liquidity & funding risk arise?
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Maturity mismatch (eg. long termed assets such as housing loans financed with short term liabilities such as deposits)
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How is liquidity risk managed? (5)
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1. Holding cash
2. ES funds 3. repo agreements 4. deposits w/ other ADIs 5. Ability to borrow from other ADIs and RBA |
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How is funding risk managed? (6)
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1. Diversifying source of funds
2. Holding securities 3. Securitising some assets 4. Raising funds from money market 5. Issuing long-term securities 6. Arranging direct financing for customers rather than indirect |
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Credit is main risk ADIs face but level of default is low b/c... (3)
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1. strength of economy
2. use of housing property as security 3. prudent lending practices and careful management |
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5 principles of bank lending
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1. Overcome info asymmetry
2. Diversify loan portfolio (avoid concentration risk) 3. Match i/r to risk 4. Monitor exposures 5. Attract LARGE # of depositors |
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How to manage market risk?
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Hedging positions with derivatives
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How to manage i/r risk?
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use interest free derivatives
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Who regulates ADIs? Objective?
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APRA
ensure ADIs have reserve of funds to deal with risks |
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Value of ADIs to financial system (3)
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1. Avoidance of search costs
2. Small needs has provision 3. Specialist services |
