MaxMark_Ch03_edited - MenuItem3:(Topic 3) Non-bank...

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MenuItem3:(Topic 3) Non-bank financial institutions Question 1: Investment banks and merchant banks differ from commercial banks in that: A: they raise funds in the money market and the capital market rather than from depositors B: they are primarily concerned with wholesale finance and have little involvement in the retail market C: their main source of income is fees associated with off-balance-sheet activities D* all of the above Feedback: To accept deposits from the public, a financial intermediary must be an Authorised Deposit-taking Institution (ADI). Commercial banks (‘banks’), building societies and credit unions are all ADIs. Investment banks and merchant banks that operate primarily in the wholesale market need not be ADIs and are officially classified as ‘money market corporations’. Investment banks and merchant banks earn most of their income as fees for providing advice and dealing in derivatives used for risk management (off-balance-sheet activities). In summary, the statements in A, B and C are all accurate, making D the correct answer. More: Financial Institutions, Instruments and Markets 5/e , Section 3.1.1, pp. 118–119 Investment banks and merchant banks provide financial services to their corporate and government clients. This is the world of high finance. Unlike commercial banks, these institutions do not have a depositor base from which to acquire assets. Their liabilities, or sources of funds, are predominantly short-term, and are typically raised through the issue of securities into the money markets and capital markets. They are able to acquire a high level of offshore funding for three reasons: 1. A number of investment and merchant banks are subsidiary operations of international commercial banks and therefore are able to obtain funding from the balance-sheet of their parent bank. 2. Globalisation and deregulation of the foreign exchange markets have enabled financial institutions to diversify their funding sources into the international capital markets. The high-profile reputation of many of the investment banks and merchant banks affords them access to the international capital markets 3. Investment and merchant banks often do not fall directly within the jurisdiction of financial institution regulators and thus may not be required to comply with the minimum capital adequacy requirements that apply to commercial banks (see Chapter 2). This means that the size of their balance-sheet and off-balance-sheet business may not be constrained by capital requirements. Investment bank and merchant bank assets are mainly in the form of loans to large corporations and governments, often short-term loans. They are primarily focused on wholesale finance and have little direct involvement with the household sector, except through their cash management trust and unit trust investment products. Question 2: Involvement in mergers and acquisitions is an important activity of
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This note was uploaded on 03/26/2012 for the course FINS 2624 taught by Professor Hneryyip during the Three '10 term at University of New South Wales.

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MaxMark_Ch03_edited - MenuItem3:(Topic 3) Non-bank...

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