Commercial Banking exam Flashcards

Federal Reserve System
Terms Definitions
Different Banks
Super Regional
Insurance companies
Underwrote insurance products
Saving Institutions Lead in
Depository institutions are amongst the most highly regulated institutions
Consumer Credit
commercial banks
ABS issuers
Finance Companies
Equity Multiplier EM
total assets/total equity
Charters federal saving banks and savings associations
Credit Unions
Nonprofit insitutions with the original purpose of encouraging savins and providing lonas within a community at low cost of their members
Originate to distribute approach to lending, spearates laon origination form ownership.
limited geographic mkt. Loans to Indiv, Small busin.,
and Agriculture
online terminal
subtracts the transactions immediately from the customers account
Unit Banks
(board, officers, separate docs and technology)
Check 21
Created a framework for the elimination of paper checks by allowing any institution to truncate the paper check at any point in process
Savings Institutions (Thrifts)
Specialize in real estate lending
Market Risk
Management's ability to identify , measure control,and monitor price risk
In store
Offer a limited range of services
A shell organization that owns and manages subsidiary firms. Any organization that owns controlling interest in one or more commercial banks.
corporate governance
describes the relationship that exists among managers, the board of directs the stockholders, and other stakeholders of the corporation. exposes managers to greater monitoring and discipline
Large banks
have many specialized departments and divisions including separate departments for different kinds of loans, depts to manage security holdings and borrow in the money market, a division or department to manage international operations, a marketing division and a planning unit along with other divisions
Discount Window
department in each federal reserve bank that receives requests to borrow reserves from banks & other depository institutions which are eligible to obtain credit from the fed for short periods of time.
Small Time & Savings Deposits
Commercial Banks
Savings Institutions
Credit Unions
offline terminal
accumulates all transactions until the end of the day when all transactions are subtracted from a customers account
National Credit Union Administration NCUA
Charters federal credit unions
Helps asses the overall quality of a commercial bank's condition:
Capital adequacy
asset quality
management quality
earnings quality
sensitivity to market risk
Global Impact
Govt of Great Britain, germany, and Iceland purchased stocks in large institutions
IO, Alt A, ARMs
Names given to questionable mortgages
Subprime borrowers
Borrowers whose income did not truly recover the payment amount that would have repaid the obligated principal
Commercial bank
an entity that both accepted demand deposits and made loans to businesses
Firms regulated by the Office of Thrif Supervision and were initially organized to emphasize mortgage lending to individuals
Fee Income Ratio
non interest income/ (net interest income+non interest income)
higher value indicates the bank is producing more of its net operating revenue from non-interest income (fees)
higher ratio is usually considered positive. fees might be less volatile than interest rates
Off-balance sheet items
transactions that generate fee income for a bank or help hedge against risk
expense preference behavior
approach to management in which managers use the resources of the firm to provide them with personal benefits non needed to produce and sell products. leads to increasing costs of production and declining returns of the firm's owners
disadvantage of interstate banking
threatens to increase the concentration of banking in the US especially among larger banks . could lead to higher prices and less service if the antitrust laws are not enforced.
Primary motivator for branch banks
efficiency in a "lead" economy
Efficient and competitive financial system
Prevent undue concentration of depoistory instituion resources that would be anticompetitive.
Results of these acts
Short list of products and services
Narrow geographic arease in which to compete
Open mkt operations
Conducted by the Federal rerserva Bank of New York under the direction of the Federal Open Market Committee
Equity investment
The value of the subsidiary stock at the time of purchase
Internet online banking
Access the acct info and conduct routine banking business via secured web sites
Buying long term securities
increases the amount of excess reserves
Gross Loans
equal the total of all loans currently outstanding that are recorded on the banks books
time deposits
carry a fixed maturity and banks may impose penalty if you withdraw funds before maturity date. interest rate can be fixed or floating, depending on negotiations between banks and customers
Shortcomings of restrictive bank regulation
Regulation does not prevent bank failures
It does not eliminate risk
Does not guarantee that bank mgt. will make good decisions
Federal agencies that issue and enforce regulations
Fed (Federal reserve System)
FDIC (Federal Deposit Insurance Corporations)
OCC (Office of the comptroller of the currency
Changes in reserve requirements
Directly affect the amount of legally required reserves that depository institutions are required to hold as an assett and thus change the amount of funds a depository institution can lend out.
Results in the crisis
Bear Stearns collapsed and absorbed by JP. MORGAN
Failures of Countrywide, Lehman Brothers
Bank of America absorbed Countrywide
JP Morgan absorbed Washing Mutual
Wells fargo absorbed Wachovia
Control only one bank and typically arise when the owners of an existing bank exchange their shares for stock in the holding company
NPM x AU x EM = net income common equity
Non deposit borrowings include
short term non deposits
long term non deposits
Quantitative Easing - To bring down long term rates we need to
buy long term securities
US Government actions during the crisis
Put govt sponsored enterprises (FSE, Fannie mae and Freddie Mac) into conservatorship (fully operated by govt)
Took over American International Group loaning them $150bln
Insured money market mutual funds
Authorized Bk. of America to acquire merrill Lynch
Approved Goldman Sachs, Morgan Stanley, and American Express as bank holding companies
Created a commercial paper funding facility
Increased Federal Deposit Insurance Corporation for domestic deposits and provided unlimited coverage for interest bearing business deposits
Passed the TARP (Trouble Asset Relief Program)
Bought preferred stock in nine large U.S. banks
Advantage of being a depository institution
Access to FDIC deposit insurance ($250,000 per account). the FDIC charges a bank premium for the insurance
importance of off-balance sheet items
important as a supplement to income from loans and to help a bank reduce its exposure to interest rate risk
what trends are affecting the way banks are organized today
deregulation and service innovations have accelerated the trend as intense competition encourages banks to become larger, serving broader and more diversified market areas
Demand deposits or checking accounts
accounts against which a customer can write checks or make any number of personal withdrawals
Three drawbaks of restricting the geographic and product scope of banking
It assumed that the markets for commercial bank products could be protected and that other firms could not encroach upon these markets
It disciriminated against US based firms vs foregin based firms
Historical regulation has penalized commercial bank customers who do not have convenient access to the range of products they demand
Primary reason for banks to exist
Is hard to bring depositors and borrowers together. Banks facilitate information. Large institutions are better equipped to reduce costs than smaller institutions are
Advantages of a unit bank
less costly to operate they are able to offer personalized services
Net interest margin after provision for loan losses NIMPLL
net interest income - provision for loan losses/ average (total)assets
Alternative version of NIM that considers the higer risk that might be considered earning assets or loans
better version when comparing banks with products with different risks
who charters new banks in the US
chartered by the state banking commissions, or at federal level by Comptroller of the Currency
Key role of the FDIC in chartering
exercises some control over state bank charter as wel as federal charters because most states insist that new banks qualify for federal deposit insurance before they can open for business
benefit of new branch offices over the chartering of financial firms
process is normally far simpler and less costly
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