Banking -

Essence of banking Learning outcomes Introduction The financial system Introduction Lenders and borrowers Financial intermediaries Financial instruments Financial markets Money creation Price discovery Allied participants on the financial system Principles of banking Introduction Fundamental issues in banking Basic raison d'être for banks: information costs and liquidity Introduction Information costs Asymmetry in liquidity preference OTC versus securities markets Broad functions of banks Introduction Facilitation of flow of funds Efficient allocation of funds Assistance in price discovery Money creation Enhanced liquidity Price risk lessened for the ultimate lender Improved diversification Economies of scale Payments system Monetary policy function The balance sheet of a bank Introduction Share capital (equity)Liabilities Introduction Deposits Loans Assets Introduction Central bank money Loans Liability and asset portfolio management Money creation Off-balance sheet activities Introduction Off-balance-sheet activities that carry risk Off-balance-sheet activities that carry no or little risk Bibliography Money creation Learning objectives Introduction What is money?Measures of money Monetary banking institutions Money and its role Uniqueness of banks The cash reserve requirement Money creation does not start with a bank receiving a deposit Introduction Notes and coins deposited Government spends Money creation starts with a bank loan Money creation is not dependent on a cash reserve requirement Is "money supply" a misnomer?The money identity and the creation of money Role of the central bank in money creation How does a central bank maintain a bank liquidity shortage?Bibliography Risk in banking Learning outcomes Introduction The concept of risk Interest rate risk Definition Ideal and extreme portfolios Reality Management of interest rate risk Introduction Interest rate repricing gap analysis Duration analysis Market risk Liquidity risk Definition Balance sheet changes resulting from deposit withdrawals and drawdowns on loan facilities Conditions for creation of liquidity Introduction Impeccable record Volume of and the type of liquid assets Active secondary financial markets Measures of a bank's liquidity exposure Bank liquidity and a "bank run"The central bank and the bank run Deposit insurance Credit risk Definition Asymmetric information, adverse selection and moral hazard Management of credit risk Introduction Avoidance Diversification Compensating balances and monitoring of business transactions Screening Monitoring Long-term relationship building Loan commitments Collateral requirement Credit rationing Specialisation in lending Credit derivatives Sovereign credit risk Banking statute returns in respect of credit risk Currency risk Counterparty risk Operational risk Introduction Information technology systems risk Human resources risk Reputation risk Compliance risk Legal and documentation risk External risk Bibliography Bank models & prudential requirements Learning outcomes Introduction Bank models Introduction Commercial banks Mutual banks / building societies Merchant and investment banks Trading banks Private banks Islamic banks Development banks Micro-credit banks Co-operative banks Dedicated banks Discount houses Rationale, objectives & principles of regulation Introduction Rationale for regulation Introduction Systemic malfunction Market imperfections The moral hazard problem Economies of scale Consumer confidence and consumer demand for regulation Supplier demand for regulation Objectives of regulation Introduction Promotion of financial stability Promotion of fair and healthy competition Promotion of consumer protection Principles of regulation Introduction Efficiency-related principles Stability-related principles Conflict-conciliatory principles Regulatory-structure principles General principles Prudential requirements Introduction Basel accords Basel II Introduction Pillar 1: minimum capital requirement Pillar 2: supervisory review (regulatory response to Pillar 1)Pillar 3: market discipline (promotes greater stability in the financial system)Basel III The banking statute: general The banking statute: prudential requirements Introduction Share capital and unimpaired reserve fund Liquid assets Large exposures Reserve requirement Returns The banking statute: other requirements associated with risk management Bibliography