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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
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