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Commercial Banking Ch. 11, Investment Banking Ch. 16, Mutual Funds and Hedge Funds Ch. 17
Terms in this set (57)
Cost Economies of scale
a FI can lower its average operating costs by expanding its activities beyond domestic boundaries
Revenue increases or cost reductions resulting from mergers that are not due to scale or scope economies
bank assets vs bank liabilities
Bank assets tend to have longer maturities and lower liquidity than/as bank liabilities.
Economies of scope
The value of a firm's products or services increases as a function of the number of different businesses in which that firm operates.
Standby letters of credit
used to guarantee that a party will fulfill monetary obligations involving construction, service, or sales contracts
A contingent promise by a bank to pay a bill when it comes due if the bill's originator fails to pay.
banks vs depository institutions
Usually have an ROA of 0.5-3%
I. Banks have more diversified asset portfolios
II. Banks obtain funds from more different types sources
III. The average size bank is larger than other depository institutions
IS A Non-bank bank called industrial loan corporations and they provide loans to low quality, high-interest rate corporations that banks avoid.
Reasons for decrease in bank profitability
I. Flattening of the yield curve
II. Increase in competitive pressures on asset pricing
III. Increases in foreclosures in the mortgage market
An inverted yield curve can result in a negative NIM
Venture Capital Firms
Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership
Investment firms that pool money from individuals and/or institutions and invest equity funds in startup firms.
Sarbanes- Oaxley Bill
This bill is
I. Created an independent auditing oversight board run by the SEC
II. Increased penalties for corporate wrongdoers
are a direct competitor to mutual funds. long-term mutual funds that are also designed to replicate a particular stock market index.
Funds consisting of various mixtures of money market securities that have caused disintermediation at banks at times. This is because MMMFs Sometimes pay higher interest rates than bank deposits
Under ERISA, pension fund managers are required to invest fund assets as wisely as if they were investing their own money. This requirement is called the Prudent person rule
401 K plans
plans that allow employees to make tax favored pay deferrals toward retirement savings through a payroll deduction plan
II. They allow employer and employee contributions
III. Earnings accrue tax free during the employee's working years
IV. They allow employee discretion in asset allocation
Loans -% of assets/classes
Loans are the highest earning asset on the bank balance sheet. In order to compete and
reward its shareholders, banks must invest heavily in their highest returning asset. Prior to
deregulation and increased competition, banks held much lower percentages of loans.
The four major loan categories are commercial and industrial loans (loans to businesses),
mortgage loans, consumer loans and the ubiquitous "other" category.
Major sources of funds for banks
*Equity: Common stock, paid in capital and retained earnings
*Deposits: The main source of funding
*Transaction accounts are comprised of demand deposits (pay no interest) or NOW
accounts (negotiable order of withdrawal or an interest bearing checking account)
*Retail savings and time deposits (<$100,000 in size) savings have no fixed maturity,
while time deposits have a set maturity date.
*Large time deposits (>$100,000) are negotiable certificates of deposit that can be resold
to other investors prior to maturity.
*Non-deposit liabilities include loans from other banks, repurchase agreements and bonds.
A procedure that permits a company to register a number of securities with the SEC and sell them over a two-year period rather than at the time of registration.
Corporations can submit one registration statement for stock issues for the next two years. This allows issuers to quickly bring an issue to the public at times when prices are
The largest in dollar value of assets group also called depository institutions b/c a significant portion of their funds come from customer deposits.
Major assets are loans and their major liabilities are deposits.
They provide long term mortgage loans to households, and still raise funds with short term liability contracts such as deposits.
Involves transactions such as the raising of debt and equity securities for corporations or governments. This includes the origination, underwriting, and placement of securities in money and capital markets for corporate or government issuers.
Majority are open-end mutual funds that sell new shares to investors and redeem outstanding shares on demand at their fair market value. They provide opportunities for small investors to invest in a liquid and diversified portfolio of financial securities AND can be viewed as both a financial institution and a security investment.
They enjoy economies of scale by incurring lower transaction costs and investments.
Investment pools that invest funds for (wealthy) individuals and other investors (commercial banks) . Offer a high degree of privacy for their investors and offer less regulations that mutual funds by limiting the # of investors to less than 100. They use aggressive strategies like; short selling, leveraging, program trading arbitrage, and derivatives trading. Managers charge management fees (% of total ASSETS) and performance fees
the various forms of checkable deposits, including regular checking accounts, NOW accounts=interest bearing negotiable order of withdrawal accounts, ATS accounts and share draft accounts.
the sum or non interest bearing accounts and interest bearing checking accounts.
Negotiable Certificates of deposit (CDs)
Fixed maturity interest bearing deposits with face values of $100,000 or more that can be resold in the secondary market.
off balance sheet (OBS) asset
When an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement.
off-balance sheet (OBS) liability
When an event occurs, this item moves onto the liability side of the balance sheet or an expense is realized on the income statement.
a bank that specializes in retail or consumer banking
Consumer-oriented banking such as providing residential and consumer loans and accepting smaller deposits
commercial- oriented banking such as providing commercial and industrial loans funded with purchased funds
regional or superregional bank
A bank that engages in a complete array of wholesale commercial banking activities.
federal funds market
An interbank market for short-term borrowing and lending of bank reserves
money center bank
A bank that relies heavily on non deposit or borrowed sources of funds.
interest rate spread
The difference between lending and deposit rates
net interest margin
Interest income minus interest expense divided by earning assets
non current loans
Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower.
net charge offs
Actual losses on loans and leases
net operating income
Income before taxes and extraordinary items.
dual banking system
The coexistence of both nationally and state chartered banks, as in the United States.
A parent company that owns a controlling interest in a subsidiary bank or other FI.
Firms that assist in the trading of existing securities.
Assisting in the issue of new securities
A stockbroker that conducts trades for customers but does not offer investment advice
A securities issue placed with one or a few large institutional investors.
institutional venture capital firms
Business entities whose sole purpose os to find and fund the most promising new firms.
angel venture capitalists (angels)
Wealthy individuals who make equity investments
cash management accounts
Money market mutual funds sold by investment banks that offer check writing privileges.
Funds consisting of common and preferred stock securities.
Funds consisting of fixed income capital market debt securities.
Funds consisting of both stock and bond securities.
marked to market
Asset and balance sheet values are adjusted to reflect current market prices
The net asset value of a mutual fund- equal to the market value of the assets in the mutual fund portfolio divided by the number of shares outstanding.
closed-end investment companies
Specialized investment companies that have a fixed supply of outstanding shares but invest in the securities and assets of other firms.
A real estate investment trust; a closed end investment company that specializes in investing in mortgages, property, or real estate company shares.
A mutual fund with an up-front sales or commission charge that the investor must pay.
A mutual fund that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors.
Fees relating to the distribution costs of mutual fund shares
4 regulatory institutions
FDIC-Federal Deposit Insurance Corp. Insure deposits of commercial banks
FRS- Federal Reserve System-Central bank of the US
OCC- Office Controller Currency-Charter and close national banks
State Agencies and State Regulators same as OCC but on a state level
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