Banking Overview

Question 1

List the general characteristics of banks.

Answer 1

1. Roles of banks
2. Types of banks
3. banking products and activities
4. Pricing
5. Provisions
6. Revenues and costs
7. Balance sheet
8. Key risks
9. Legislation

Question 2

List the key risks that banks face.

Answer 2

1. Credit risk
2. Market risk
3. Operational risk
4. Liquidity risk
5. Business strategic risk
6. Currency risk
7. Pre-payment risk
8. Model risk

Question 3

Give the two major trends that affect the banking sector in general.

Answer 3

1. Increasing regulatory requirements for risk management and measurement,
2. Fintech - greater digital and mobile banking experiences and improved use of data and AI

Question 4

Give the types of retail banking products.

Answer 4

1. Transactional accounts
2. Savings accounts
3. Credit cards
4. Overdrafts
5. Mortgage loans
6. Vehicle finance loans
7. Unsecured personal loans - revolving and term

Question 5

Give the types of business banking products.

Answer 5

1. Transactional accounts
2. OVerdrafts
3. Asset-based finance
4. Unsecured loans
5. Merchant services
6. Foreign exchange and trade solution services
7. Cash solutions
8. Savings and investment products
9. Portfolio management

Question 6

What is the main source of revenue for a bank?

Answer 6

Interest and fees charged to customers

Question 7

Describe what non-interest revenue in a banking context.

Answer 7

Income earned from the fees charged from banking book operations - account fees, commitment fees, transaction fees, asset management fees and insurance fees.

Question 8

Describe net interest income for a bank.

Answer 8

Banks fund themselves accepting deposits at lower interest rates than the rates that they charge their debtors.

Question 9

Give the sources of income for a bank.

Answer 9

Revenue

1. net interest income
2. Non-interest income
3. Trading income

Question 10

Give the main costs that a bank faces.

Answer 10

1. Operational expenses

2. Cost of credit

Question 11

Give a breakdown of the operational expenses that a bank faces.

Answer 11

1. Staff costs - main cost
2. Marketing and sales
3. IT systems and equipment
4. Running a branch network

Question 12

Break down the assets in a bank’s balance sheet.

Answer 12

1. Loan book
2. Earning assets
3. Non-earning assets

Question 13

Break down the liability on a bank’s loan book.

Answer 13

1. Customer deposits - commercial banks
2. Cash-collateralised instruments
3. Liabilities associated with derivatives and the trading book

Question 14

Give the subcategories of a bank’s loan book in the assets of its balance sheet.

Answer 14

1. Retail secured
2. Retail unsecured
3. Corporate
4. Commercial
5. Loan loss reserve

Question 15

Describe how a bank experiences the “cost of credit”

Answer 15

If loans are late with repayments, they are considered non-performing and interest accrued for these loans is not included in calculated profit.
If it becomes clear that a loan will not repay interest or the principal amount, then the loan is classified as a loss and is written off the balance sheet and any later recoveries are written in later.

Question 16

What specific risk is associated with credit risk and may cause concern despite the overall creditworthiness of a bank’s books?

Answer 16

Concentration risk - single name or sector concentration

Question 17

Give the types of market risks that banks face.

Answer 17

1. Volatility risk
2. Currency risk
3. Basis risk
4. Interest rate risk
5. Liquidity risk
6. Commodity price risk

Question 18

Describe basis risk.

Answer 18

When one is exposure is hedged with an offsetting exposure in another instrument that behaves in a similar, but not identical manner.

Question 19

Give the Operational risks that banks face,

Answer 19

1. Internal processes
2. People
3. Systems
4. External events

Question 20

Describe the operational risk management with regards to internal processes.

Answer 20

Clear, orderly and complete processes to meet the responsibilities to clients, manage risk, control payments, protect against fraud and comply with the regulations

Question 21

Describe the operational risk management with regards to people.

Answer 21

Communicate and enforce rules, minimise conflicts of interest and set proper incentives to maintain an ethical culture.

Question 22

Describe the operational risk management with regards to systems.

Answer 22

Adequate technology resources that are backed up and protected from security breaches.

Question 23

Describe the operational risk management with regards to external events.

Answer 23

Have the ability to know and monitor clients to guard against fraud and protect people and facilities,