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Lecture 4

BUSI 3410U Lecture Notes - Lecture 4: Money Market Fund, Financial Institution, Demand Deposit

Course Code
BUSI 3410U
Bin Chang

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Lecture 4: Canadian Banking
Financial Institutions
Source of fund Liability
- Demand deposit: payable on demand; that is, if a depositor shows up at the bank and requests payment by
making a withdrawal, the bank must pay the depositor immediately. For example, a checking account.
- Notice deposit: notice requirement. But the notice requirement is never enforced. So it is just like demand
- Fixed Term Deposits
- Borrowings from Bank of Canada is called advances
- Bak Capital →cushion against a drop in the value of its assets, which could force the bank into insolvency
- Obligation related to borrowed security: when an investment bank short sells a security, it generates cash
for itself and shows the obligation to repay the loan
Asset: Use of funds
- Cash esee → deposit i BOC, o iteest
- Deposits at other banks
- Cash ites i poess of olletio→ suppose that a heue itte o a aout at aothe ak is
deposited in your bank and the funds for this cheque has not yet been received (collected) from other
o This cheque is an asset for your bank because it is a claim on other banks for funds that will be paid
in a few days
- Securities, Loans, Fixed and other assets
Basics of Banking
- 10% reserves from all deposits
- Money creation process from loans
- Fatioal esee sstes → Moe ultiplier = 1/%reserves
- Money; medium of exchange is M1
o Cash at banks and in circulation
o Chequing accounts(deposits)
- Bak Euit → if he ak deides $ is a easoale epet loa loss;
- The securities would be invested in marketable securities to be available to replenish reserves in the event
of default → if he ak deides $ is a easoale epet loa loss;
o The securities would be invested in marketable securities to be available to replenish reserves in
the event of default
- Bak ‘egulatio →i ode to aitai liuidit ad potet ak fo default, got adates
% esees euieets→ esee/asset
% Liuidit atios→ the ash held  the ak/deposits i the ak
Measure how quickly corporation/other entity can liquidate assets and cover short
term liabilities
10% Capital Ratio (equity/assets)
o All banks would have the same restrictions
o To be more profitable, bank might make riskier loans (Sub Prim) or take loans off BS
o ‘iskie loas hae highe iteest ates →isk of aks → ak u
o Requires that the bank also be regulated in terms of its assets and its other non-deposit liabilities
o Otherwise there is still significant risk of bank failures and bank runs
- Liuidit → poess also oks i eese; bank uses up all its reserves
o Calls in loans to get cash
o Someone else wants their cash; bank closes door
o More banks in the system the more money is created
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Lecture 4: Canadian Banking
Financial Institutions
o BANK ‘UN → he a lage ue of ak ustoes ithda thei deposits eause the
believe the bank is become insolvent
Asset <= deposits; cash reserve = 0
In liquidity issue, banks still have enough assets to meet liabilities, but loans are illiquid
o Banks have engaged in maturity transformation
Banks have loans as assets which are usually fixed on 2/3 years
Banks have very short liquid liabilities
Many of these deposits are cheap, serve as money; chequing accounts
o Social banks are critical for monetary policy and credit creation
Have always been heavily regulated to prevent bank
o Bank face liquidity risk due to bank runs
- Default → ooes at epa ad defaults o loas leadig to ite offs
o Depositors realize that they cannot all get repaid
o Demand cash to get out before others; bank run
o Bank needs equity or other risk capitals to bear the cost of default, so that depositors will not run
Off Balance sheet Activities
- Earn fee income by arranging loans
- Guarantee payments for a fee, bankers acceptances, subprime, line of credit
Bank Management
- ‘esees → settleet alaes at the BOC
o Balaes ea iteest→ o esee euieets
o Caadia aks hold liuid assets to suppleet thei settleet alaes → liuidit
- Assets/loas iole → edit isk: possiilit of default, Interest rate risk
- Liailities → different types of deposits
Current accounts (chequing accounts),Saving accounts
o Borrowing
- ‘isk ad peaet apital: Euit ad LT det → apital adeua
Basel Committee Bank for International Settlements (BIS)
- Created to deal with German reparations after WW1(1930)
- Boad of Dietos→ akes lu + outies
o Membership from central banks/national treasuries, industrialised plus emerging markets
- Atiities ilude→ uig/sellig gold, ledig to ee countries, issuance and marketing of
securities, negotiate international financial agreements, forum for discussion of intl monetary issues
Basel Committee on Banking Supervision
- Foed i   etal aks fo  outies Cetal ak fo Cetal Bakes
- Basel Capital Aod  o Basel I → aeded i 
o Foel Itl Coegee of Capital Measueet ad Capital “tadads
o Capital Ratio = capital/ weighted assets
o Cooke ‘atio → isk-eightig all o loas ad off guaatees B“ risk
o ‘isk eighted → o B“: atios defied fo etai tpes of assets
Off B“→ oesio fato to taslate isks ito opaale o-balance sheet risk to
risk weighted
- Basel II→ appoed , effetie ; to ipoe apital adeua faeok
o  pillas→ iiu apital euieet, supeiso eie, aket disiplie
o Promotes strong emphasis on risk management; encourage ongoing improvements in risk
assessment capabilities
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