Class Notes (972,838)
CA (572,918)
UOIT (1,969)
BUSI (226)
BUSI 3410U (20)
Bin Chang (14)
Lecture 4

BUSI 3410U Lecture 4: Lecture 4

by OneClass174234 , Winter 2013
5 Pages
68 Views

School
UOIT
Department
Business
Course Code
BUSI 3410U
Professor
Bin Chang
Lecture
4

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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
deposits.
- 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
banks
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
Problems
- 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
management
- 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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Description
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 deposits. Fixed Term Deposits Borrowings from Bank of Canada is called advances Bank 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 reserve deposit in BOC, no interest Deposits at other banks Cash items in process of collection suppose that a cheque written on an account at another bank is deposited in your bank and the funds for this cheque has not yet been received (collected) from other banks 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 Fractional reserve systems Money multiplier = 1reserves Money; medium of exchange is M1 o Cash at banks and in circulation o Chequing accounts(deposits) Bank Equity if he bank decides 10 is a reasonable expect loan loss; The securities would be invested in marketable securities to be available to replenish reserves in the event of default if he bank decides 10 is a reasonable expect loan loss; o The securities would be invested in marketable securities to be available to replenish reserves in the event of default Bank Regulation in order to maintain liquidity and protect bank from default, govt mandates 10 reserves requirements reserveasset 8 Liquidity ratios the cash held by the bankdeposits in the bank Measure how quickly corporationother entity can liquidate assets and cover short term liabilities 10 Capital Ratio (equityassets) 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 Riskier loans have higher interest rates risk of banks bank run o Requires that the bank also be regulated in terms of its assets and its other nondeposit liabilities o Otherwise there is still significant risk of bank failures and bank runs Problems Liquidity process also works in reverse; 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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