Financial markets: Investment and commercial banks

What is a commercial bank?

Banks that provide retail banking services to household and business customers

What is an investment bank?

A bank that specialise in services for companies and high net worth investors related to capital markets

How do investment banks make profit?

• Underwriting securities offerings - purchase securities from issuer at discounted price then sell to public at a higher price

• Mergers and Acquisitions - advisory services to companies involved in M&A and charge fees for

• Trading and sales

What are private banks?

Banks that provide wealth management services to high net worth individuals

What are building societies and their main assets and liabilities?

These are owned by their members/customers not shareholders

Assets: Loans and advances to customers

Liabilities: Shares (customer deposits), debt securities

What are features of commercial banks?

• Licensed deposit takers providing different savings accounts

• Li

How do commercial banks make profit?

The spread on assets and liabilities by charging a higher interest rate on loans and other assets than it pays back on deposits or other liabilities

What are the main functions of a commercial bank?

• Accepting deposits

• Providing loans

• Payment services

• Safekeeping of valuables

• Currency exchange

What is the balance sheet of a commercial bank before lending

Assets: Currency, reserves, loans and advances, investments

Liabilities: Deposits, capital

Why are deposits a liability

They are a record of how much the bank owes its customers

What is the balance sheet of a commercial bank after lending?

Assets: New loans, currency, reserves, loans and advances, investments

Liabilities: New deposits, deposits, capital

How do commercial banks create credit?

• Agreeing loans to businesses and households - when banks make a loan or business take out a loan, it credits their bank account with a deposit the size of the loan

• Fractional reserve system - Required to hold only a fraction of their deposits as cash/liquid reserves and can lend out the rest

• Money multiplier - When banks lends out a portion of funds deposited with them, these funds are deposited to other banks