Comm 469: Chapter 2

what are the four factors of the Financial Services Modernization Act (FSMA) of 1999

• repealed barriers between commercial banking, insurance, and investment banking

• allowed the creation of “financial services holding companies” that could engage in banking, insurance, and securities activities.

• allowed large banks to place certain activities, including some securities underwriting and indirect bank subsidiaries

• opened doors for the creation of full-service financial institutions in the US.

the Volcker Rule (2018) provision of the wall street reform and consumer protection act

prohibits bank holding companies from engaging in proprietary trading and limits their investments in hedge funds.

what are the three major Financial Institutions groups?

commercial banks, savings institutions, and credit unions

_____________ from small consumers is the most important source of funds for credit unions in Canada.

Savings deposits

Credit unions make proportionately larger amounts of __________________ than large Canadian banks

real estate loans

compared to the average large Canadian Bank, credit unions tend to have higher _____________________ per dollar of assets.

overhead expenses

OBS for Canadian banks include but are not limited to: (list four)

• derivative contracts

• loan commitments

• standby letters of credit

• issuing securities

OBS activities may expose financial institutions to what kind of risk that will not be reflected on their balance sheet?

credit risk, liquidity risk and counterparty risk

what is counterparty risk?

the likelihood that the other party in an investment, credit or securities trading transaction may fail to meet is obligations & default on the contract.

what constitutes the highest percentage of total assets for all banks in Canada

commercial and real estate

who are the primary regulators of Canadian banks

• the office of the Superintendent of Financial Institutions (OSFI)

• the Canada Deposit Insurance Corporation (CDIC)

CDIC provides how much coverage of what products & what do they not cover?

$100,000 coverage if financial institutions fails eligible products include deposits in canadian or foreign currency, GICs, and other term deposits.

does not cover: stocks, bonds, mutual funds, exchange traded funds, and cryptocurrencies

what are the four types of depository institutions in Canada?

• chartered banks

• trust and loan companies

• credit unions

• caisses populaires (equivalent of a credit union)

what are the key services of commercial banks

• checking & savings accounts

• personal, business and mortgage loans

• payments services (credit/debit cards, wire transfers)

what are the major components of the balance sheet structure of a commercial bank

Assets:

• loans (commercial, real estate, and personal)

• investment securities (bonds, equities)

• real-estate (major asset between 1984 and 2019, but declined due to COVID)

• securities and cash assets (increased since 2020)

Liabilities:

• Deposits

  • transaction account

  • Negotiable order of withdrawal (NOW) accounts

  • Money market deposit accounts

  • certificates of deposit

• borrowing

• other liabilities

Troubled Asset Relief Program (TARP) from 2008-2009 was intended to encourage U.S. financial institutions to:

• build capital

• prevent avoidable foreclosures

• increase the flow of financing

• support the US economy

Major OBS Activies

• issuing guarantees

  • letters of creidt

• derivative transactions

  • futures

  • forwards

  • options

  • swaps

major OBS activities risk examples

• interest rate risk

• basis risk

• takedown risk

• credit risk

• risk associated with letter of credit

• aggregate funding risk

Other Fee-Generating Activities for Banks

• trust services

• correspondent banking

key regulatory agencies for banks

• the federal deposit insurance corporation (FDIC)

• Office of the Comptroller of the Currency (OCC)

• Federal Reserve System (FRS)

• State authorities

• dual banking systems

explain what a savings institutions primary function is?

A savings institution primarily functions to accept deposits from customers and provide mortgage and other types of loans. They focus on promoting savings and facilitating home ownership.

explain what a credit union is

A credit union is a member-owned financial cooperative that provides savings accounts, loans, and other financial services to its members, often at lower fees and better rates than traditional banks.