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Banking - Dr AP Faure

Year 2013

1. Essence of banking1.1. Learning outcomes1.2. Introduction1.3. The financial system 1.3.1. Introduction1.3.2. Lenders and borrowers1.3.3. Financial intermediaries1.3.4. Financial instruments1.3.5. Financial markets1.3.6. Money creation1.3.7. Price discovery1.3.8. Allied participants on the financial system1.4. Principles of banking 1.4.1. Introduction1.4.2. Fundamental issues in banking1.4.3. Basic raison d'être for banks: information costs and liquidity Introduction1.4.3.2. Information costs1.4.3.3. Asymmetry in liquidity preference1.4.3.4. OTC versus securities markets1.4.4. Broad functions of banks1.4.4.1. Introduction1.4.4.2. Facilitation of flow of funds1.4.4.3. Efficient allocation of funds1.4.4.4. Assistance in price discovery1.4.4.5. Money creation1.4.4.6. Enhanced liquidity1.4.4.7. Price risk lessened for the ultimate lender1.4.4.8. Improved diversification1.4.4.9. Economies of scale1.4.4.10. Payments system1.4.4.11. Monetary policy function1.5. The balance sheet of a bank1.5.1. Introduction1.5.2. Share capital (equity)1.5.3. Liabilities Introduction1.5.3.2. Deposits1.5.3.3. Loans1.5.4. Assets Introduction1.5.4.2. Central bank money1.5.4.3. Loans1.5.5. Liability and asset portfolio management1.5.6. Money creation1.5.7. Off-balance sheet activities Introduction1.5.7.2. Off-balance-sheet activities that carry risk1.5.7.3. Off-balance-sheet activities that carry no or little risk1.6. Bibliography2. Money creation2.1. Learning objectives2.2. Introduction2.3. What is money?2.4. Measures of money2.5. Monetary banking institutions2.6. Money and its role2.7. Uniqueness of banks2.8. The cash reserve requirement2.9. Money creation does not start with a bank receiving a deposit2.9.1. Introduction2.9.2. Notes and coins deposited2.9.3. Government spends2.9.4. Money creation starts with a bank loan2.10. Money creation is not dependent on a cash reserve requirement2.11. Is "money supply" a misnomer?2.12. The money identity and the creation of money2.13. Role of the central bank in money creation2.14. How does a central bank maintain a bank liquidity shortage?2.15. Bibliography3. Risk in banking3.1. Learning outcomes3.2. Introduction3.3. The concept of risk3.4. Interest rate risk3.4.1. Definition3.4.2. Ideal and extreme portfolios3.4.3. Reality3.4.4. Management of interest rate risk3.4.4.1. Introduction3.4.4.2. Interest rate repricing gap analysis3.4.4.3. Duration analysis3.5. Market risk3.6. Liquidity risk3.6.1. Definition3.6.2. Balance sheet changes resulting from deposit withdrawals and drawdowns on loan facilities3.6.3. Conditions for creation of liquidity Introduction3.6.3.2. Impeccable record3.6.3.3. Volume of and the type of liquid assets3.6.3.4. Active secondary financial markets3.6.4. Measures of a bank's liquidity exposure3.6.5. Bank liquidity and a "bank run"3.6.6. The central bank and the bank run3.6.7. Deposit insurance3.7. Credit risk3.7.1. Definition3.7.2. Asymmetric information, adverse selection and moral hazard3.7.3. Management of credit risk3.7.3.1. Introduction3.7.3.2. Avoidance3.7.3.3. Diversification3.7.3.4. Compensating balances and monitoring of business transactions3.7.3.5. Screening3.7.3.6. Monitoring3.7.3.7. Long-term relationship building3.7.3.8. Loan commitments3.7.3.9. Collateral requirement3.7.3.10. Credit rationing3.7.3.11. Specialisation in lending3.7.3.12. Credit derivatives3.7.4. Sovereign credit risk3.7.5. Banking statute returns in respect of credit risk3.8. Currency risk3.9. Counterparty risk3.10. Operational risk3.10.1. Introduction3.10.2. Information technology systems risk3.10.3. Human resources risk3.10.4. Reputation risk3.10.5. Compliance risk3.10.6. Legal and documentation risk3.10.7. External risk3.11. Bibliography4. Bank models & prudential requirements4.1. Learning outcomes4.2. Introduction4.3. Bank models4.3.1. Introduction4.3.2. Commercial banks4.3.3. Mutual banks / building societies4.3.4. Merchant and investment banks4.3.5. Trading banks4.3.6. Private banks4.3.7. Islamic banks4.3.8. Development banks4.3.9. Micro-credit banks4.3.10. Co-operative banks4.3.11. Dedicated banks4.3.12. Discount houses4.4. Rationale, objectives & principles of regulation 4.4.1. Introduction4.4.2. Rationale for regulation4.4.2.1. Introduction4.4.2.2. Systemic malfunction4.4.2.3. Market imperfections4.4.2.4. The moral hazard problem4.4.2.5. Economies of scale4.4.2.6. Consumer confidence and consumer demand for regulation4.4.2.7. Supplier demand for regulation4.4.3. Objectives of regulation4.4.3.1. Introduction4.4.3.2. Promotion of financial stability4.4.3.3. Promotion of fair and healthy competition4.4.3.4. Promotion of consumer protection4.4.4. Principles of regulation4.4.4.1. Introduction4.4.4.2. Efficiency-related principles4.4.4.3. Stability-related principles4.4.4.4. Conflict-conciliatory principles4.4.4.5. Regulatory-structure principles4.4.4.6. General principles4.5. Prudential requirements4.5.1. Introduction4.5.2. Basel accords4.5.3. Basel II Introduction4.5.3.2. Pillar 1: minimum capital requirement4.5.3.3. Pillar 2: supervisory review (regulatory response to Pillar 1) Pillar 3: market discipline (promotes greater stability in the financial system)4.5.4. Basel III4.5.5. The banking statute: general4.5.6. The banking statute: prudential requirements4.5.6.1. Introduction4.5.6.2. Share capital and unimpaired reserve fund4.5.6.3. Liquid assets4.5.6.4. Large exposures4.5.6.5. Reserve requirement4.5.6.6. Returns4.5.7. The banking statute: other requirements associated with risk management4.6. Bibliography
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