Commercial banks and investment banks

• What is the primary function of a commercial bank?

  To manage deposits, cheques, and savings accounts for individuals and firms
• How do commercial banks generate loans?

  By using the money saved with them from deposits
• What do investment banks primarily facilitate?

  The trade of stocks, bonds, and other forms of investment
• Why do investment banks have a higher risk tolerance?

  Due to weaker government regulation and their business model
• What are the main functions of a commercial bank?

  • Accept deposits
  • Provide loans
  • Overdraft services
  • Investment of funds
  • Agency functions
• What types of deposits do commercial banks accept?

  Demand deposits, fixed deposits, and saving deposits
• What is a demand deposit?

  A deposit that allows immediate withdrawals and deposits
• What is a fixed deposit?

  A deposit that stores money for a long time with higher interest rates
• Who typically uses saving deposits?

  Individuals who withdraw money often but not immediately
• What is the main source of income for commercial banks?

  Interest earned from providing loans
• What is a secured loan?

  A loan that is backed by an asset to protect the bank's funds
• What are cash credit loans based on?

  Bonds and approved securities
• What is an overdraft?

  A facility that allows consumers to borrow money when their account has no deposits
• What can surplus funds be invested in by banks?

  Securities such as government bonds and treasury bills
• What are agency functions of banks?

  Services like collecting cheques, paying bills, and transferring money for consumers
• What does a balance sheet show?

  The value of a company’s assets, liabilities, and owner’s equity
• What is a liability?

  Something that must be paid and is a claim on assets
• What is an asset?

  Something that can be sold for value
• What is owner's equity also called?

  Bank capital
• How are liabilities used in a bank?

  To buy assets and earn income from them
• What are the components of liabilities in a commercial bank?

  Share capital, deposits, borrowing, and reserve funds
• What are the components of assets in a commercial bank?

  Cash, securities, bills, loans, and investments
• What are the objectives of a commercial bank?

  • Liquidity: Ease of turning assets into cash
  • Profitability: Earning profits to pay depositors and expenses
  • Security: Maintaining safety of assets and managing risks
• What is liquidity in the context of a bank?

  The ease of turning assets into cash
• How does liquidity affect profitability in banks?

  Prioritizing liquidity can lead to lower profits
• What is the most liquid asset in a commercial bank?

  Cash
• What happens if banks can borrow easily and cheaply?

  They are likely to keep fewer liquid assets
• Why do banks need to earn profits?

  To pay depositors interest, wages, and general expenses
• What is the risk associated with holding a lot of funds in cash?

  It limits profitability
• What must banks maintain to ensure the safety of their assets?

  High proportions of their liabilities with themselves and the central bank
• What is the consequence of prioritizing safety in a bank?

  It may lead to lower profits and loss of customers