Commercial Bank and Investment Bank

• Intermediaries - a middle man for loans that offer a lower rate of return to borrowers than the interest rate of lenders to make profits . eg commercial/investment banks, pension funds, hedge funds etc
• Hedge funds - take risky deals than mutual funds with buying financial assets and thus, have higher regulations
• Systemic Risk - when the risk of one side of the banking system failing, causes the other side to fail eg. commercial/investment banks

  • failure risks increase if company engage in both sides of banking
• Objective of a commercial bank:

  • Profit
  • Liquidity
  • Security
• Potential conflict with a banks objectives - banks will limit profits if liquidity remains high and vice versa.
• Repo rate - The rate at which the central bank lends money to commercial banks.
• Fractional Reserve Banking - consumers will deposit cash earning a return rate, banks will use that money to give loans etc with higher interest rates than return rate to earn profits
• Money multiplier (how much profit is made by banks from a deposit):

  • 1 / reserve requirement
• Comercial bank - A bank that accepts deposits from the public and makes loans to individuals and businesses.
• Investment banks - Provide financial services to corporations and governments.
• Commercial bank assets:

  • Cash
  • BoE reserves
  • short term investments - interbank lending
  • long term investments - gov bonds, shares
  • Advances - loans, mortgages
• Commercial bank Liabilities:

  • Deposits
  • Short term borrowing - interbank borrowing
  • Long term borrowing - issue corp bonds, shares
  • Shareholder funds (CAPITAL - shareholder)
  • Retained profits (CAPITAL)
• Credit creation is created through fractional reserve banking