Banking II
Assignment 3
Question 1
-Transaction Risk versus Translation Risk
Transaction risk refers to a risk experienced in change of exchange rates, when an investor makes an in investment in a foreign country they tent to experience transaction risk as the the rates changes based on the other country’s exchange rates, or the time delay between entering into the contact and settling it and this time frame mostly contributes to this type of risks as the length of time between the transaction may collide with the fluctuating of exchange rates, example to this is a business trading in a foreign country transporting goods from home country to country of business , but the longer they take to pay for its custom duties the more they experience the transaction risk as rates keeps fluctuating due to different strains in the economic patterns.
While translation risk refers to a risk faced by local businesses trading in foreign currencies or trading by listing foreign assets, this type of risk is more experienced in multinational companies as they operate in different countries and there is a difference in exchange rates from time to time and different times of economic changes. Example to this is a company such as coca cola, this type of multinational company may experience this type of risk at times of economic recessions and fluctuating economic patterns causing it to lower the price of its products or having to only trade with products that are mostly bought or have a high selling rates neglecting other products, till situation comes better and resume its operations the usual way etc.
Interest Rate Risk versus Equity Risk
Interest rate risks has to do with risks associated with interest rates on different investments, this type of risks is mostly due to unexpected change in interest rate and mostly affect the investment itself as well. Different investments carry different magnitudes of interest rate risks and long-term investments carries the highest of these risks. An example to this is in the bond trading business trading on different types of bonds both short and long-term but experience interest risks probably because the interest charged changed.
While equity risk is a risk that is associated with the stock or securities that the business is in position of, assets in the business faces risks of different kinds and equity risks is described on different kinds of things, equity risks can also be because of old stock that is taking long to sell, products being un-satisfactory to clients and returned, or shop forced to sell its products on lower prices as their expiry date draws near, in a process called sale or marked down.
Currency Risk versus Commodity Risk
-Currency Risk refers to risks associated with wealth, or money to be specific mostly common in exchange rate, currency risks mostly arise when changing currency from one to another. This type of risks arises when investors or business have operations across the boarders and experience currency risk as the money market fluctuates dues to different changes. Example of currency risks are: Transaction risk and translation risk.
While commodity risk is a sudden or change in commodity prices that could result in losses, this type of risk could arise due to political problems such as war, or due to the economic distress or market- based impact which could be that the commodity prices increased due to a high demand rate or price drops due to too many commodity products available for trading. This type of risk could also be due to changes in the prices of raw materials and these factors are beyond control in the commodity market.
Standing Order versus Stop Payment
-Standing order is when or mostly when the bank customer orders or authorizes the bank officials to pay a certain amount from their accounts to another for a fixed period of time, money transferred in this way can either be used for payments of mortgages, and different types of loans and this type of agreement can be cancelled by the customer or till the agreement expires.
While stop payment refers to cancellation of a certain cheque or payment by the account holder. This type of procedure has steps and requirements, the account holder must have a written confirmation or must be available to verify for bank officials to go further with the payment stop.
Notice of withdrawal versus Negotiable Instrument
Notice of withdrawal refers to to a filled form, with a notification to notify the financial institution at which the account is held, that money will be withdrawn from an account. This should be done by the owner with the authorization and identification documents and notice takes a period of time depending on the financial institution’s police and this type of notice of withdrawal is mostly on accounts such as 32days accounts/ NOW accounts. Some lending or financial institutions requires clients to use withdrawals slips and demand for their money at the teller, provided that the funds needed or requested is available, this type of notice of withdrawals happened within a day.
While negotiable instruments is an instrument with confirmation that the owner of the account is willing to allow the client to withdraw or get a certain amount of money without the person that has issued or gave the money. Example to this is cell to cell funds transfer, electronic funds transfer and cheques.
2) Investment bank refers to banking institution that trades with or operates by offering and selling different investments, these types of banking involves buying and selling of available shares, provide advisory on transactions, mergers, acquisitions and to arrange financing of these transactions if not provide financing for them if possible. Investment banking also operates by accepting deposits from clients as well as extending loans to businesses in need of loans and individuals.
investment banks also act as intermediaries between security issuers and investors and this helps new firms to go public about their operations. Most of these banking institutions are privately owned, sometimes referred to corporate finance and divided into different divisions such as products divisions and industrial division.
There are different types of investment banks such as:
Consumer bank is a banking facility whose primary focus is to provide services and basic banking services directly to individuals this type of banking offers services ranging from depositing money for individuals who wish to deposit, offering private loans, mortgage loans, providing checking and saving accounts, plus many other banking services needed by individuals on daily basis. They are mainly branches different divisions catering for different banking services and products, they are also known as retail banking.
-Lead bank that specializes in developing plans and programs, managing and funding projects involving more than one lender, in short it is a financial entity that organizes loans and this can either be done as a functioning agent on a project on behalf of other lenders involved.
-Clearing bank refers to a commercial bank mainly part of several other banks that operates by processing cheques, this type of banking mainly just aims at deducting from payers account to a payees account for different purposes and they trade with all cheques written by different banks.
-Subsidiary bank is a banking institution that operates in a different country other than its origin/parent bank country, this particular banking model is useful and plays a vital role in carrying out duties in different nations, all regulations apply to all subsidiary banks in it’s host country. Subsidiary banks are ideal for different investments as they attract different client base in different countries creating a whole wide range of client base which could be profitable to it’s parent bank.
Internet bank is when the bank has a provision of accessing banking activities and facility online, internet bank is very important as it is an easier way of clients to carry out their banking activities anytime without having to go to the bank itself. Internet bank is also viewed safe and convenient.
Custodian bank refers to a bank that operates by keeping customer’s valuable assets or any assets that customers wish to to keep safe, this type of bank does not only keep assets but may keep any other valuable items such as jewelries, important documents and many others to minimize risk of loss or theft. Custody banks charge for safe guarding goods for customers and they charge according to the value of the item as the higher the value of an item the higher the risk associated with it. Goods are safe guarded in what is known as safety deposit box.
Prime Bank is a larger bank or financial institution that trades with issuing loans to larger entities or countries, prime banks also deals with investments and issuing debt securities to struggling non- performing entities seeking financial assistance. A prime bank should be a very large financial entity and should be able to fund an economic challenged country and a major banking entity that can participate in global commerce. An example of a prime bank is the world bank.
Question 3
3.1 Banking deregulation refers to an eliminating or not abiding to some of the rules that A certain banking regulator has. The bank may reduces the regulations/ restriction in the banking business to improve banking business operations, increase competition as this forces firms to improve and better their services, deregulations also helps to formulate their own strategies, improves innovations, entrepreneurship and efficiency. With all these leads the banking business to lower their prices for their customers and improved quality.
3.2 Interbank Rate refers to the amount of rate of interest banks charges each other on short-term loans. The interest rate charged depends on the availability of money in the market, term or length of the contract, the type of loan extended and prevailing rates.
3.3 Saving Account is the most basic type of transactional account usually held in the bank, that allows customers to keep their money safe by depositing their funds whenever and withdraw their money any time they wish to. This money is entirely for the client and the customer can deposit any amount they wish to save. Saving accounts varies, it is very safe and it allows customers to grow their funds as they pay interest into accounts.
3.4 Banking syndicate refers to a group of investment banks that comes together or works together for a specific purpose such as to issue new stock to the public, underwrite an initial public offering. A syndicate bank is not a permanent entity but forms specifically to handle a deal that might be too risky for one underwriter to handle.
3.5 Giro transfer is a method of payment transfer of funds from one bank account to another bank account. This type transaction is an instruction from the owner of the account to the bank, payer should have sufficient amount of money in their account and this type of transfer can be done for different purposes such as paying bills, taxes, credit cards or other obligations. Transfer is done either at the branch, through internet banking, or ATM.
3.6 Certificate of deposit is a saving certificate usually sold by the bank that allows clients who wish to invest or save money they don’t have to use in months or year and it is known as CD. This type of investment is very safe and a client is guaranteed that they will get the same amount of money they have invested plus interest added depending on how much money customers have invested too at maturity. CDs also have terms and conditions meaning there are rules that a depositors need to adhere to such as not demanding for the money before maturity as this may result in a penalty of charges charged on the client’s money. CDs may also give a notice if in need of the money before maturity unless it is an emergency.
3.7 Time Deposit is the way of putting money away in a bank account for a fixed period of time, or refers to money deposited in a bank account for fixed period of time, whereby the depositor can only withdraw the money after giving advanced notice. Time deposit is may may interest at a higher rate even more than the demand deposit.
3.8 Money market deposit account is an account in a bank where a client can save their money as well as have a provision of performing checking from the same account too, but the account has a restriction of the number of times the account holder can perform these activities in a month. This type of deposit if very safe but offers a lower interest rate than most other investment.
3.9 Check/Cheque Account refers to an account held in the bank where the owner is allowed to deposit their money any time as well as withdrawing their money any time without any limits. With this account, clients can make deposits over-the-counter in the bank or at any ATM, account holder’s also have chip cards which they can use to pay for bills and purchase goods in shops, they can also use smart phones to access their accounts.
3.10 Deposit Account is a type of bank account where money deposited in it belongs to the account holder, earn interest and can be withdrawn from it with a notice. Deposit accounts are safe to keep money as nobody has access to it or can withdraw money from it without having the bank call u to confirm as to whether the bank officials can go ahead with the transaction.
3.11 Causes of Bank Failures in 2009 was mainly from the fact that some countries experienced poor economic climate, which could be experienced from the changes in the economic cycle like could be that the country had no enough money causing the country’s economy to drop which could exert pressure on banking businesses too. The dramatic fall in in capital making it difficult for banks to have shortage on money and possible for the bank to be unable to meet its debt obligations. Many of the bank failures in 2009 were mainly contributed by widespread debt failures , bank’s in-ability to keep operating as their trades begun dropping making it difficult for banks to keep operating, resulting in some banks to be forced out of business and liquidate their bank assets in order to pay for their creditors, as they had difficulties obtaining credits from other institutions due to lack of collateral or so.Question 4
Functions of front, middle and back office
4.1 Functions of front office: is the primary phase of the business that mainly deals with direct interaction with clients, front office acts as the public face of the business. In banking business or financial facilities the front office mainly deals with sales and trading products and services of the firms are sold to customers in this office, and when buying and selling takes place the firm scores an incremental amount of money on each trade. In front office, the main research that are beneficial to the business is carried out, management performs their role to make sure that the business is running efficient, and employee’s duties are executed and company reports about their company’s achievements, and determine different sections of the business that may need improvement.
Front office also deals with investment management by managing company’s important assets, securities and various company products so they can be able to be on standard and attract investors which is beneficial for the company, it is in this division as well, where cash management, lending and securities brokerage are provided to the company.
Middle office: is the second part of a company that deals with assuring that transaction representations are properly capturing profit flows, meaning this division is mainly for operations and finance control including products control as well measures to risk control. This section is mainly important as it is the division that deals with making sure that the business is free from different risks that arises or they are controlled before they affect the business. A business’s funds are controlled on this section too in order for the company to operate, it requires finance and management of funds are vital for business operations and profitability structure.
Back office: usually located at the back of most companies, back office are responsible for the running of the company, administrations tasks, IT employees and technical supports of the company as they are essential for the company. There is no contact with customers in the back office but this division is very important for any company, the back office is sometimes meant to describe all jobs that do not directly generate revenue for a company.
