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Essence of bankingLearning outcomesIntroductionThe financial system IntroductionLenders and borrowersFinancial intermediariesFinancial instrumentsFinancial marketsMoney creationPrice discoveryAllied participants on the financial systemPrinciples of banking IntroductionFundamental issues in bankingBasic raison d'être for banks: information costs and liquidity IntroductionInformation costsAsymmetry in liquidity preferenceOTC versus securities marketsBroad functions of banksIntroductionFacilitation of flow of fundsEfficient allocation of fundsAssistance in price discoveryMoney creationEnhanced liquidityPrice risk lessened for the ultimate lenderImproved diversificationEconomies of scalePayments systemMonetary policy functionThe balance sheet of a bankIntroductionShare capital (equity)Liabilities IntroductionDepositsLoansAssets IntroductionCentral bank moneyLoansLiability and asset portfolio managementMoney creationOff-balance sheet activities IntroductionOff-balance-sheet activities that carry riskOff-balance-sheet activities that carry no or little riskBibliographyMoney creationLearning objectivesIntroductionWhat is money?Measures of moneyMonetary banking institutionsMoney and its roleUniqueness of banksThe cash reserve requirementMoney creation does not start with a bank receiving a depositIntroductionNotes and coins depositedGovernment spendsMoney creation starts with a bank loanMoney creation is not dependent on a cash reserve requirementIs "money supply" a misnomer?The money identity and the creation of moneyRole of the central bank in money creationHow does a central bank maintain a bank liquidity shortage?BibliographyRisk in bankingLearning outcomesIntroductionThe concept of riskInterest rate riskDefinitionIdeal and extreme portfoliosRealityManagement of interest rate riskIntroductionInterest rate repricing gap analysisDuration analysisMarket riskLiquidity riskDefinitionBalance sheet changes resulting from deposit withdrawals and drawdowns on loan facilitiesConditions for creation of liquidity IntroductionImpeccable recordVolume of and the type of liquid assetsActive secondary financial marketsMeasures of a bank's liquidity exposureBank liquidity and a "bank run"The central bank and the bank runDeposit insuranceCredit riskDefinitionAsymmetric information, adverse selection and moral hazardManagement of credit riskIntroductionAvoidanceDiversificationCompensating balances and monitoring of business transactionsScreeningMonitoringLong-term relationship buildingLoan commitmentsCollateral requirementCredit rationingSpecialisation in lendingCredit derivativesSovereign credit riskBanking statute returns in respect of credit riskCurrency riskCounterparty riskOperational riskIntroductionInformation technology systems riskHuman resources riskReputation riskCompliance riskLegal and documentation riskExternal riskBibliographyBank models & prudential requirementsLearning outcomesIntroductionBank modelsIntroductionCommercial banksMutual banks / building societiesMerchant and investment banksTrading banksPrivate banksIslamic banksDevelopment banksMicro-credit banksCo-operative banksDedicated banksDiscount housesRationale, objectives & principles of regulation IntroductionRationale for regulationIntroductionSystemic malfunctionMarket imperfectionsThe moral hazard problemEconomies of scaleConsumer confidence and consumer demand for regulationSupplier demand for regulationObjectives of regulationIntroductionPromotion of financial stabilityPromotion of fair and healthy competitionPromotion of consumer protectionPrinciples of regulationIntroductionEfficiency-related principlesStability-related principlesConflict-conciliatory principlesRegulatory-structure principlesGeneral principlesPrudential requirementsIntroductionBasel accordsBasel II IntroductionPillar 1: minimum capital requirementPillar 2: supervisory review (regulatory response to Pillar 1)Pillar 3: market discipline (promotes greater stability in the financial system)Basel IIIThe banking statute: generalThe banking statute: prudential requirementsIntroductionShare capital and unimpaired reserve fundLiquid assetsLarge exposuresReserve requirementReturnsThe banking statute: other requirements associated with risk managementBibliography
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