Question

1)state and explain what constitutes assets and liabilities in commercial banks and how profitability is measured.( 8 marks)

2)explain the following term, clearly stating the impact they have on the provision of financial services. information asymmetry,adverse selection,moral hazard.

3) comment on the characteristics following the type of financial intermediaries and how there services may defer from other financial intermediaries. investment banks,insurance companies,pension funds,credit unions.

Answer 1

A brief explanation of assets and liabilities of commercial banks

1. Capital and Reserve- Jointly they are called owned fund of bank. Capital represents paid up capital i.e. amount of share capital actually owned by owners.

Reserve are retained earnings or undistributed profit of banks accumulated over their working lives.

2. Deposits-Deposit by banks remains the most important form of saving of public.

3. Borrowing- Banks borrowing from Central bank and other non banking finance institutions. Individual banks borrow from each other as well through the call money market.

4. Other liabilities- like; Bills payable etc.

Assets of bank

1. Cash- Cash in hand and balances with other banks including the central bank of the country. This term is called CRR.

2. Money at call or short notice- Money lent to other banks stock broker and other financial institutions for a very short period from 1 to 14 days. Banks place their surplus cash in such to earn some interest.

3. Investment-Investment done under 3 heading a) government securities b) other approved securities and other securities. For example- Treasury Bill, Treasury deposit.

4. Overdraft-An advance given by allowing a customer to overdraw his current account upto agreed limits.

The traditional measures of the profitability of any business are it Return on assets(ROA) and Return on Equity (ROE). However, not all assets can be used to earn income, because banks must have cash to satisfy cash withdrawal request of customers.

2. Question number 2 is not clear to me.

3. There are 5 types of financial intermediaries.

Banks

Credit Unions

Pension funds

Insurance Companies

Stock Exchange

Their offered services are defer to each other

Banks-Banks act a role of middleman between lender and borrower. They give money to individual as a loan and collect money from individual as saving.

Credit Unions-Credit Unions bring together people who need money and those who have it. When somebody needs a loan from a credit union, they will receive it because, there are funds act credit union's disposal that someone else contributed. Besides lending they also oversee many credit related inquires.

Pension Funds- It works based on risk factor, matching contribution, and long term investing. Once the employee retires, they get all the contributions ( by employee during his working life) alongwith any interest and realised gains.

Insurance Companies-These companies offer coverage against risk. Whether it is a car, home or health . Whenever individual need his money, he claims it from insurance companies.