Question

4. a) Make commentaries on what constitutes assets and liabilities in a bank.

b) Make commentaries on the following terms Information Asymmetry,Adverse Selection,Moral Hazard.

c) features of the following terms investment banks,insurance firms,pension funds,credit unions

Answer 1

a)

Liabilities of Banks:

1. Capital and Reserves;  Together they constitute owned funds of banks. Capital represents paid-up capital, i.e., the amount of share capital actually contributed by owners (shareholders) banks. Reserves are retained earnings or undistributed profits of banks accumulated over their working lives.

2. deposits ;

3. Borrowings ; Banks as a whole borrow from the RBI, the IDBI, the NABARD, and from the non-bank financial institutions (the LIC, the UTI, the GIC and its subsidiaries, and the ICICI) that are permitted to lend by the RBI in the inter-bank call money market. Individual banks borrow from each other as well through the call money market and other­wise.

4. Other Liabilities: such as bills payable,participation certificates etc.

Assets of Banks:

1. Cash:

2. Money at Call at Short Notice:
3. Investments:

4. Loans, Advances and Bills Discounted-or Purchased:

(a) Cash Credit:

(b) Overdrafts:

  (c) Demand Loans

  (d) Term Loans:

b)

Information Asymmetry

Asymmetric information, also known as "information failure," occurs when one party to an economic transaction possesses greater material knowledge than the other party. This typically manifests when the seller of a good or service possesses greater knowledge than the buyer; however, the reverse dynamic is also possible. Almost all economic transactions involve information asymmetries.

Adverse Selection

Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality.
It is thus the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect on it.

Moral Hazard.

Moral hazard is the risk that one party has not entered into the contract in good faith or has provided false details about its assets, liabilities, or credit capacity. For instance, in the investment banking sector, it may become known that government regulatory bodies will bail out failing banks; as a result, bank employees may take on excessive amounts of risk to score lucrative bonuses knowing that if their risky bets do not pan out, the bank will be saved anyhow.

c)

investment banks

Modern day investment banking began with the merchant-banking model in the 18th and 19th centuries.
Investment banking is a sector of the industry that deals mainly with capital financing for a range of customers in global and local businesses.
In particular, investment banking helps companies bring shares to the public, underwrites bond offerings, and engages in proprietary trading and investment.
Most investment banks today cater to corporations, organizations, or high-net-worth clients.

insurance firms

The insurance industry is made up of different types of players operating in different spaces.
Life insurance companies focus on legacy planning and replacing human capital value, health insurers cover medical costs, and property, casualty, or accident insurance is aimed at replacing the value of homes, cars, or valuables.
Insurance companies can be structured either as a traditional stock company with outside investors, or mutual companies where policyholders are the owners

pension funds

Some of the advantages of investing in Pension Plans are listed below:

a. Option in Investment
Pension funds give investors the option to invest in either the safe government securities or take some risk and invest in debt and equity investments depending on their risk profile. The risk is balanced by the prospect of higher returns that are generated by the investment.

b. Long-term savings
These plans serve as a long-term savings scheme regardless of whether you opt for a lump sum payments or multiple payments of small amounts, the savings is assured. Pension plans create an annuity which can be invested further and give rise to a steady flow of cash post your retirement.

c. Choose how you want to get paid
Depending on your age or what your plans are, you can either invest a lump sum amount and get annuity payments right away, or choose a deferred annuity plan which will let your corpus earn more interest until the payouts begin.

d. Works as a life insurance cover
There are pension plans that offer the investor a lump sum amount when they retire or in case of the death of the individual, whichever scenario occurs earlier. This means that your pension policy also serves as a life insurance cover.

e. Negates the effect of Inflation
It is an excellent way of negating the effect of inflation by investing in pension plans. These plans pay a lump sum during your retirement, which amounts to a maximum of one-third of the accumulated corpus and the remaining two-thirds of the corpus is used in generating a steady cash flow.

f. Access a lump sum amount during an emergency
You are allowed to make adjustments to your pension policy to access a lump sum payout in case of an emergency. This can be done to cover one’s long-term health care.

credit unions

A credit union is a type of financial cooperative that provides traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants spanning the country, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.

Credit unions have fewer options than traditional banks, but offer clients access to better rates and more ATM locations because they are not publicly traded and only need to make enough money to continue daily operations.
However, credit unions have considerably fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service.
Credit unions are exempt from paying corporate income tax on their earnings.