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After completing this reading, you should be able to:
- Identify the major risks faced by banks and explain ways in which these risks can arise.
- Distinguish between economic capital and regulatory capital.
- Summarize the Basel committee regulations for regulatory capital and their motivations.
- Explain how deposit insurance gives rise to a moral hazard problem.
- Describe investment banking financing arrangements, including private placement, public offering, best efforts, firm commitment, and Dutch auction approaches.
- Describe the potential conflicts of interest among commercial banking, securities services, and investment banking divisions of a bank, and recommend solutions to these conflict of interest problems.
- Describe the distinctions between the banking book and the trading book of a bank.
- Explain the originate-to-distribute banking model and discuss its benefits and drawbacks.
0:00 Introduction
2:37 Types of Banks
3:36 Major Risks in Banking
18:39 Regulatory vs. Economic Capital
25:48 BCBS Regulatory Capital Guidelines
28:30 Motivations behind Basel Committee Regulations
29:41 What is Deposit Insurance?
32:38 Deposit Insurance and Moral Hazard
34:10 Banking financing Arrangements
45:49 Conflicts of Interest in Banking
51:21 Banking Book vs. Trading Book
52:48 The Originate-to-Distribute Banking Model