WHY BANKS ARE SPECIAL
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
Why are banks considered 'special' compared to other financial intermediaries?
Banks are special because they simultaneously accept deposits from the public and extend credit, creating money in the process, and their failure can trigger systemic risk across the entire economy.
What is the primary function of banks that distinguishes them from ordinary lenders?
Banks accept deposits and channel funds into productive loans.
What is the primary reason banks face a unique liquidity risk not shared by most other firms?
Banks borrow short-term (deposits) and lend long-term (loans), creating a structural maturity mismatch that makes them inherently vulnerable to sudden deposit withdrawals or bank runs.
What is 'narrow banking' and how does it differ from traditional banking?
Narrow banks invest only in safe assets, avoiding credit risk entirely.
What is the meaning of 'systemic risk' in the context of banking?
Systemic risk is the risk that the failure of one bank can trigger a cascade of failures across the entire financial system due to the interconnectedness of banks through interbank lending and payment systems.
Why is opacity of bank balance sheets considered a unique feature of banking risk?
Loan quality is hard to verify externally, creating information asymmetry.
Why does the government extend a safety net to banks but not to most other industries?
Because bank failures can destroy public confidence, disrupt the payment system, and cause economy-wide damage, governments provide deposit insurance and lender-of-last-resort facilities to maintain financial stability.
What is 'roll-over risk' in the context of bank funding?
Risk that short-term borrowings cannot be renewed at maturity.
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