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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Expert led content

+1,000 expert presented, on-demand video modules

Learning analytics

Keep track of learning progress with our comprehensive data

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Engage with our video hotspots and knowledge check-ins

Testing & certification

Gain CPD / CPE credits and professional certification

Managed learning

Build, scale and manage your organisation’s learning

Integrations

Connect Finance Unlocked to your current platform

Featured Content

More featured content

Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

More featured content

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Balance Sheet Walk-through

Balance Sheet Walk-through

Robert Ellison

20 years: Capital markets & banking

In this video, Rob walks us through Lloyds Banking Group's balance sheet. He explains the components of the financial statement and explains where they sit within the bank's assets and liabilities. He delves more deeply into the concepts discussed in 'What is a bank?' and puts some real-world figures around them.

In this video, Rob walks us through Lloyds Banking Group's balance sheet. He explains the components of the financial statement and explains where they sit within the bank's assets and liabilities. He delves more deeply into the concepts discussed in 'What is a bank?' and puts some real-world figures around them.

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Balance Sheet Walk-through

20 mins 14 secs

Key learning objectives:

  • Define the key metrics reported on a bank’s balance sheet

  • Learn how assets are categorised and weighted

  • Identify what investors look for

Overview:

A bank’s balance sheet is the most important statement it publishes. It comes with many pages of disclosures and footnotes that report ratios for regulatory and investor purposes. The golden rule of balance sheets is it must balance: Assets = Liabilities + Equity.

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Summary

Define the different metrics reported on a bank’s balance sheet, how assets are categorised and weighted and what investors look for

The Loan:Deposit Ratio

  • The Loan:Deposit Ratio is customer assets divided by customer liabilities, expressed as a percentage. A ratio above 100% means that a bank has to access wholesale funding to support customer lending

Liquid assets and the Liquidity Coverage Ratio

  • A bank’s High Quality Liquid Assets a.k.a liquidity must be at least as big as its modelled cash outflows over the next 30 calendar days, including in periods of extreme stress
  • The Liquidity Coverage Ratio is the degree of liquidity a bank holds relative to the amount of funding that could theoretically leave the liability side of its balance sheet during 30 days of extreme stress. The regulations say it must be a minimum of 100% at all times
  • This comes at a cost because assets in the liquidity portfolio tend to be very low-yielding so a large book of liquid assets represents an opportunity cost – to the detriment of Return on Equity

Shareholders Equity/Leverage ratio

  • A bank’s shareholders’ equity represents the capital the bank has to protect creditors from losses
  • The leverage ratio clarifies how big a bank’s equity base is relative to its asset book i.e. how well capitalised a bank is. The leverage ratio – asset exposure divided by equity capital – tells you how much capital a bank has relative to its asset base, but not how risky its asset base might be

RWAs

  • The riskiness of a bank’s assets and the relativity of its capital base to the riskiness of its asset book is calculated using risk-weighted assets (RWAs). A low risk weighting (10%-20%) is assigned to low-risk assets; a high risk weighting is applied to high-risk assets, up to 100%
  • RWA calculations enable banks to calculate how much capital they need to hold against each asset to protect against future losses. The higher the risk weight, the more capital that asset will need to consume
  • This drives banks’ risk-based pricing models and explains why a mortgage bears a lower rate of interest than an auto loan which bears a lower rate of interest than a credit card

Core Equity Tier 1 ratio and other capital measures

  • The Core Equity Tier 1 (CET1) ratio measures how much capital a bank holds in relation to its RWA. It is calculated following a number of deductions, add-ons and adjustments to both numerator and denominator so is complex
  • If calculated consistently across a cohort of banks with globally co-ordinated regulation, it is a great way to compare and contrast the relative capital strength of all banks
  • Equity is the most important and highest quality capital for all banks. But banks also calculate a total capital ratio, and the MREL ratio, which include other sources of capital additional to equity and which provide incremental protection to depositors. These ratios describe the size of additional capital buffers relative to a bank’s balance sheet

Return on Equity

  • Bank shareholders look at the return on equity – the return a bank generates on equity investments
  • RoE is the value that remains for shareholders after the bank has collected interest from debtors, collected fees and commissions and paid out the interest due to depositors and bondholders, provided for losses and operating expenses and paid its taxes

Net interest income and other income

  • For banks making loans to customers and taking deposits from customers, profitability relies solely on generating a Net Interest Margin between the two
  • But banks do much more than just make loans and take deposits; they provide all kinds of services to their customers
  • The ‘other income’ line in a bank’s income statement can be as diverse as insurance premiums, fees relating to payments or FX services, or trading income. Some banks refer to the Other Income line as Other Operating Income, or OOI

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Robert Ellison

Robert Ellison

Rob has spent 20-years working in the city in a career spanning debt origination, debt syndicate and client coverage. Rob has worked at UBS Investment Bank and Lloyds Banking Group, and he is now one of Finance Unlocked's co-founders.

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