Intermediate Banking Professional cheat sheet
Intermediate Banking Professional · Keep the key ideas within reach.
Banking and Financial Environment
A central bank sets the policy rate; commercial banks price deposits and loans off that rate plus a spread for credit, liquidity and term risk.
Deposit insurance protects covered depositors up to a statutory limit per depositor per institution; it does not cover investment or equity products.
Reserve requirements force banks to hold a fraction of eligible deposits at the central bank or as vault cash, reducing the lendable base.
The money multiplier approximates 1 divided by the reserve ratio; a 10% ratio implies a theoretical maximum expansion of 10 times new reserves.
A bank's net interest margin equals net interest income divided by average earning assets; it widens when asset yields rise faster than funding costs.
Basel III minimum ratios: common equity tier 1 of 4.5% of risk-weighted assets, tier 1 of 6%, and total capital of 8%, before buffers.
A liquidity coverage ratio requires high-quality liquid assets to cover 30 days of net stressed cash outflows, with a 100% minimum.
Shadow banking covers credit intermediation outside deposit-insured banks, including money market funds, finance companies and securitisation vehicles.
Banking Law
A bank account is a contract of debt: the bank owes the customer the balance, and the customer holds a creditor claim rather than title to specific notes.
The banker-customer relationship imposes duties of confidentiality, reasonable care and skill, and compliance with the customer's mandate.
A bank must honour cheques that are validly drawn and within mandate; wrongful dishonour exposes the bank to damages for breach of contract.
The limitation period for most contract claims is six years from the cause of action in common-law jurisdictions, subject to local statute.
A guarantee is a secondary obligation to pay another's debt; it must be supported by consideration or executed as a deed.
Set-off allows a bank to combine a customer's debit and credit balances, but only where the debts are mutual, due and in the same right.
A floating charge crystallises on insolvency or enforcement, fixing over the assets then held by the borrower.
Anti-money-laundering law requires customer due diligence, beneficial ownership identification and ongoing transaction monitoring before and during the relationship.
Regulation and Compliance
Know-your-customer rules require identity verification, beneficial ownership above a threshold (commonly 25%), and risk-based enhanced due diligence for politically exposed persons.
A suspicious transaction report is filed with the financial intelligence unit; tipping off the customer about the report is a criminal offence.
Sanctions screening compares customer and payment data against designated-party lists; a true match requires blocking and reporting, not merely a note.
Basel III adds a capital conservation buffer of 2.5% and a countercyclical buffer of 0 to 2.5% of risk-weighted assets.
The leverage ratio is tier 1 capital divided by total exposure, with a 3% minimum under Basel III.
MiFID-style suitability rules require assessing a client's knowledge, experience, financial situation and objectives before recommending a product.
Compliance testing is independent of the business line; the three-lines-of-defence model places risk ownership in the first line and audit in the third.
Record-keeping rules typically require retention of customer identification and transaction records for five years after the relationship ends or the transaction occurs.
Credit Analysis and Lending
The five Cs of credit: character, capacity, capital, collateral and conditions; capacity is assessed from cash flow, not from collateral.
Debt service coverage ratio equals EBITDA divided by total debt service; a ratio below 1.0 means operating cash flow cannot cover scheduled payments.
Loan-to-value equals loan amount divided by appraised collateral value; higher LTV raises loss given default.
Expected loss equals probability of default times loss given default times exposure at default.
A credit scorecard ranks applicants by statistical probability of default; cut-off scores trade approval volume against expected loss.
Covenants are maintenance tests (tested periodically) or incurrence tests (triggered by an action such as new debt), and breaches trigger default or waiver.
A loan covenant package typically covers leverage, interest cover, minimum net worth and restrictions on dividends or asset sales.
Risk-based pricing sets the loan rate as the funding cost plus expected loss plus operating cost plus a capital charge and profit margin.
Financial Statement Analysis and Corporate Finance
The current ratio equals current assets divided by current liabilities; the quick ratio excludes inventory and is a stricter liquidity test.
Return on equity equals net income divided by average shareholders' equity; it can be decomposed by DuPont into margin, asset turnover and leverage.
The cash conversion cycle equals days inventory plus days receivable minus days payable; a shorter cycle frees working capital.
Free cash flow to the firm equals operating cash flow minus capital expenditure, adjusted for changes in working capital.
Weighted average cost of capital equals the after-tax cost of debt times its weight plus the cost of equity times its weight.
Net present value discounts expected cash flows at the WACC; a positive NPV adds value, and IRR is the discount rate giving zero NPV.
Accrual profit can diverge from cash: rising receivables and inventory relative to sales are early warning signs of earnings quality problems.
Goodwill arises on acquisition when consideration exceeds fair value of identifiable net assets, and is tested annually for impairment rather than amortised under IFRS.
Bank Operations
The general ledger records every transaction in double entry; the trial balance must balance before period-end close.
Reconciliation matches the bank's internal records to external statements, such as nostro accounts and clearing files; unreconciled items age and escalate.
Segregation of duties separates initiation, authorisation, recording and reconciliation so no single person controls a full transaction cycle.
Straight-through processing passes a payment from capture to settlement without manual intervention, lowering error rates and cost per transaction.
A nostro account is the bank's account held with a correspondent bank in another currency; a vostro is the correspondent's account held with the bank.
Business continuity planning sets recovery time and recovery point objectives; a recovery point objective defines tolerable data loss in time.
Operational risk losses are classified by event type, including execution errors, fraud, system failures and process failures.
End-of-day cut-off times determine value date; a payment received after cut-off is processed on the next business day.
Payments and Treasury
SWIFT MT103 is a single customer credit transfer; MT202 is a general financial institution transfer covering the cover payment.
ISO 20022 replaced legacy SWIFT MT payment messages under the CBPR+ migration, using structured data such as a UETR for end-to-end tracking.
A real-time gross settlement system settles each payment individually and irrevocably in central bank money, used for high-value interbank payments.
A correspondent banking chain adds intermediaries; each hop deducts fees and raises the risk of delay and compliance holds.
Treasury manages the bank's liquidity gap: the difference between maturing assets and liabilities in each time bucket, funded in the interbank or repo market.
An interest rate swap converts fixed to floating exposure; the bank pays or receives the difference on a notional principal without exchanging it.
FX forward rates derive from spot and the interest rate differential between the two currencies, per covered interest parity.
Value dating and settlement risk: Herstatt risk is the risk that one leg of an FX trade settles while the counterparty fails before delivering the other leg.
Risk Management
Credit risk is the risk of loss from borrower default; market risk is loss from price, rate or FX moves; operational risk arises from people, process, systems and external events.
Value at risk estimates the maximum loss over a holding period at a given confidence level, but says nothing about losses beyond that threshold.
Duration measures a bond's price sensitivity to yield: a modified duration of 5 implies a roughly 5% price fall for a 1% yield rise.
Gap analysis compares rate-sensitive assets and liabilities repricing within a bucket; a positive gap gains when rates rise.
Stress testing applies severe but plausible scenarios to capital and liquidity; reverse stress testing asks what scenario would breach the business model.
The Basel internal ratings-based approach lets banks use their own probability of default and loss given default estimates, subject to supervisory approval.
Liquidity risk has two forms: funding liquidity (inability to roll over liabilities) and market liquidity (inability to sell assets without a discount).
Risk appetite is set by the board as limits on earnings volatility, capital adequacy and concentration by sector, product and single obligor.
Customer Relationship and Sales Management
Share of wallet measures the proportion of a customer's total financial spend captured by the bank; it is a better growth indicator than product count alone.
Customer lifetime value equals expected contribution margin over the relationship, discounted at the bank's cost of capital, minus acquisition cost.
Net promoter score is the percentage of promoters minus the percentage of detractors on a 0-10 likelihood-to-recommend question.
Cross-selling raises revenue per customer but increases conduct risk if products are sold without suitability assessment.
A needs-based sales process identifies the customer's objective first, then matches product; product-first selling drives mis-selling complaints.
Churn rate is customers lost in a period divided by customers at the start of the period; retention cost is typically lower than acquisition cost.
Segmenting by profitability, not just balance, separates high-value relationship clients from transaction-only users.
Complaint root-cause analysis feeds product and process fixes; repeated complaint categories are an early indicator of conduct and remediation cost.