Ch 1 - Functions and Forms of Banking Banking What is a bank What do banks do Why do they perform these services Comparison with other fin Ser Orgs

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Functions and Forms of Banking Banking What is a bank? What do banks do? Why do they perform these services? Comparison with other fin. Ser. Orgs. Factors affecting operations of Factors Commercial banks Commercial Sources and uses of bank funds What is a bank? What A fin. Inst. Owned by stockholders, operates for fin. a profit and engages in lending activities. (Fed Res Glossary) Res A fin. inst. That accepts deposits from general fin. public for the purpose of lending or investing, repayable on demand or otherwise and drawable by cheque, draft or order or otherwise. (Pak bnkg Co ord. 1962) otherwise. Functions of a bank Functions What do banks do for their customers Payments (settlement of fin. transactions) Intermediation (deposit & loan function) Other financial services (off-B/S Other activities, Insurance, Trust services etc.) activities, Bank Risk Management Bank Types of risks faced by banks Credit risk Interest rate risk Operational risk Liquidity risk Price risk Compliance risk Foreign exchange risk Strategic risk Reputation risk Constraints for Bank Management Management Market constraints (compet. Rates) Social constraints (servi to charities etc.) Legal and Regulatory constraints Legal B/S composition (cap. Requirments etc.) B/S customer relationships (cust. Protectn laws) Major factors affecting bank market share share Inflation and volatile interest rates Securitization Technological advances Consumers Deregulation Despecialization and Competition Globalization Globalization Money and capital markets Inflation and volatile interest rates Inflation High interest rates lead to higher cost of High borrowing borrowing Failure of financial institutions (due to Failure short-term borrowing and long-term loan investments) investments) Large default of borrowers Decline of market value of assets Securitization Securitization Issuance of debt instrument from defined Issuance pool of loans (e.g. credit card loans, mortgage loans, car loans etc.) mortgage Securitization vs. Collateralization Packaging and selling the loan Unbundling lending process (originating Unbundling loan, packaging, servicing, funding) loan, Bank’s liquidity and access to secondary Bank’s market market Technological advances Technological Impact of technology on competition Reduction of processing costs of financial Reduction transactions Specialization in securitization by large Specialization Financial Institutions Financial Economies of scale (high vol, low cost) Reduction in costs of screening and Reduction monitoring loan portfolio monitoring Economies of scope (through internet) Consumers Consumers Greater education and personal money Greater management management Internet and on-line banking Greater volatility in flow of funds Deregulation Deregulation Reduction or elimination of laws No geographical limits on banks Bank mergers and failures Collaboration of investment banks and Collaboration insurance companies insurance Despecialization and Competition Despecialization Changing structure of fin. Serv industry Bank Desp. – One stop shopping center Overlapping of fin. Serv. by banking and Overlapping non-banking firms non-banking Increased competition Trade credit to customers Globalization Globalization The world as a single market Globalization vs. internationalization Global integration of fin. Markets Increased competition Money and capital markets Money Money markets – short term funds Capital markets – long term funds Large Cos greater access to cheaper Large funds thru commercial papers funds Decline in bank market share of fin. Decline assets due to competition Assets and Liabilities of Commercial Banks (sources & uses of funds) Banks Assets Assets Bank credit Investments (govt. securities, other) Loans (commercial and industrial, other) Interbank loans Cash assets (4 – 8%) Other assets (building, equipment etc.) Assets and Liabilities of Commercial Banks (contd.) (contd.) Liabilities Liabilities Deposits (transaction, non-transaction) Borrowings Other liabilities Equity Bank’s own capital (5 – 10%) Banks – a high leveraged org. ...
View Full Document

This note was uploaded on 10/23/2011 for the course ECONOMIA ECo2311 taught by Professor Alonzo during the Spring '10 term at ESSCA.

Ask a homework question - tutors are online