{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

BankingIndustry_Basics - The Banking Industry Basics ECON...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
The Banking Industry: Basics ECON 3381 A. Hales
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What is a bank? A bank is a financial institution that accepts deposits and makes loans.
Image of page 2
Types of Banks Commercial Banks Largest part of the banking system Can be subdivided into 3 categories, based partly on size Money –Center Banks: Commercial bank located in a major financial center that raises funds primarily by borrowing from other banks or issuing bonds. Regional and Superregional banks: Regional Bank: commercial bank (not a money-center bank) with assets above $1 billion that operates in one geographic region. Superregional bank: commercial bank (not a money- center bank) with assets above $1 billion that operates in
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Who Can Open a Bank? To open a bank, you need a charter—a license from the government to operate a bank. Chartering Agencies Federal charters are granted by the Office of the Comptroller of the Currency (OCC). State charters are granted by individual states’ chartering agencies.
Image of page 4
Who Can Open a Bank? Obtaining a Charter To obtain a charter, a prospective bank completes an application and submits to the chartering agency for review. The application includes the bank’s business plan, its expected earnings, its initial level of capital, and its top management. Much of the process entails review of key personnel. Regulators examine applicants’ careers and interview previous employers. They try to keep crooks and gamblers out of the industry. Ultimately, if the bank poses high risk of failure, the application is denied
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Why are banks important to the economy? Banks reduce the problem of asymmetric information in financial markets. Banks reduce adverse selection by gathering information about borrowers. Loan officers are trained to screen borrowers and gain expertise by doing so repeatedly. Banks reduce transaction costs: the costs in time and money of exchanging goods, services, or assets. Banks make it easy and inexpensive to save by opening a checking or savings account. Banks make borrowing easy and inexpensive particularly for small firms who cannot pay underwriting fees to an investment bank for bond or stock issues. Bank loan contracts are standardized and can be used on multiple borrowers. In addition, the bank has criteria to evaluate the creditworthiness of the borrower, allowing it to process applications relatively quickly.
Image of page 6
The Bank balance sheet Balance sheet: Financial statement that summarizes an entity’s assets, liabilities, and net worth at a given date.
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Banks’ balance sheets-Assets Loans are the assets of the banks and also one of the ways it uses its funds. They produce a flow of income in the form of interest payments. They are also the most important asset class.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern