BankingIndustry_Basics

BankingIndustry_Basics - The Banking Industry: Basics ECON...

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The Banking Industry: Basics ECON 3381 A. Hales
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What is a bank? A bank is a financial institution that accepts deposits and makes loans.
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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-
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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.
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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
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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.
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The Bank balance sheet Balance sheet: Financial statement that summarizes an entity’s assets, liabilities, and net worth at a given date.
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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. Cash Items:
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BankingIndustry_Basics - The Banking Industry: Basics ECON...

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