THE BUSINESS OF BANKING

1 THE BUSINESS

OF BANKING

1.1 Introduction to Banking

1.2 Role of Banks in the Economy

1.3 How the Banking System Works

1.4 Other Financial Institutions





Slide 1

Lesson 1.1

INTRODUCTION

TO BANKING

GOALS

Define the business of banking



Identify trends in modern banking









Slide 2

WHAT IS A BANK?



A bank is a business.

Banks sell their services to earn money.

Banks must earn a profit to survive.









Slide 3

A UNIQUE BUSINESS



The services banks offer to customers have to do

almost entirely with handling money for other people.

Money is a medium of exchange—an agreed upon system

for measuring values of goods and services.

Money shows how much something is worth.



A bank is a financial intermediary for the safeguarding,

transferring, exchanging, or lending of money.





Slide 4

A Unique Business

Banks are closely regulated and must operate

by strict procedures and principles.



Banks are supervised by governments to

guarantee the safety and stability of the money

supply and of the country.



Banks are usually corporations and may be

owned by a group of individuals, corporations or

some combination of the two.



Slide 5

A Unique Business



Banks are chartered either by Federal or State

government agencies.



Federally Chartered—required to be corporations

since 1863.



State Chartered—usually owned by partnerships,

individuals, and some corporations.





Slide 6

Types of Banks



 In 1980’s the line between pure banking and other

providers of financial and investment services has

grown fuzzy.



 Banks provide a multitude of financial services of

many types beyond the traditional practices of

holding deposits and lending money.



 Not only has banking changed considerably, so have

the people who work in the banking world.



Slide 7

Types of Banks



 Although banks are still closely supervised and

regulated by the government, the regulations used to

be much sticker

 Deregulation in 1980’s was designed to promote more

competition among financial institutions.

 As a result, the lines separating types of financial

institutions became fuzzy as each type expanded the

variety and number of services offered.





Slide 8

TYPES OF BANKS



Commercial banks



Retail banks



Central banks









Slide 9

Types of Banks



1. Commercial Banks—Full Service Banks

 60 % of deposit and loan business

 Checking and saving account services

 Credit cards

 Investment services

 At one time, only offered services to business, but

today seek the business of any worthy customer.



Slide 10

Types of Banks



2. Retail Banks, Mutual Saving Banks, Savings

and Loans, and Credit Unions

 Offer services to individuals not served by

Commercial Banks.

 Originally originated to serve the needs of

individuals consumers.

 They offer a wide range of financial services.





Slide 11

Types of Banks

3. Central Banks

 Government Banks (Federal Reserve Banks) manage,

regulate and protect the money supply, and the banks

themselves.

 Serves as a financial intermediary between banks and do not

offer services to individual consumers.

 Issue currency and conduct monetary policy.

 The Federal Reserve is owned by the banks themselves.

 The Board of Governors is appointed by the President with the

consent of the Senate.

 The President also selects the powerful chairman of the Federal

Reserve.

Slide 12

BANKING TODAY



Traditionally, banking was viewed as a solid and

slow-moving industry.



Banking today is an exciting, fast-moving, around-

the-clock, around-the-world activity.



Banking is an international business.



U.S. Banks seek international business.



Slide 13

MERGERS



A merger occurs when one or more banks join or

acquire another bank or banks.

Mergers increase the size of banks, giving them

more resources.

Mergers decrease the number of banks.

Mergers have created an opening for a new wave

of small local banks.



Slide 14

TOP TEN LARGEST

BANKS WORLDWIDE (Ranked by size of assets)



Bank Country

Citigroup United States

Mizuho Financial Group Japan

UBS Switzerland

Sumitomo Mitsui Fin. Grp. Japan

Deutsche Bank Group Germany

Mitsubishi Tokyo Fin. Grp. Japan

HSBC Group United Kingdom

JP Morgan Chase & Co. United States

BNP Paribas France

Bayer HypoVereinsbank Germany

Slide 15

Top Ten Banks in the U.S.

Bank Assets (billions)

1 Citigroup $1,097

2 Bank of America Corporation (BAC) $ 851

3 JP Morgan Chase $ 759

4 Wells Fargo (WFC) $ 349

5 Wachovia $ 341

6 Bank One (ONE) $ 277

7 MetLife $ 277

8 Washington Mutual $ 268

9 US Bancorp $ 180

10 ABN Amro N America $ 140





Slide 16

TECHNOLOGY

Impact on bankers

Accounting, auditing, and examining functions have

been taken over by fast and efficient technology.

Funds transfer, record keeping, and financial analyses

have become instantaneous.



Impact on consumers

Automated teller machines (ATMs)

―Smart‖ cards

Online banking



Slide 17

COMPETITION



As government regulations have changed,

competition between banks has become fiercer.



Banks compete with each other and with other

businesses that sell financial services.









Slide 18

Lesson 1.2

ROLE OF BANKS IN

THE ECONOMY

GOALS

List banking activities that contribute to

economic stability

Explain how banking expands the

economy





Slide 19

BANKS AND ECONOMICS

 Money is a medium of exchange and the basis of the

modern economy.

 Banks and other institutions play a critical role in

performing services that are essential to the functioning of

an economy.

 Bank as financial intermediaries help move money

throughout our economy. In that role they:

 Safeguard

 Transfer

 Exchange

 Lend

Slide 20

KEEPING YOUR MONEY SAFE



1. Record keeping



2. Identification



3. Enforcement



4. Transfer security



5. Sound business practices





Slide 21

Keeping Your Money Safe



1. Recordkeeping

 Keep accurate records.

 You expect them to keep careful track of your money.



2. Identification

 Identify when funds are missing through theft or fraud.

 Bank officials must work closely with law enforcement

agencies to prevent various forms of identify fraud.





Slide 22

Keeping Your Money Safe



3. Enforcement

 Enforce legal actions against those who inflict

looses on the bank.



 Catch those that attempt to take it.



 Track down fraud, making collections who default

on loans, and pursuing legal actions against those

who inflict losses on the bank.







Slide 23

Keeping Your Money Safe



4. Transfer Security

 Most money moves merely on computer screens.



 Transfer money in a secure manner



 Technology takes a greater role in bank

transactions.



 Electronic banking is an important part of banking







Slide 24

Keeping Your Money Safe



5. Sound business practices

 Good judgment and management of day-to-day

bank operations



 Choosing and training employees



 Deciding who is credit worthy



 Making investment decisions





Slide 25

Investment Activity



Group ―banks‖ $1000 per person to

award!









Slide 26

SPREADING THE WEALTH



Banks play a key role in transferring money to

provide growth and stabilizing the monetary supply.



Bank lending makes money available to consumers

and businesses to make purchases they might not

otherwise be able to make.









Slide 27

Spreading the Wealth



Banks are critical to the economy and play a central role in

establishing financial environment.

1. Transferring



2. Lending



3. Creditworthiness



4. Guaranteeing the Money



5. The Substance of Society



Slide 28

TRANSFERRING



Between banks

Between banks and individual

customers

Between banks and industry

Between banks and governments

Between governments



Slide 29

LENDING



Loans to businesses



Loans to governments



Loans to individuals

Credit cards

Home loans

Automobile loans



Slide 30

CREDITWORTHINESS



Evaluating the creditworthiness of customers is a

banking function that affects the economy at large.



Banking policies and regulations regarding

creditworthiness and the ratio of loans to deposits

help guarantee a secure financial environment.









Slide 31

GUARANTEEING THE MONEY



 In the United States, banks and the government work together

to form the banking system and to make sure the money

supply is adequate, appropriate, and trustworthy.

 Much of this guarantee is backed through the central banking

function of the Federal Reserve.

 Individual banks work with the government to implement

monetary policy, perform exchange functions, and defeat

counterfeiters of currency.

 Banks guarantee their own policies.



Slide 32

THE SUBSTANCE OF SOCIETY



Banks provide a common financial system.



A great part of the economic system is

psychological.



Banks are at the heart of our financial system, and

their effect on your life cannot be calculated.







Slide 33

Lesson 1.3

HOW THE BANKING

SYSTEM WORKS

GOALS

Explain how banks acquire money to do

business

Identify new services that banks offer to

stay competitive





Slide 34

MONEY AT WORK



Banks earn money in various ways.

Most of their income comes from the

interest that people or businesses pay as

they repay a loan.



When banks lend money,

they put it to work.







Slide 35

The Spread



Depositors—People who put money into banks.



Interest—A percentage earned over a period of

time.









Slide 36

The Spread

The spread (net interest income)—The difference

between what a bank pays in interest and what it

receives in interest.

The spread is income, or revenue.

The spread is not pure profit.

Cost--Maintenance

Profit (or net income) is what is left of revenue

after expenses are deducted.



Slide 37

The Spread









Slide 38

OTHER FUNDS



In addition to interest income, banks have other

sources of income.

They charge for various services

Rental of safe-deposit boxes

Account maintenance fees for checking accounts

Fees for online bill payment

ATM transaction fees

Banks make money on investments.

Banks may have funds at their disposal from

stockholder investments.

Slide 39

ASSETS AND LIABILITIES



Asset is anything of value. In financial terms, that

usually means money. (Own)

Liquid asset is anything that can readily be exchanged,

like cash.

Liability, in financial terms, is a cash obligation. (Owe)

Equity is the worth of the business.



Net Assets-Total Liabilities=Net Worth





Slide 40

TWO PRINCIPLES OF BANKING



1. A bank’s liabilities exceed its reserves.



2. A bank’s liabilities are more liquid than its assets.









Slide 41

TEST OF BANK PROFITABILITY

Financial Statements can be used to determined the bank’s

profitability. Stockholders and investors are particularly interested.

 Return on assets (ROA). Measures how efficiently the bank is

using its assets to generate revenue.

Net income  Total assets  Return on assets

$10,000 ÷ $171,500 = .058 or 5.8% (5.8 cents on the dollar)



 Return on equity (ROE). Represents the amount of return

earned on each dollar invested.

Net income  Total equity  Return on equity

$10,000 ÷ $71,500 = .139 or 13.9% (13.9 cents on the dollar)



Slide 42

BANKS WORKING FOR YOU



Banking has changed radically in the last 20 years.



Large regional banks have huge resources.



Smaller banks use the flexibility that sometimes

comes with smaller size to their advantage and

target niche markets. (Niche Markets—involve

identifying a need not being met or a group not

being served.)



Slide 43

Banks Working for You

Today there are fewer banks than there were ten

years ago, there is an ever-wider array of services.

1930’s Great Depression—heavy regulations

1980’s—Deregulation—loosened the restrictions and

let banks compete in the open market.

Changed the banking environment.









Slide 44

CHANGES IN TRADITIONAL SERVICES

Customer oriented—a new focus for customers

1. Branch locations

 More satellite locations

 Mall branch offices



2. Extended hours

 No more Banker Hours—9-3



3. Drive-Up windows



Slide 45

CHANGES IN TRADITIONAL SERVICES



4. Variety of checking accounts

Several types of checking accounts available in a single

institution to meet customer needs:

 No cost checking

 Overdraft protection

 Interest bearing accounts

 No-frills checking accounts

 Custom-tailored mix of features to let customers pick

an account to suit their wishes.



Slide 46

Changes in Traditional Services



5. A variety of savings options

 Traditional savings accounts

 Variety of ways to compound interest

 Money market accounts offer higher rate of interest



6. Personal services

 Traditional loans

 Trust accounts

 Safe-deposit boxes



Slide 47

New Services

Because of deregulation—Banks moved into new

areas of business

1. Credit cards

 Profitable field of lending

 Can negotiate rates with consumers

 Some economists worry that the growth in this

business comes at the expense of savings

2. Innovative lending

 Second mortgages for homes—home equity loans

 Interest tax deductible

 Usually involves a line of credit

Slide 48

New Services

3. Technology Tools

 Automatic Teller Machines (ATM)

 Customers have access to their accounts day and night

 Networked computers can do business any where in the

world

 Smart Cards

 Credit, debit, or other types of cards that have an embedded

microchip

 Card store, gift cards, security cards, customer loyalty reward

cards

 Online Banking

 Allows customers to perform banking transactions from their

home computers

Slide 49

COOL AND NEW…Techno stuff…



 Citigroup's "Tap & Go"  Wells Fargo's "CEO

Stickers Mobile"

 Stickers on cell phone  Enables corporate

(up to $50) on Paypass customers to initiate or

readers approve wire transfers

 JP Morgan Chase and outgoing

payments, monitor

―QuickDeposit‖ and balances in corporate

―QuickPay‖ bank accounts, view

 Remote deposit capture transaction details, etc.

for iPhone





Slide 50

Lesson 1.4

OTHER FINANCIAL

INSTITUTIONS

GOALS

Explain depository financial institutions

Explain nondepository financial institutions









Slide 51

TYPES OF FINANCIAL INSTITUTIONS



Depository intermediaries

Obtain funds from the public

Use the funds to finance their business



Nondepository intermediaries

Do not take or hold deposits

Earn their money by selling specific services or policies









Slide 52

Depository Intermediaries



 Receive deposits from customers and use

the money to run their business.

 Four types:

1. Commercial Banks

2. Savings and Loan Associations

3. Mutual Savings Banks

4. Credit Unions







Slide 53

Commercial Banks



Owned by stockholders

Expect a profit

Work with both business and individuals

Wholesale banks—specialize only in business

banking







Slide 54

Saving and Loan Associations

 Various Names–

homestead banks, cooperative banks, building and loan

associations



 Most of deposits from individuals

 Chartered by state or federal

 Focused on real estate lending

 Offer same services as commercial banks

 Owned by depositors who receive shares of the company



Slide 55

Mutual Saving Bank



Similar to saving and loan associations

Receive deposits from individuals

Concentrate on private real estate mortgages

Owned by depositors

State chartered

Sometimes called thrift institutions



Slide 56

Credit Unions



 Owned by depositors

 Users must have membership based on some

common type of association—employer, line of work,

geographic region, or social or

religious association

 Not-for-Profit—any money beyond costs is returned to

members in forms of dividends on savings, reduced

fees for services, or lower rates for loans.





Slide 57

Nondepository Intermediaries

 Usually private companies that perform other financial

services and collect fees for their primary means of

business

 Regulated by the government but not backed or protected

by government

 Five types—not considered to be in the business of

banking

Insurance Companies

Trust Companies/Pension Funds

Brokerage Hours

Loan Companies

Currency Exchanges

Slide 58

Insurance Companies

 Make money on the policies they sell

 Some policies have a cash value

 Can be redeemed at any time

 Some policies let customers remove cash gradually

 Policies can be used to secure a loan

 You pay insurance premiums

 Profit is earned from the premiums beyond the cost of

insurance payouts.

 Insurance is an essential financial protection but not a

good investment





Slide 59

Trust Companies/Pension Funds



 Administer pension or retirement funds

 Manage money for a fee and promise in return to

provide future income

 Some Pension funds are closely regulated, others

may not be

 Growth for the contributor comes not from interest on

deposits but investments made by the administrator

 Yield a profit, but there is also an element of risk.







Slide 60

Brokerage Houses



Buy and sell stock and other securities



Charges commissions for their services



Offers advice or guidance on investment

strategies



Private companies



Makes a profit on transactions.



Slide 61

Loan Companies



 Finance companies—not banks

 Do not receive deposits

 Private companies

 Lend money to make a profit on the interest

 Charge higher interest rates to offset the risk

 New form of loan companies—short term loan against

a soon coming pay check at a higher rate of interest.



Slide 62

Currency Exchanges



Do not make loans or receive deposits

Cash checks, sell money orders, perform forms

other exchange services.

Charge a fee—usually a % of amount

Located where not other financial intermediaries

exist and offer services of people in those

areas.



Slide 63

Chapter Objectives



 Introduction to Banking



 Role of Banks in the Economy



 How the Banking System Works



 Other Financial Institutions









Slide 64