the business of banking

Copyright South-Western, a division of Thomson, Inc. Slide 1

THE BUSINESSOF BANKING

1.1 Introduction to Banking1.2 Role of Banks in the Economy1.3 How the Banking System Works1.4 Other Financial Institutions

1


Lesson 1.1

INTRODUCTIONTO BANKING

Define the business of bankingIdentify trends in modern banking

GOALS


WHAT IS A BANK?

A bank is a business.Banks sell their services to earn money.Banks must earn a profit to survive.


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.


TYPES OF BANKS

Commercial banksRetail banksCentral banks


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.


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.


TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets)

BankCountryCitigroup United StatesMizuho Financial Group JapanUBS SwitzerlandSumitomo Mitsui Fin. Grp. JapanDeutsche Bank Group GermanyMitsubishi Tokyo Fin. Grp. JapanHSBC Group United KingdomJP Morgan Chase & Co. United StatesBNP Paribas FranceBayer HypoVereinsbank Germany


TECHNOLOGY

Impact on bankersAccounting, 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” cardsOnline banking


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.


Lesson 1.2

ROLE OF BANKS IN THE ECONOMY

List banking activities that contribute to economic stabilityExplain how banking expands the economy

GOALS


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.


KEEPING YOUR MONEY SAFE

Record keepingIdentificationEnforcementTransfer securitySound business practices


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.


TRANSFERRING

Between banksBetween banks and individual customersBetween banks and industryBetween banks and governmentsBetween governments


LENDING

Loans to businessesLoans to governmentsLoans to individuals

Credit cardsHome loansAutomobile loans


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.


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.


THE SUBSTANCE OF SOCIETY

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.


Lesson 1.3

HOW THE BANKING SYSTEM WORKS

Explain how banks acquire money to do businessIdentify new services that banks offer to stay competitive

GOALS


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.


THE SPREAD

The difference between what a bank pays in interest and what it receives in interest is called the spread, or net interest income.

The spread is not pure profit. The spread is income, or revenue.

Profit (or net income) is what is left of revenue after expenses are deducted.


OTHER FUNDS

In addition to interest income, banks have other sources of income.

They charge for various services such as rental of safe-deposit boxes, account maintenance fees for checking accounts, fees for online bill payments, and ATM transaction fees.

Banks make money on investments.Banks may have funds at their disposal from

stockholder investments.


ASSETS AND LIABILITIES

An asset is anything of value. In financial terms, that usually means money.

A liquid asset is anything that can readily be exchanged, like cash.

A liability, in financial terms, is a cash obligation.


TWO PRINCIPLES OF BANKING

A bank’s liabilities exceed its reserves.A bank’s liabilities are more liquid than its

assets.


TEST OF BANK PROFITABILITY

Return on assets (ROA)Net income Total assets Return on assets

Return on equity (ROE)Net income Total equity Return on equity


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.


CHANGES IN TRADITIONAL SERVICES

Branch locationsExtended hoursDrive-up windowsVariety of checking accountsSavings optionsPersonal service


NEW SERVICES

Credit cardsInnovative lendingAutomated teller machines (ATMs)Smart cardsOnline banking


Lesson 1.4

OTHER FINANCIAL INSTITUTIONS

Explain depository financial institutionsExplain nondepository financial institutions

GOALS


TYPES OF FINANCIAL INSTITUTIONS

Depository intermediaries Obtain funds from the publicUse the funds to finance their business

Nondepository intermediariesDo not take or hold depositsEarn their money by selling specific services or

policies


DEPOSITORY INTERMEDIARIES

Commercial banksSavings and loan associationsMutual savings banksCredit unions


NONDEPOSITORY INTERMEDIARIES

Insurance companiesTrusts companies/pension fundsBrokerage housesLoan companiesCurrency exchanges

the business of banking

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