Course structure. A. Bank as financial intermediary. B. Banking products and services. C. Banks' Financial Reporting. D. Risk management issues

Transcription

1 Course structure 1 A. Bank as financial intermediary B. Banking products and services Course 3 - Banking activities Course 4 - Banking products and their pricing Course 5 - Types of banking C. Banks' Financial Reporting D. Risk management issues

2 Part B. Bank as financial intermediary Lecture 3. Banking activities

3 3 Banking activities

4 Objectives What do banks do? 3.2. Banking services

5 3.1. What do banks do? 5 A simplified bank balance sheet Example (course) for banks, the main source of funding is customer deposits (reported on the liabilities side of the balance sheet); this funding is then invested in loans, other investments and fixed assets (such as buildings for the branch network); the difference between total assets and total liabilities is the bank capital (equity); banks make profits by charging an interest rate on their loans that is higher than the one they pay to depositors;

6 3.1. What do banks do? 6 A simplified bank balance sheet Example (course) as with other companies, banks can raise funds by issuing bonds and equity (shares), and saving from past profits (retained earnings); however, the bulk of their money comes from deposits.!!! It is this ability to collect deposits from the public that distinguishes banks from other financial institutions.

7 3.1. What do banks do? 7 Banks are deposit-taking institutions (DTIs) and are also known as monetary financial institutions (MFIs). Monetary financial institutions play a major role in a country s economy as their deposit liabilities form a major part of a country s money supply and are therefore very relevant to governments and Central Banks for the transmission of monetary policy. Banks deposits function as money; as a consequence, an expansion of bank deposits results in an increase in the stock of money circulating in an economy. All other things being equal, the money supply, that is the total amount of money in the economy, will increase.

8 3.1. What do banks do? 8 The monetary function of bank deposits is often seen as one of the main reasons why deposit-taking institutions (DTIs) are subjected to heavier regulation and supervision than their non-deposit-taking institution (NDTI) counterparts (such as insurance companies, pension funds, investment companies, finance houses).

9 3.1. What do banks do? Classification of financial intermediaries by the nature of financial contracts 9

10 3.1. What do banks do? 10 Discretionary flow of funds savers can make discretionary decisions concerning how much money to hold and for how long depositors are free to decide the frequency and amount of their transactions

11 3.1. What do banks do? 11 Contractual flow of funds holding assets from other financial institutions requires a contract which specifies the amount and frequency of the flow of funds; Example: the monthly contributions to a pension fund or to an insurance provider are normally fixed and predetermined.

12 3.1. What do banks do? 12!!! There is no unique, universally accepted classification of financial intermediaries. Furthermore, regulation; financial conglomeration; advances in information technology and financial innovation; increased competition; and globalisation have all contributed to change the industry in recent years.

13 3.1. What do banks do? 13 All countries have regulations that define what banking business is. EU countries banks have been permitted to perform a broad array of financial services activity since the early 1990s; Since 1999 both US and Japanese banks are also allowed to operate as full service financial firms. Commercial banks can undertake a broad range of financial services, including investment banking and insurance activities; In Romania commercial banks have several restrictions regarding investment activities.

14 3.1. What do banks do? 14 universal banks - banks that engage, directly or through subsidiaries, in other financial activities, such as: financial instruments factoring leasing investment banking

15 3.2. Banking services 15 Modern banks offer a wide range of financial services, including: Payment services Deposit and lending services Investment, pensions and insurance services E-banking

16 Banking services Payment services

17 3.2. Banking services Payment services 17 Banks play a major role in the provision of payment services. transfers between individuals and/or companies transfers between financial institutions (typically high-value transactions)!!! If any of these circulation systems failed, the functioning of large and important parts of the economy would be affected.

18 3.2. Banking services Payment services 18 Types of cashless payments: Cheques Credit transfers Standing orders Direct debits Plastic cards

19 3.2. Banking services Payment services 19 Cheques A document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, the drawer, has a transaction banking account (often called a current account) where their money is held. The drawer writes the various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated.!!! Cheque payments are known as debit transfers because they are written requests to debit the payee s account.

20 Banking services Payment services

21 3.2. Banking services Payment services 21 Cheques Parts of a cheque based on a UK example: 1. drawee (the financial institution where the cheque can be presented for payment) 2. payee (the recipient of the money) 3. date of issue 4. amount of currency 5. drawer, the person or entity making the cheque 6. signature of drawer 7. machine readable routing and account information.

22 3.2. Banking services Payment services 22 Credit transfers (or Bank Giro Credits) payments where the customer instructs their bank to transfer funds directly to the beneficiary's bank account. Examples: pay invoices; send payment in advance for products ordered.

23 Banking services Payment services

24 Banking services Payment services

25 3.2. Banking services Payment services 25 Standing orders are instructions from the customer (account holder) to the bank to pay a fixed amount at regular intervals into the account of another individual or company. The bank has the responsibility for remembering to make these payments. Only the account holder can change the standing order instructions. Example: rents, credit rates.

26 3.2. Banking services Payment services 26 Direct debits are originated by the supplier that supplied the goods/service and the customer has to sign the direct debit; the direct debit instructions are usually of a variable amount and the times at which debiting takes place can also be either fixed or variable (although usually fixed); If a payment is missed, the supplier can request the missed payment on a number of occasions. If the payments are continually missed over a period of time, the customer s bank will cancel the direct debit. Example: utility bills (electricity, gas, water bills)

27 Banking services Payment services Plastic cards include credit cards, debit cards, cheque guarantee cards, travel and entertainment cards, shop cards and smart or chip cards. technically, plastic cards do not act themselves as a payment mechanism they help to identify the customers and assist in creating either a paper or electronic payment.

28 3.2. Banking services Payment services 28 Plastic cards: Credit cards provide holders with a pre-arranged credit limit to use for purchases at retail stores and other outlets; the retailer pays the credit card company a commission on every sale made via credit cards; the consumer obtains free credit if the bill is paid off before a certain date; if the bill is not fully paid off then it attracts interest. Visa and MasterCard are the two most important bankowned credit card organizations.

29 3.2. Banking services Payment services 29 Plastic cards: Debit cards are issued directly by banks and allow customers to withdraw money from their accounts. they can also be used to obtain cash and other information when used through automated teller machines (ATMs).

30 Banking services Payment services

31 31

32 32

33 33

34 34

35 35

36 36

37 37

38 38

39 39

40 3.2. Banking services Deposit and lending services 40 Current or checking accounts Time or savings deposits Consumer loans and mortgages

41 3.2. Banking services Deposit and lending services 41 Current or checking accounts pay no (or low) rates of interest and are used mainly for payments banks offer a broad range of current accounts tailored to various market segments and with various other services attached

42 3.2. Banking services Deposit and lending services 42 Current or checking accounts

43 3.2. Banking services Deposit and lending services 43 Time or savings deposits involve depositing funds for a set period of time for a predetermined or variable rate of interest Banks offer an extensive range of such savings products, from standard fixed term and fixed deposit rate to variable term with variable rates. banks offer deposit facilities that have features that are a combination of time and current accounts whereby customers can withdraw their funds instantly or at short notice. deposits that can be withdrawn on demand pay lower rates than those deposited in the bank for a set period.

44 Banking services Deposit and lending services

45 3.2. Banking services Deposit and lending services 45 Consumer loans and mortgages are commonly offered by banks to their retail customers Consumer loans can be unsecured (no collateral is requested) or secured on property (collateral is requested) interest rates are mainly variable (interest payments vary relative to a benchmark rate such as LIBOR, EURIBOR, ROBOR), but can be also fixed

46 3.2. Banking services Investment, pensions and insurance services 46 Investment products Pensions and insurance services

47 3.2. Banking services Investment, pensions and insurance services 47 Pensions and insurance services provide retirement income (in the form of annuities) to those contributing to pension plans; contributions paid into the pension fund are invested in longterm investments with the individual making contributions receiving a pension on retirement; pension services offered via banks are known as private pensions to distinguish them from public pensions offered by the state; insurance products protect individuals (policyholders) from various adverse events.

48 3.2. Banking services Investment, pensions and insurance services 48 Investment products include various securities-related products including mutual funds (unit trusts), investment in company stocks and various other securities-related products (such as savings bonds); in reality there is a strong overlap between savings and investments products and many banks advertise these services together;

49 3.2. Banking services E-banking 49 E-money includes reloadable electronic money instruments in the form of stored value cards and electronic tokens stored in computer memory. Remote payments payment instruments that allow (remote) access to a customer s account

50 Banking services E-banking

51 Banking services E-banking

52 3.2. Banking services E-banking 52 Major institutions offer traditional remote banking services (ATMs and telephone banking) and have started to offer a growing number of on-line PC banking and internet banking services. Some small-sized specialized banks operate without branches exclusively via remote banking channels. In most cases these banks are subsidiaries of existing banking groups. Innovative new institutions are setting up business on the internet, also covering traditional banking activities. This activity is often promoted by large to medium-sized banks.