Lesson 1 Global Banking and Financial Institutions

Why do we have banks?Banks are important players in global financial markets. They store deposits and extend credits to households and firms.

The major types of banks are: commercial banksprivate banksoffshore banks merchant banks investment banks

HSBC bank in Jordan

Commercial BanksA commercial bank is an institution that

accepts deposits, makes business loans, and offers related services to the general public: individuals and businesses.

Private BanksPrivate banks offer personalized financial and

banking services to high net worth clientele.These individuals acquire more wealth than

the average person and can therefore partake in a large variety of investments.

Most clients have at least $500,000 of investable assets.

These bankers often address the client’s entire financial situation.

Offshore BanksAn offshore bank is a bank that is located

outside the country of residence of the depositor.

Often these banks are located in low tax jurisdictions that provide financial and legal advantages.

Some of these advantages include greater privacy, low or little taxation, easy access to deposits, and protection against local instability.

Merchant BanksTraditional merchant banks deal mainly with

international finance, long-term loans for companies, and underwriting.

They issue letters of credit, manage investment portfolios, transfer funds internationally, and advise companies on trading (such as mergers and acquisitions)

They do not provide banking services to the general public.

Today, commercial banks and investment banks engage in merchant bank activities.

What is an investment bank?An investment bank helps companies and governments access capital markets (such as stock markets and bond markets).

While companies can access these markets directly, investment banks offer value-added services, such asHelping a company launch an IPO (initial public offering). This happens when a private company wants to get listed on the stock market and thus become public. The public can then buy shares of this company.Creating a special class of stocks that are available to specific clientele, such as insurance companies or other banksHelping a company raise debt capital (for example bonds)Insuring bonds or other financial products

Investment banks also engage in proprietary trading (in-house money managers invests or trades the investment bank’s own money for its private account)