Mrs. Shefa El Sagga F&BMP110/7/2015. Chapter 1 Mrs. Shefa El Sagga F&BMP2 What are Banks and What Do...

Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 1104/21/2304/21/23

Chapter 1

Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 22

What are Banks and What Do They Do?

The Meaning of Banking Organizational Structures

Banking Structures Financial Conglomerates

Central Banking 04/21/2304/21/23

1.11.1 . .IntroductionIntroduction

The term ‘‘banking’’ can be applied to a large The term ‘‘banking’’ can be applied to a large range of financial institutions, from savings, and range of financial institutions, from savings, and loans organizations to the large money-centre loans organizations to the large money-centre commercial banks.commercial banks.


DiscussionDiscussion:: What are the banks that you visited, or What are the banks that you visited, or identified in Gaza?.identified in Gaza?.

Do you have a bank account?. What are Do you have a bank account?. What are the procedures that you have made to open the procedures that you have made to open a bank account?.a bank account?.

How is the bank's relationship with How is the bank's relationship with clients?.clients?.


1.21.2 . .The Meaning of BankingThe Meaning of Banking

Financial firms Financial firms provision of deposit and loan products provision of deposit and loan products normally distinguishes banks from normally distinguishes banks from other types of financial other types of financial firms:firms:1.1.The bank is to maximize profit. Likewise, they manage the The bank is to maximize profit. Likewise, they manage the assets created by lending.assets created by lending.2.2.The core activity is to act as intermediaries between The core activity is to act as intermediaries between depositors and borrowers.depositors and borrowers.3.3.Other financial institutions, such as stockbrokers, are also Other financial institutions, such as stockbrokers, are also intermediaries between buyers and sellers of shares.intermediaries between buyers and sellers of shares.4.4.Financial services as: deposits and the granting of loanFinancial services as: deposits and the granting of loan


1.31.3 . .Organizational StructuresOrganizational Structures why a bank exhibits the organizational structure it does?. why a bank exhibits the organizational structure it does?. • Profit-maximizing, & the intermediary and payments services. Profit-maximizing, & the intermediary and payments services.

Another question explain why banks exist:Another question explain why banks exist:1.1.banks have the same objective as any other firm.banks have the same objective as any other firm.

2.2.The existence of the ‘‘traditional’’ bank, which intermediates The existence of the ‘‘traditional’’ bank, which intermediates between borrower and lender, and offers a payments service to its between borrower and lender, and offers a payments service to its customers.customers.

3.3.The core functions of a bank are loans and deposits are internal to The core functions of a bank are loans and deposits are internal to a bank. a bank.

4.4.Banks are participating in organized markets were developed and Banks are participating in organized markets were developed and extendedextended


Types work of Organizational StructuresTypes work of Organizational Structures

1.3.1. Banks and the Principal Agent Problem.1.3.1. Banks and the Principal Agent Problem.

1.3.2. Relationship Banking.1.3.2. Relationship Banking.

1.3.3. Transactional or Contract Banking1.3.3. Transactional or Contract Banking

1.3.4. Payment Systems: A Byproduct of the 1.3.4. Payment Systems: A Byproduct of the Intermediary Process.Intermediary Process.

1.3.5. Use of Cards and ATMs.1.3.5. Use of Cards and ATMs.

1.3.6. An International Comparison of Payments 1.3.6. An International Comparison of Payments Technology.Technology.


1.3.1. 1.3.1. Banks and the Principal Agent Banks and the Principal Agent ProblemProblemThe nature of banking is such that it suffers from agency The nature of banking is such that it suffers from agency problems. The principal agent theory can be applied to problems. The principal agent theory can be applied to explain the nature of contracts betweenexplain the nature of contracts between::

1.1.The shareholders of a bank (principal) and its The shareholders of a bank (principal) and its management (agent).management (agent).

2.2.The bank (principal) and its officers (agent).The bank (principal) and its officers (agent).

3.3.The bank (principal) and its debtors (agent).The bank (principal) and its debtors (agent).

4.4.The depositors (principal) and the bank (agent).The depositors (principal) and the bank (agent).Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 8804/21/2304/21/23

1.3.21.3.2 . .Relationship BankingRelationship BankingRelationship banking can help to minimize Relationship banking can help to minimize principal agent and adverse selection problems.principal agent and adverse selection problems.

1.1.A relational contract if there is an understandingA relational contract if there is an understanding

2.2.Period of time.Period of time.

3.3.Supply financial services. Supply financial services.

4.4.A relational contract improves information flows.A relational contract improves information flows.

5.5. Flexibility of response for any unforeseen events.Flexibility of response for any unforeseen events.


1.3.3. Transactional or Contract 1.3.3. Transactional or Contract BankingBanking

1.1. length length transactional transactional or or classical contract. classical contract.

2.2. Relationship exists between the two Relationship exists between the two parties.parties.

3.3. Information flows the scope for flexibility. Information flows the scope for flexibility.

4.4. Relationship banking. Relationship banking.

5.5. Banks facing bankruptcy.Banks facing bankruptcy.

6.6. Decline in the stock market. Decline in the stock market. Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 101004/21/2304/21/23

1.3.41.3.4 . .Payment Systems: Payment Systems: A Byproduct A Byproduct of the Intermediary Processof the Intermediary Process Banks differ from other financial firms because: Banks differ from other financial firms because:

1.1.They act as intermediaries and provide liquidity. They act as intermediaries and provide liquidity.

2.2.Banks require a system for processing the debits and Banks require a system for processing the debits and credits arising from these banking transactions. credits arising from these banking transactions. There are There are two key two key risks associated with any payment. risks associated with any payment. Banks must manageBanks must manage the following:the following:

Liquidity riskLiquidity risk Operational riskOperational risk


1.3.51.3.5 . .Use of Cards and ATMsUse of Cards and ATMs In the mid to late 1990s, there was a continued In the mid to late 1990s, there was a continued rapid growth in the use of rapid growth in the use of cards instead of checks. cards instead of checks. and ATM withdrawals and ATM withdrawals have more than doubled. have more than doubled. Cash payments remain the dominant payment Cash payments remain the dominant payment method.method. Checks as a form of payment has fallen Checks as a form of payment has fallen dramatically, as businesses switch.dramatically, as businesses switch.


DiscussionDiscussion::1.1. What are the benefits of credit card for the What are the benefits of credit card for the

holder, the merchant, the bank?.holder, the merchant, the bank?.

2.2. What problems of a credit card?.What problems of a credit card?.


1.3.61.3.6 . .An International Comparison of An International Comparison of Payments TechnologyPayments Technology

Look for the book Figures 1.3–1.6 Look for the book Figures 1.3–1.6 illustrate how the pace and form of illustrate how the pace and form of payments-related technological innovation payments-related technological innovation has varied widely among the different has varied widely among the different industrialized countries.industrialized countries.


1.41.4 . .Banking StructuresBanking Structures

1.4.1. Some Comparative Figures.1.4.1. Some Comparative Figures.

1.4.2. Definitions of Types of Banking 1.4.2. Definitions of Types of Banking Universal banking.Universal banking.


1.4.11.4.1 . .Some Comparative FiguresSome Comparative Figures.. The structure of banking varies widely from country The structure of banking varies widely from country

to country. Often, a country’s banking structure is a to country. Often, a country’s banking structure is a

consequence of the regulatory regime to which it is consequence of the regulatory regime to which it is

subject, Chapter 5. Below, different types of banking subject, Chapter 5. Below, different types of banking

structures are defined.structures are defined. These different banking structures do not alter the These different banking structures do not alter the

core functions core functions of banks, the provision of of banks, the provision of

intermediation and liquidity, and, indirectly, a payment intermediation and liquidity, and, indirectly, a payment

service, which are the service, which are the definingdefining features of banks. features of banks. Table 1.2 shows the top 10 banks by assets. Table 1.2 shows the top 10 banks by assets.


1.4.2. Definitions of Types of Banking 1.4.2. Definitions of Types of Banking Universal Universal bankingbanking

Universal banks offer the full range of banking services, together with Universal banks offer the full range of banking services, together with non-banking financial services, under one legal entity. In addition, the non-banking financial services, under one legal entity. In addition, the banks have direct links between banking and commerce through banks have direct links between banking and commerce through cross-shareholdings and shared directorships. Financial activities cross-shareholdings and shared directorships. Financial activities normally include the following.normally include the following.1.1.Intermediation and liquidity via deposits and loans; a byproduct is Intermediation and liquidity via deposits and loans; a byproduct is the payments system.the payments system.2.2.Trading of financial instruments (e.g., bond, equity, currency) and Trading of financial instruments (e.g., bond, equity, currency) and associated derivatives.associated derivatives.3.3.Proprietary trading.Proprietary trading.4.4.Stock broking.Stock broking.5.5.Corporate advisory services, including mergers and acquisitions.Corporate advisory services, including mergers and acquisitions.6.6.Investment management.Investment management.7.7.Insurance.Insurance. Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 171704/21/2304/21/23

Types of bankingTypes of banking1.1. Central BanksCentral Banks2.2. Commercial banks: Commercial banks:

• Banks with branches, Banks with branches, • Banks chains, Banks chains, • Banks holding group, Banks holding group, • Individual banks, Individual banks, • local banks.local banks.

3.3. Non-commercial banks (banks specialized): Non-commercial banks (banks specialized): • Industrial Bank, Industrial Bank, • Agricultural Bank, Agricultural Bank, • Land Bank.Land Bank.

4.4. Banks, foreign trade:Banks, foreign trade:5.5. Other banks: Other banks:

• Investment banks, Investment banks, • Savings banks, Savings banks, • Islamic banks, Islamic banks, • Insurance companies against accidents.Insurance companies against accidents.


1.1. Commercial and Investment banksCommercial and Investment banks Commercial banks offer wholesale and retail banking Commercial banks offer wholesale and retail banking

services.services.

1.1. Wholesale banking Wholesale banking typically involves offering typically involves offering intermediary, liquidity and payment services to large intermediary, liquidity and payment services to large customers such as big corporations and governments.customers such as big corporations and governments.

2.2. They offer business current accounts, make commercial They offer business current accounts, make commercial loans, participate in syndicated lending.loans, participate in syndicated lending.

3.3. active in the active in the interbank interbank markets to borrow/lend from/to markets to borrow/lend from/to other banks.other banks.

4.4. Retail banking Retail banking offers the same services to numerous offers the same services to numerous personal banking customers and small businessespersonal banking customers and small businesses..


2.2. Is an investment bank a bank?Is an investment bank a bank? This chapter has stressed that the features which This chapter has stressed that the features which distinguish banks from other financial firms are: distinguish banks from other financial firms are: 1.1.The combined function of acting as an intermediary The combined function of acting as an intermediary between savers and borrowers (either retail or wholesale).between savers and borrowers (either retail or wholesale).Investment banks act as intermediaries when offering Investment banks act as intermediaries when offering services such as :services such as :A.A.Underwriting. Underwriting. B.B.Advice on mergers and acquisitions.Advice on mergers and acquisitions.C.C.Trading.Trading.D.D. Asset management.Asset management.E.E. global custody. global custody.


Is an investment bank a bankIs an investment bank a bank??

However, it is a different form of However, it is a different form of intermediation.intermediation.

Investment banks don't offer liquidity as a Investment banks don't offer liquidity as a service in the same way as a standard bank.service in the same way as a standard bank.

The functions of the investment bank The functions of the investment bank differ so much from the traditional bank.differ so much from the traditional bank.


3.3. Financial Holding CompaniesFinancial Holding Companies

(FHCs), which can own subsidiary (FHCs), which can own subsidiary commercial banks, investment banks and commercial banks, investment banks and insurance firms. Likewise, investment insurance firms. Likewise, investment banks and insurance firms may form banks and insurance firms may form FHCs, subject to the approval of the FHCs, subject to the approval of the Federal Reserve.Federal Reserve.


1.51.5 . .Financial ConglomeratesFinancial Conglomerates

Defined Defined a financial conglomerate a financial conglomerate as a firm that as a firm that undertakes undertakes at least two of five financial activities: at least two of five financial activities: 1.1.Intermediary.Intermediary.2.2.Payments, insurance, securities.Payments, insurance, securities.3.3.Corporate finance. Corporate finance. 4.4.Fund management. Fund management. 5.5.Advising on Selling investment products to retail Advising on Selling investment products to retail customers. customers.


ContinueContinue:: Encouraged banks to become part of financial conglomerates. Encouraged banks to become part of financial conglomerates. Identified the advantages and disadvantages of financial Identified the advantages and disadvantages of financial

conglomerates. conglomerates. The advantages:The advantages: First, the efficiency of the financial system is improved., First, the efficiency of the financial system is improved.,

Economies of scale. Economies of scale. Second, they can apply their expertise to assist in the Second, they can apply their expertise to assist in the

development of a country’s.development of a country’s. A third diversification may actually increase the financial A third diversification may actually increase the financial

institutions’ income volatility.institutions’ income volatility. Functional supervision normally means independent regulators Functional supervision normally means independent regulators

oversee different functions. oversee different functions. Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 242404/21/2304/21/23

DiscussionDiscussion::1.1. What benefits achieved by the modern What benefits achieved by the modern

services?.services?.

2.2. What is the role of financial establishments in What is the role of financial establishments in the national economy?.the national economy?.

3.3. What are the disadvantages of financial What are the disadvantages of financial conglomerates?. conglomerates?.


1.61.6 . .Central BankingCentral Banking

Central bank is a government institution Central bank is a government institution and does not compete with banks and does not compete with banks operating in the private banking sector.operating in the private banking sector.

Two key debates dominate the central Two key debates dominate the central banking literature are: banking literature are:

1.1. The functions, & The functions, & 2.2. The degree of autonomy enjoyed of the The degree of autonomy enjoyed of the

central bank.central bank.Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 262604/21/2304/21/23

The functions of the central bankThe functions of the central bank..

1.1. Issuance of currency.Issuance of currency.2.2. Control of the activity determines banking Control of the activity determines banking

deposits and lending and investment.deposits and lending and investment.3.3. Regulatory (Watchdog) probe bank accounts.Regulatory (Watchdog) probe bank accounts.4.4. Advisor of the State.Advisor of the State.5.5. Bank of banks (lender of last resort for the Bank of banks (lender of last resort for the

banking system).banking system).6.6. Complex of bank reserves.Complex of bank reserves.


Continue:Continue: Modern central banks are normally Modern central banks are normally

responsible for:responsible for:1.6.1. Monetary Control or Price 1.6.1. Monetary Control or Price

Stability.Stability.1.6.2. Prudential Control.1.6.2. Prudential Control.1.6.3. Government Debt Placement1.6.3. Government Debt Placement..


Chapter ReviewChapter Review

1.1. Summary Why are Banks Special?.Summary Why are Banks Special?.

2.2. What are the benefits of credit card for the What are the benefits of credit card for the holder, the merchant, and the bank?.holder, the merchant, and the bank?.

3.3. What problems of a credit card?.What problems of a credit card?.((Potential answerPotential answer: lack of precision, theft, financial : lack of precision, theft, financial

cost, the risk on the liquidity of the bank's , cost, the risk on the liquidity of the bank's , bad public impression of the bank).bad public impression of the bank).


Chapter ReviewChapter Review4.4. What benefits achieved by the modern services?.What benefits achieved by the modern services?.((Potential answer Potential answer : Advertising of the bank, to increase : Advertising of the bank, to increase

resources, increase the employments of the bank, to resources, increase the employments of the bank, to commissions and interest rates).commissions and interest rates).

5.5. What is the role of financial establishments in the What is the role of financial establishments in the national economy?.national economy?.

((Potential answer Potential answer : The money is vital artery which solves : The money is vital artery which solves growth, stability and development, a means of growth, stability and development, a means of exchange, to channel saving into investment, exchange, to channel saving into investment, insurance against accidents).insurance against accidents).


Home Work:Home Work:1.1. Summary Why are Banks Special?.Summary Why are Banks Special?.



4.4. What are the banking financial activity to the What are the banking financial activity to the traditional bank?.traditional bank?.

5.5. What they of global custody?.What they of global custody?. 04/21/2304/21/23 Mrs. Shefa El Sagga F&BMPMrs. Shefa El Sagga F&BMP 3131

Mrs. Shefa El Sagga F&BMP110/7/2015. Chapter 1 Mrs. Shefa El Sagga F&BMP2 What are Banks and What Do...

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