1. Lecture 1
Introduction to Banking Systems

2. Six Parts of the Financial System
Money
To pay for purchases and store wealth.
Financial Instruments
To transfer resources from savers to investors and to transfer risk to those best equipped to bear it.
Financial Markets To buy and sell financial instruments.
Financial Institutions
To provide access to financial markets, collect information & provide services.
Regulatory Agencies
To provide oversight for financial system.
Central Banks
To monitor financial Institutions and stabilize the economy.

3. Six Parts of the Financial System
Money
Money has changed from gold/silver coins to paper currency to electronic funds.
Cash can be obtained from an ATM any where in the world.
Bills are paid and transactions are checked online.

4. Six Parts of the Financial System
Financial instruments
Buying and selling individual stocks used to be only for the wealthy.
Today we have mutual funds and other stocks available through banks or online.
Putting together a portfolio is open to everyone.

5. Six Parts of the Financial System
Financial Markets
Once financial markets were located in coffeehouses and taverns.
Then organized markets were created, like the New York Stock Exchange.
Now transactions are mostly handled by electronic markets.
This has reduced the cost of processing financial transactions.
There is a much broader array of financial instruments available.

6. Six Parts of the Financial System
Financial Institutions
Banks began as vaults, developed into institutions, to today’s financial supermarket.
Offer a huge assortment of financial products and services.

7. Six Parts of the Financial System
Government regulatory agencies
Government regulatory agencies were introduced by federal government after the Great Depression.
Government regulatory agencies provide wide-ranging financial regulation - rules and supervision.
Government regulatory agencies examine the systems a bank uses to manage its risk.
The financial crises has led governments to consider greater regulation.

8. Six Parts of the Financial System
Central banks
Central banks began as large private banks to finance wars.
Central banks control the availability of money and credit to ensure low inflation, high growth and stability of financial system.
Today’s policymakers strive for transparency in their operations.

9. Five Core Principles of Money and Banking
Time has value.
Risk requires compensation.
Information is the basis for decisions.
Markets determine prices and allocation resources.
Stability improves welfare.

10. Five Core Principles of Money and Banking
Core Principle 1: Time has value
Time affects the value of financial instruments.
Interest is paid to compensate the lenders for the time the borrowers have their money.
Chapter 4 develops an understanding of interest rates and how to use them.

11. Five Core Principles of Money and Banking
Core Principle 2: Risk requires compensation
In a world of uncertainty, individuals will accept risk only if they are compensated.
In the financial world, compensation comes in the form of explicit payments: the higher the risk the bigger the payment.

12. Five Core Principles of Money and Banking
Core Principle 3: Information is the basis for decisions
The more important the decision, the more information we gather.
Collection and processing of information is the foundation of the financial system.

13. Five Core Principles of Money and Banking
Core Principle 4: Markets determine prices and allocate resources.
Markets are the core of the economic system.
Markets channel resources and minimize the cost of gathering information and making transactions.
The better developed the financial markets, the faster the country will grow.

14. Five Core Principles of Money and Banking
Core Principle 5: Stability improves welfare.
A stable economy reduces risk and improves everyone's welfare.
Financial instability in the autumn of triggered the worse global downturn since the Great Depression.
A stable economy grows faster than an unstable one.

15. Financial Institutions
Firms that provide access to the financial markets, both
to savers who wish to purchase financial instruments directly and
to borrowers who want to issue them.
Also known as financial intermediaries.
Examples: banks, insurance companies, securities firms, and pension funds.
Healthy financial institutions open the flow of resources, increasing the system’s efficiency.

16. Financial institutions are businesses which offer multiple services in banking and finance. The services customers receive may include savings and checking accounts, loans, investments, and financial counseling. The benefits consumers gain by using financial institutions includes convenience, cost savings, safety, and security.

17. The Role of Financial Institutions
To reduce transaction costs by specializing in the issuance of standardized securities.
To reduce the information costs of screening and monitoring borrowers.
They curb asymmetries, helping resources flow to most productive uses.
To give savers ready access to their funds.

18. Financial intermediation and leverage in the US have shifted away from traditional banks and toward other financial institutions less subject to government regulations.
Brokerages, insurers, hedge funds, etc.
These have become known as shadow banks.
Provide services that compete with banks but do not accept deposits.
Take on more risk than traditional banks and are less transparent.

19. The rise of highly leveraged shadow banks, combined with government relaxation of rules for traditional banks, permitted a rise of leverage in the financial system as a whole.
This made the financial system more vulnerable to shocks.
Rapid growth in some financial instruments made it easier to conceal leverage and risk- taking.

20. The financial crisis transformed shadow banking.
The largest US brokerages failed, merged, or converted themselves into traditional banks to gain access to funding.
The crisis has encouraged the government to scrutinize any financial institution that could, by risk taking, pose a threat to the financial system.

21. The Structure of the Financial Industry
We can divide intermediaries into two broad categories:
Depository institutions,
Take deposits and make loans
What most people think of as banks
Non-depository institutions.
Include insurance companies, securities firms, mutual fund companies, etc.

22. The Structure of the Financial Industry
Depository institutions take deposits and make loans.
Insurance companies accept premiums, which they invest, in return for promising compensation to policy holders under certain events.
Pension funds invest individual and company contributions in stocks, bonds, and real estate in order to provide payments to retired workers.

23. The Structure of the Financial Industry
Securities firms include brokers, investment banks, underwriters, and mutual fund companies.
Brokers and investment banks issue stocks and bonds to corporate customers, trade them, and advise customers.
Mutual-fund companies pool the resources of individuals and companies and invest them in portfolios.
Hedge funds do the same for small groups of wealthy investors.

24. The Structure of the Financial Industry
Finance companies raise funds directly in the financial markets in order to make loans to individuals and firms.
Finance companies tend to specialize in particular types of loans, such as mortgage, automobile, or business equipment.

25. The Structure of the Financial Industry
Government-sponsored enterprises are federal credit agencies that provide loans directly for farmers and home mortgagors.
Guarantee programs that insure loans made by private lenders.
Provides retirement income and medical care through Social Security and Medicare.

26. Nondepository Financial Institutions
Are financial intermediaries that do not accept deposits but do pool the payments of many people in the form of premiums or contributions and either invest it or provide credit to others.
Nondepository institutions include pension funds, securities firms, government-sponsored enterprises, and finance companies.

27. Insurances Companies Insurance companies may be classified as
1. Life insurance companies, which sell life insurance, annuities and pensions products.
2. Non-life or general insurance companies, which sell other types of insurance.

28. There are also smaller non depository institutions, such as pawnshops that make loans based on the value of property such as jewelry, electronics, or other valuable items.
Pawnshops charge much higher fees than other lending institutions.

29. Mutual Fund
An investment which is comprised of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market securities and similar assets.

30. Brokerage Houses
Stock brokers assist people in investing, online only companies are called 'discount brokerages', companies with a branch presence are called 'full service brokerages' or 'private client services.

31. Investment company
Generally, an "investment company" is a company (corporation, business trust, partnership, or limited liability company) that
Issues securities
and
Is primarily engaged in the business of investing in securities.

32. Depository institutions
Figure 13.3. Where Our Money Is Deposited

33. Banks
A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.

34. 1. Central Bank
A Central Bank, Reserve Bank or Monetary Authority, is an entity responsible for the monetary policy of its country or of a group of member states, such as the European Central Bank (ECB) in the European Union, the Federal Reserve System in the United States of America,

35. 1. Central Bank
Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a “lender of last resort” to the banking sector during times of financial crisis

36. 2. Commercial Banks
A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional- reserve banking. Some banks (called Banks of issue) issue banknotes as legal tender.

37. Size, structure and composition
From1985 to 2016 the number of banks decreased as a result of merges and acquisitions.

38. Small banks

39. Large banks

40. 3. Investment Banks
Help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.

41. 4. Saving Banks
A saving bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.

42. 5. Micro Finance Banks
For the purpose of poverty reduction program, such kind of banks are working in the different countries with the contribution of UNO or World Bank.

43. 6. Islamic Banks
Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse.

44. 9. Leasing Companies
A lease or tenancy is the right to use or occupy personal property or real property given by a lessor to another person (usually called the lessee or tenant) for a fixed or indefinite period of time, whereby the lessee obtains exclusive possession of the property in return for paying the lessor a fixed or determinable consideration (payment).

45. Federal Reserve System
Established to supervise and regulate member banks
All national banks are required to join the Federal Reserve System
Banks that join the system are called “member banks”

46. The functions of the Central Banks
Cashes checks for banks
Makes loans to banks
Wires money
Collect checks for banks
Supervise all national banks
Supervises other members of the system
Raises and lowers interest rates
Attempts to control inflation

47. Money Supply
A bank holds on to only a fraction of the money that it takes in—an amount called its reserves— and lends the rest out to individuals, businesses, and governments.
In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers.
The money multiplier effect ensures that the cycle expands.

49. Conclusion
Financial institutions serve as financial intermediaries between savers and borrowers and direct the flow of funds between the two groups.