1. © South-Western Publishing Slide 1 THE BUSINESS OF BANKING 1.1 1.1 Introduction to Banking 1.2 1.2 Role of Banks in the Economy 1.3 1.3 How the Banking System Works 1.4 1.4 Other Financial Institutions 1

2. © South-Western Publishing Slide 2 Lesson 1.1 INTRODUCTION TO BANKING Define the business of banking Identify trends in modern banking GOALS

3. © South-Western Publishing Slide 3 WHAT IS A BANK? A bank is a business. Banks sell their services to earn money. Banks must earn a profit to survive.

4. © South-Western Publishing Slide 4 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. An intermediary is a facilitator acting between parties. Banks facilitate the flow of money throughout our economy.

5. © South-Western Publishing Slide 5 TYPES OF BANKS Commercial banks Retail banks Central banks

6. © South-Western Publishing Slide 6 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.

7. © South-Western Publishing Slide 7 MERGERSMERGERS 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.

8. © South-Western Publishing Slide 8 TOP TEN LARGEST BANKS WORLDWIDE TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets) BankCountry Mizuho Financial GroupJapan CitigroupUnited States Deutsche BankGermany JP Morgan Chase Co.United States Bank of Tokyo-MitsubishiJapan HSBC HoldingsUnited Kingdom Hypo VereinsbankGermany UBSSwitzerland BNP ParibasFrance Bank of America Corp.United States

9. © South-Western Publishing Slide 9 TECHNOLOGYTECHNOLOGY Impact on bankers Accounting, 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” cards Online banking

10. © South-Western Publishing Slide 10 COMPETITIONCOMPETITION As government regulations have changed, competition between banks has become fiercer. Banks compete with each other and with other businesses that sell financial services.

11. © South-Western Publishing Slide 11 Lesson 1.2 ROLE OF BANKS IN THE ECONOMY List banking activities that contribute to economic stability Explain how banking expands the economy GOALS

12. © South-Western Publishing Slide 12 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.

13. © South-Western Publishing Slide 13 KEEPING YOUR MONEY SAFE Record keeping Identification Enforcement Transfer security Sound business practices

14. © South-Western Publishing Slide 14 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.

15. © South-Western Publishing Slide 15 TRANSFERRINGTRANSFERRING Between banks Between banks and individual customers Between banks and industry Between banks and governments Between governments

16. © South-Western Publishing Slide 16 LENDINGLENDING Loans to businesses Loans to governments Loans to individuals Credit cards Home loans Automobile loans

17. © South-Western Publishing Slide 17 CREDITWORTHINESSCREDITWORTHINESS 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.

18. © South-Western Publishing Slide 18 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.

19. © South-Western Publishing Slide 19 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.

20. © South-Western Publishing Slide 20 Lesson 1.3 HOW THE BANKING SYSTEM WORKS Explain how banks acquire money to do business Identify new services that banks offer to stay competitive GOALS

21. © South-Western Publishing Slide 21 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.

22. © South-Western Publishing Slide 22 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 is what is left of revenue after costs are deducted.

23. © South-Western Publishing Slide 23 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.

24. © South-Western Publishing Slide 24 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.

25. © South-Western Publishing Slide 25 TWO PRINCIPLES OF BANKING A bank’s liabilities exceed its reserves. A bank’s liabilities are more liquid than its assets.

26. © South-Western Publishing Slide 26 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.

27. © South-Western Publishing Slide 27 CHANGES IN TRADITIONAL SERVICES Branch locations Extended hours Drive-up windows Variety of checking accounts Savings options Personal service

28. © South-Western Publishing Slide 28 NEW SERVICES Credit cards Innovative lending Automated teller machines (ATMs) Smart cards Online banking

29. © South-Western Publishing Slide 29 Lesson 1.4 OTHER FINANCIAL INSTITUTIONS Explain depository financial institutions Explain nondepository financial institutions GOALS

30. © South-Western Publishing Slide 30 TYPES OF FINANCIAL INSTITUTIONS Depository intermediaries Obtain funds from the public Use the funds to finance their business Nondepository intermediaries Do not take or hold deposits Earn their money by selling specific services or policies

31. © South-Western Publishing Slide 31 DEPOSITORY INTERMEDIARIES Commercial banks Savings and loan associations Mutual savings banks Credit unions

32. © South-Western Publishing Slide 32 NONDEPOSITORY INTERMEDIARIES Insurance companies Trusts companies/pension funds Brokerage houses Loan companies Currency exchanges