1. THE BUSINESS OF BANKING
4/16/2017
THE BUSINESS OF BANKING 1
1.1 Introduction to Banking
1.2 Role of Banks in the Economy
1.3 How the Banking System Works
1.4 Other Financial Institutions
Chapter 1

2. Lesson 1.1 INTRODUCTION TO BANKING
4/16/2017
Lesson 1.1 INTRODUCTION TO BANKING
GOALS
Define the business of banking
Identify trends in modern banking
Chapter 1

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. 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. TYPES OF BANKS
Commercial banks
Retail banks
Central banks

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. MERGERS
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. TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets)
Bank Country
Mizuho Financial Group Japan
Citigroup United States
Deutsche Bank Germany
JP Morgan Chase Co. United States
Bank of Tokyo-Mitsubishi Japan
HSBC Holdings United Kingdom
Hypo Vereinsbank Germany
UBS Switzerland
BNP Paribas France
Bank of America Corp. United States

9. TECHNOLOGY Impact on bankers Impact on consumers
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. COMPETITION
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. Lesson 1.2 ROLE OF BANKS IN THE ECONOMY
GOALS
List banking activities that contribute to economic stability
Explain how banking expands the economy

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. KEEPING YOUR MONEY SAFE
Record keeping
Identification
Enforcement
Transfer security
Sound business practices

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. TRANSFERRING
Between banks
Between banks and individual customers
Between banks and industry
Between banks and governments
Between governments

16. LENDING Loans to businesses Loans to governments Loans to individuals
Credit cards
Home loans
Automobile loans

17. CREDITWORTHINESS
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. 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. 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. Lesson 1.3 HOW THE BANKING SYSTEM WORKS
GOALS
Explain how banks acquire money to do business
Identify new services that banks offer to stay competitive

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. 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. 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. 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. TWO PRINCIPLES OF BANKING
A bank’s liabilities exceed its reserves.
A bank’s liabilities are more liquid than its assets.

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. CHANGES IN TRADITIONAL SERVICES
Branch locations
Extended hours
Drive-up windows
Variety of checking accounts
Savings options
Personal service

28. NEW SERVICES
Credit cards
Innovative lending
Automated teller machines (ATMs)
Smart cards
Online banking

29. Lesson 1.4 OTHER FINANCIAL INSTITUTIONS
GOALS
Explain depository financial institutions
Explain nondepository financial institutions

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. DEPOSITORY INTERMEDIARIES
Commercial banks
Savings and loan associations
Mutual savings banks
Credit unions

32. NONDEPOSITORY INTERMEDIARIES
Insurance companies
Trusts companies/pension funds
Brokerage houses
Loan companies
Currency exchanges