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Introduction to Banking and Finance

AQ002-3-1

An overview of changing financial services


Learning Outcomes

Which entities are included in the financial services industry

The competition within the financial services industry

The roles of different institutions

The services offered by banks and other financial service institutions

Key trends affecting all financial services firms

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What is a Bank?

A bank is any business offering deposits subject to withdrawal on


demand (such as by writing a check or making an electronic transfer
of funds) and making loans of a commercial or business nature
(such as granting credit to private businesses seeking to expand the
inventory of goods on their shelves or purchase equipment)
Banking is the oldest of all financial service professions

Though numerous definitions but generally a bank can be defined in


terms of a) the economic functions it serves b) the services it offers
to its customers or c) the legal basis for its existence

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a) Economic Functions(17 Sept 2015)
Financial intermediation-process performed by banks of taking
funds from depositors & lending them to borrowers

- (maturity intermediation- making long term loan on short-term


borrowed funds)
Payment mechanism

Risk transfer and diversification-insurance & derivatives( a contract


that derives value from performance of an underlying entity. Used as
a hedge against price movement eg forwards, futures, options,
swap, mortgage backed securities)
Providing Liquidity etc

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b) Services Offered
(30 Sept 2015)
(24 Nov 2015)
Checking and saving accounts

Loans to business, individuals and governments

Investment banking (Financial advisory, security underwriting etc)

Insurance protection

Risk Management solutions

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c) Legal basis for existence

More deregulation these days

The traditional banks and non-bank financial sectors are changing


the way they operate (convergence within industry)

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The financial system and competing
financial services institutions

Role of the financial system


To encourage individuals and institutions to save and to transfer those savings
(surplus funds) to those individuals and institutions who need funds (deficient)
Supporting services like payment mechanisms, risk protection services, liquidity
services, credit services etc

The competing challenge for banks


Banking share of the financial market generally has fallen due to competition
Many argue that the share has fallen due to the excessive regulation in the
banking sector that is restricting banks to compete

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Leading competitors with banks
( 25 Nov 2015)
(01 Dec 2015)
Non-bank financial institutions like
Saving Associations
Specialize in selling saving deposits and granting home mortgage loans an other
forms of loans to individuals and families
Mutually held (depositors and borrowers are members with voting rights)

The first Savings & Loans Associations in USA was in 1831

Credit Unions

-cooperative financial institution


Collect deposits from and make loans to their members

Money Market Funds


Sells units to public representing an interest in a professionally managed pool of
short term debt securities
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Leading competitors with banks

Hedge Funds
Sell shares mainly to upscale investors in a broad group of different kinds of
assets (including nontraditional investments in commodities, real estate, loans to
new and ailing businesses and other risky assets)

Security Brokers and Dealers


Buy and sell securities on behalf of their customers and for their own accounts

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Leading competitors with banks

Investment Banks
Provide financial advisory services, underwriting, deals etc

Finance Companies
Offer loans to commercial enterprises (such as auto and appliance dealers) and
to individuals and families using funds borrowed in the open market or from other
financial institutions

Insurance Companies
Protect against risks to persons or property and manage the pension plans of
businesses and the retirement funds of individuals

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Traditional Services Offered By Banks

Exchange of Currency
Commercial Notes and Loans
Offering Savings Deposits
Safekeeping of Valuables
Supporting Government Activities with Credit
Checking Accounts
Trust Services

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Recent Services of Banks

Consumer Loans
Financial Advice
Cash Management
Equipment Leasing
Venture Capital Loans
Selling Insurance Products
Security Underwriting and Brokerage Services
Mutual Funds and Annuities
Merchant Banking Services

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The Roles of Commercial Banks and
Their Closest Competitors

Maturity Intermediation-making term loans on funds borrowed at short term


int. rates
Payment Mechanism
Guarantor
Risk Management
Financial advisory
Underwriting
Safekeeping/Certification of Value
Agency
Policy Implementation-central bank policies

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Key trends affecting all financial service
firms( 01 Oct 2015) ( 2 Dec 2015)

Service Proliferation- expand the menu of services offered


Rising Competition
Government deregulation
Interest (profit) sensitive funds- consumers more educated, more interest
sensitive, will go to competitors if offered better rates
Technological change and automation
Consolidation and geographical expansion
Globalization

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