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.

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THE BUSINESSOF BANKING

1.11.1 Introduction to Banking1.21.2 Role of Banks in the Economy1.31.3 How the Banking System Works1.41.4 Other Financial Institutions

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Lesson 1.1

INTRODUCTIONTO BANKING

Define the business of bankingIdentify trends in modern banking

GOALSGOALS

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WHAT IS A BANK?WHAT IS A BANK?WHAT IS A BANK?WHAT IS A BANK?

A bank is a business.Banks sell their services to earn money.Banks must earn a profit to survive.

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A UNIQUE BUSINESSA UNIQUE BUSINESSA UNIQUE BUSINESSA 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.

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TYPES OF BANKSTYPES OF BANKSTYPES OF BANKSTYPES OF BANKS

Commercial banksRetail banksCentral banks

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BANKING TODAYBANKING TODAYBANKING TODAYBANKING 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.

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MERGERSMERGERSMERGERSMERGERS

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.

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TOP TEN LARGEST TOP TEN LARGEST BANKS WORLDWIDE BANKS WORLDWIDE (Ranked by size of assets)

BankBank CountryCountryMizuho Financial Group JapanCitigroup United StatesDeutsche Bank GermanyJP Morgan Chase Co. United StatesBank of Tokyo-Mitsubishi JapanHSBC Holdings United KingdomHypo Vereinsbank GermanyUBS SwitzerlandBNP Paribas FranceBank of America Corp. United States

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TECHNOLOGYTECHNOLOGYTECHNOLOGYTECHNOLOGY

Impact on bankersAccounting, 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” cardsOnline banking

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COMPETITIONCOMPETITIONCOMPETITIONCOMPETITION

As government regulations have changed, competition between banks has become fiercer.

Banks compete with each other and with other businesses that sell financial services.

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Lesson 1.2

ROLE OF BANKS IN THE ECONOMY

List banking activities that contribute to economic stabilityExplain how banking expands the economy

GOALSGOALS

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BANKS AND ECONOMICSBANKS AND ECONOMICSBANKS AND ECONOMICSBANKS 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.

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KEEPING YOUR MONEY SAFEKEEPING YOUR MONEY SAFEKEEPING YOUR MONEY SAFEKEEPING YOUR MONEY SAFE

Record keepingIdentificationEnforcementTransfer securitySound business practices

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SPREADING THE WEALTHSPREADING THE WEALTHSPREADING THE WEALTHSPREADING 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.

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TRANSFERRINGTRANSFERRINGTRANSFERRINGTRANSFERRING

Between banksBetween banks and individual customersBetween banks and industryBetween banks and governmentsBetween governments

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LENDINGLENDINGLENDINGLENDING

Loans to businessesLoans to governmentsLoans to individuals

Credit cardsHome loansAutomobile loans

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CREDITWORTHINESSCREDITWORTHINESSCREDITWORTHINESSCREDITWORTHINESS

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.

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GUARANTEEING THE MONEYGUARANTEEING THE MONEYGUARANTEEING THE MONEYGUARANTEEING 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.

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THE SUBSTANCE OF SOCIETYTHE SUBSTANCE OF SOCIETYTHE SUBSTANCE OF SOCIETYTHE 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.

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Lesson 1.3

HOW THE BANKING SYSTEM WORKS

Explain how banks acquire money to do businessIdentify new services that banks offer to stay competitive

GOALSGOALS

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MONEY AT WORKMONEY AT WORKMONEY AT WORKMONEY 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.

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THE SPREADTHE SPREADTHE SPREADTHE 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.

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OTHER FUNDSOTHER FUNDSOTHER FUNDSOTHER 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.

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ASSETS AND LIABILITIESASSETS AND LIABILITIESASSETS AND LIABILITIESASSETS 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.

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TWO PRINCIPLES OF BANKINGTWO PRINCIPLES OF BANKINGTWO PRINCIPLES OF BANKINGTWO PRINCIPLES OF BANKING

A bank’s liabilities exceed its reserves.A bank’s liabilities are more liquid than its

assets.

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BANKS WORKING FOR YOUBANKS WORKING FOR YOUBANKS WORKING FOR YOUBANKS 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.

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CHANGES IN TRADITIONAL SERVICESCHANGES IN TRADITIONAL SERVICESCHANGES IN TRADITIONAL SERVICESCHANGES IN TRADITIONAL SERVICES

Branch locationsExtended hoursDrive-up windowsVariety of checking accountsSavings optionsPersonal service

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NEW SERVICESNEW SERVICESNEW SERVICESNEW SERVICES

Credit cardsInnovative lendingAutomated teller machines (ATMs)Smart cardsOnline banking

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Lesson 1.4

OTHER FINANCIAL INSTITUTIONS

Explain depository financial institutionsExplain nondepository financial institutions

GOALSGOALS

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TYPES OF FINANCIAL INSTITUTIONSTYPES OF FINANCIAL INSTITUTIONSTYPES OF FINANCIAL INSTITUTIONSTYPES OF FINANCIAL INSTITUTIONS

Depository intermediaries Obtain funds from the publicUse the funds to finance their business

Nondepository intermediariesDo not take or hold depositsEarn their money by selling specific services or

policies

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DEPOSITORY INTERMEDIARIESDEPOSITORY INTERMEDIARIESDEPOSITORY INTERMEDIARIESDEPOSITORY INTERMEDIARIES

Commercial banksSavings and loan associationsMutual savings banksCredit unions

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NONDEPOSITORY INTERMEDIARIESNONDEPOSITORY INTERMEDIARIESNONDEPOSITORY INTERMEDIARIESNONDEPOSITORY INTERMEDIARIES

Insurance companiesTrusts companies/pension fundsBrokerage housesLoan companiesCurrency exchanges