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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture # 15
ROLE OF COMMERCIAL 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.
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. A commercial bank is usually defined as
an institution that both accepts deposits and makes loans; there are also financial institutions
that provide selected banking services without meeting the legal definition of a bank. Many
banks offer ancillary financial services to make additional profit; for example, most banks
also rent safe deposit boxes in their branches. Currently in most jurisdictions commercial
banks are regulated & require permission to operate. Operational authority is granted by
bank regulatory authorities which provides rights to conduct the most fundamental banking
services such as accepting deposits and making loans.
Purpose of a bank
Banks have influenced economies & politics for centuries. Historically, the primary
purpose of a bank was to provide loans to trading companies. Banks provided funds to
allow businesses to purchase inventory, and collected those funds back with interest when
the goods were sold.
Commercial Lending
For centuries, the banking industry only dealt with businesses, not consumers. Commercial
lending today is a very intense activity, with banks carefully analyzing the financial
condition of their business clients to determine the level of risk in each loan transaction.
Banking Services
Banking services have expanded to include services directed at individuals, and risks in
these much smaller transactions are pooled.
A Bank's Profit
A bank generates a profit from the differential between the level of interest it pays for
deposits and other sources of funds, and the level of interest it charges in its lending
activities. This difference is referred to as the spread between the cost of funds and the loan
interest rate. Historically, profitability from lending activities has been cyclic and dependent
on the needs and strengths of loan customers. In recent history, investors have demanded a
more stable
revenue stream and banks have therefore placed more emphasis on transaction fees,
primarily loan fees but also including service charges on array of deposit activities and
ancillary services (international banking, foreign exchange, insurance, investments, wire
transfers, etc.). However, lending activities still provide the bulk of a commercial bank's
income.
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Management of Financial Institutions - MGT 604
VU
The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance by Florentines bankers, who used to make their transactions above a desk
covered by a green tablecloth.
However, there are traces of banking activity even in the Babylonian times, and indeed a
book about the history of banking is named : Banking, from Babylon to Wall Street.
Services Typically Offered by Banks
Although the basic type of services offered by a bank depends upon the type of bank and the
country, services provided usually include:
1.
Taking deposits from their customers and issuing current (Pak) or checking (US)
accounts and savings accounts to individuals and businesses.
2.
Extending loans to individuals and businesses.
3.
Cashing cheque
4.
Facilitating money transactions such as wire transfers and cashier's checks
5.
Issuing credit cards, ATM cards, and debit cards
6.
Storing valuables, particularly in a safe deposit box
7. Consumer & commercial financial advisory services
8. Pension & retirement planning
Financial transactions can be performed through many different channels:
1. A branch, banking centre or financial centre is a retail location where a bank or financial
institution offers a wide array of face to face service to its customers.
2. ATM is a computerized telecommunications device that provides a financial institution's
customers a method of financial transactions in a public space without the need for a human
clerk or bank teller
3. Mail is part of the postal system which itself is a system wherein written documents
typically enclosed in envelopes, and also small packages containing other matter, are
delivered to destinations around the world
4. Telephone banking is a service provided by a financial institution which allows its
customers to perform transactions over the telephone.
5. Online banking is a term used for performing transactions, payments etc. over the
Internet through a bank, credit union or building society's secure website.
Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and
small businesses; business banking, providing services to mid-market business; corporate
banking, directed at large business entities; and investment banking, relating to activities on
the financial markets.
Most banks are profit-making, private enterprises. However, some are owned by
government, or are non-profits.
Central banks are non-commercial bodies or government agencies often charged with
controlling interest rates and money supply across the whole economy. They generally
provide liquidity to the banking system and act as Lender of last resort in event of a crisis.
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Management of Financial Institutions - MGT 604
VU
Commercial bank: the term used for a normal bank to distinguish it from an investment
bank. After the Great Depression, the U.S. Congress required that banks only engage in
banking activities, whereas investment banks were limited to capital market activities. Since
the two no longer have to be under separate ownership, some use the term "commercial
bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans
from corporations or large businesses.
Community Banks: locally operated financial institutions that empower employees to
make local decisions to serve their customers and the partners
Community development banks: regulated banks that provide financial services and credit
to underserved markets or populations.
Postal savings banks: savings banks associated with national postal systems.
Private Banks: manage the assets of high net worth individuals.
Offshore Banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.
Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th
century. Their original objective was to provide easily accessible savings products to all
strata of the population. In some countries, savings banks were created on public initiative,
while in others socially committed individuals created foundations to put in place the
necessary infrastructure. Nowadays, European savings banks have kept their focus on retail
banking: payments, savings products, credits and insurances for individuals or small and
medium-sized enterprises.
Apart from this retail focus, they also differ from commercial banks by their broadly
decentralized distribution network, providing local and regional outreach and by their
socially responsible approach to business and society.
Building societies and Landesbanks: conduct retail banking.
Ethical banks: banks that prioritize the transparency of all operations and make only what
they consider to be socially-responsible investments.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,