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1 THE BUSINESS OF BANKING 1. 1 1. 2 1. 3 1. 4 Slide 1 THE BUSINESS OF BANKING 1. 1 1. 2 1. 3 1. 4 Slide 1 Introduction to Banking Role of Banks in the Economy How the Banking System Works Other Financial Institutions © South-Western Publishing

Lesson 1. 1 INTRODUCTION TO BANKING GOALS Define the business of banking Identify trends Lesson 1. 1 INTRODUCTION TO BANKING GOALS Define the business of banking Identify trends in modern banking Slide 2 © South-Western Publishing

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

A UNIQUE BUSINESS l The services banks offer to customers have to do almost A UNIQUE BUSINESS l The services banks offer to customers have to do almost entirely with handling money for other people. l Money is a medium of exchange—an agreed upon system for measuring values of goods and services. l Money shows how much something is worth. l A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of money. l An intermediary is a facilitator acting between parties. l Banks facilitate the flow of money throughout our economy. 4 © South-Western Publishing

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

BANKING TODAY l Traditionally, banking was viewed as a solid and slow-moving industry. l BANKING TODAY l Traditionally, banking was viewed as a solid and slow-moving industry. l Banking today is an exciting, fast-moving, around -the-clock, around-the-world activity. 6 © South-Western Publishing

MERGERS l A merger occurs when one or more banks join or acquire another MERGERS l A merger occurs when one or more banks join or acquire another bank or banks. l Mergers increase the size of banks, giving them more resources. l Mergers decrease the number of banks. l Mergers have created an opening for a new wave of small local banks. 7 © South-Western Publishing

TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets) Bank Mizuho Financial Group TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets) Bank Mizuho Financial Group Citigroup Deutsche Bank JP Morgan Chase Co. Bank of Tokyo-Mitsubishi HSBC Holdings Hypo Vereinsbank UBS BNP Paribas Bank of America Corp. 8 Country Japan United States Germany United States Japan United Kingdom Germany Switzerland France United States © South-Western Publishing

TECHNOLOGY l Impact on bankers l Accounting, auditing, and examining functions have been taken TECHNOLOGY l Impact on bankers l Accounting, auditing, and examining functions have been taken over by fast and efficient technology. l Funds transfer, record keeping, and financial analyses have become instantaneous. l Impact on consumers l Automated teller machines (ATMs) l “Smart” cards l Online banking 9 © South-Western Publishing

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

Lesson 1. 2 ROLE OF BANKS IN THE ECONOMY GOALS List banking activities that Lesson 1. 2 ROLE OF BANKS IN THE ECONOMY GOALS List banking activities that contribute to economic stability Explain how banking expands the economy Slide 11 © South-Western Publishing

BANKS AND ECONOMICS l Money is a medium of exchange and the basis of BANKS AND ECONOMICS l Money is a medium of exchange and the basis of the modern economy. l Banks and other institutions play a critical role in performing services that are essential to the functioning of an economy. 12 © South-Western Publishing

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

SPREADING THE WEALTH l Banks play a key role in transferring money to provide SPREADING THE WEALTH l Banks play a key role in transferring money to provide growth and stabilizing the monetary supply. l Bank lending makes money available to consumers and businesses to make purchases they might not otherwise be able to make. 14 © South-Western Publishing

TRANSFERRING l Between banks and individual customers l Between banks and industry l Between TRANSFERRING l Between banks and individual customers l Between banks and industry l Between banks and governments l Between governments 15 © South-Western Publishing

LENDING l Loans to businesses l Loans to governments l Loans to individuals l LENDING l Loans to businesses l Loans to governments l Loans to individuals l Credit cards l Home loans l Automobile loans 16 © South-Western Publishing

CREDITWORTHINESS l Evaluating the creditworthiness of customers is a banking function that affects the CREDITWORTHINESS l Evaluating the creditworthiness of customers is a banking function that affects the economy at large. l Banking policies and regulations regarding creditworthiness and the ratio of loans to deposits help guarantee a secure financial environment. 17 © South-Western Publishing

GUARANTEEING THE MONEY l In the United States, banks and the government work together GUARANTEEING THE MONEY l 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. l Much of this guarantee is backed through the central banking function of the Federal Reserve. l Individual banks work with the government to implement monetary policy, perform exchange functions, and defeat counterfeiters of currency. l Banks guarantee their own policies. 18 © South-Western Publishing

THE SUBSTANCE OF SOCIETY l A great part of the economic system is psychological. THE SUBSTANCE OF SOCIETY l A great part of the economic system is psychological. l Banks are at the heart of our financial system, and their effect on your life cannot be calculated. 19 © South-Western Publishing

Lesson 1. 3 HOW THE BANKING SYSTEM WORKS GOALS Explain how banks acquire money 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 Slide 20 © South-Western Publishing

MONEY AT WORK l Banks earn money in various ways. l Most of their MONEY AT WORK l Banks earn money in various ways. l Most of their incomes from the interest that people or businesses pay as they repay a loan. l When banks lend money, they put it to work. 21 © South-Western Publishing

THE SPREAD l The difference between what a bank pays in interest and what THE SPREAD l The difference between what a bank pays in interest and what it receives in interest is called the spread, or net interest income. l The spread is not pure profit. The spread is income, or revenue. l Profit is what is left of revenue after costs are deducted. 22 © South-Western Publishing

OTHER FUNDS l In addition to interest income, banks have other sources of income. OTHER FUNDS l In addition to interest income, banks have other sources of income. l 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. l Banks make money on investments. l Banks may have funds at their disposal from stockholder investments. 23 © South-Western Publishing

ASSETS AND LIABILITIES l An asset is anything of value. In financial terms, that ASSETS AND LIABILITIES l An asset is anything of value. In financial terms, that usually means money. l A liquid asset is anything that can readily be exchanged, like cash. l A liability, in financial terms, is a cash obligation. 24 © South-Western Publishing

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

BANKS WORKING FOR YOU l Banking has changed radically in the last 20 years. BANKS WORKING FOR YOU l Banking has changed radically in the last 20 years. l Large regional banks have huge resources. l Smaller banks use the flexibility that sometimes comes with smaller size to their advantage. 26 © South-Western Publishing

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

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

Lesson 1. 4 OTHER FINANCIAL INSTITUTIONS GOALS Explain depository financial institutions Explain nondepository financial Lesson 1. 4 OTHER FINANCIAL INSTITUTIONS GOALS Explain depository financial institutions Explain nondepository financial institutions Slide 29 © South-Western Publishing

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

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

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