1 THE BUSINESS OF BANKING 1 1 1

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 Copyright South-Western, a division of Thomson, Inc.

Lesson 1. 1 INTRODUCTION TO BANKING GOALS Define the business of banking Identify trends in modern banking Slide 2 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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. 4 Copyright South-Western, a division of Thomson, Inc.

TYPES OF BANKS l Commercial banks l Retail banks l Central banks 5 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

TOP TEN LARGEST BANKS WORLDWIDE (Ranked by size of assets) Bank Country Citigroup United States Mizuho Financial Group Japan UBS Switzerland Sumitomo Mitsui Fin. Grp. Japan Deutsche Bank Group Germany Mitsubishi Tokyo Fin. Grp. Japan HSBC Group United Kingdom JP Morgan Chase & Co. United States BNP Paribas France Bayer Hypo. Vereinsbank Germany 8 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

KEEPING YOUR MONEY SAFE l Record keeping l Identification l Enforcement l Transfer security l Sound business practices 13 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

TRANSFERRING l Between banks and individual customers l Between banks and industry l Between banks and governments l Between governments 15 Copyright South-Western, a division of Thomson, Inc.

LENDING l Loans to businesses l Loans to governments l Loans to individuals l Credit cards l Home loans l Automobile loans 16 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 (or net income) is what is left of revenue after expenses are deducted. 22 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

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 Copyright South-Western, a division of Thomson, Inc.

TWO PRINCIPLES OF BANKING l A bank’s liabilities exceed its reserves. l A bank’s liabilities are more liquid than its assets. 25 Copyright South-Western, a division of Thomson, Inc.

TEST OF BANK PROFITABILITY l Return on assets (ROA) Net income Total assets Return on assets l Return on equity (ROE) Net income Total equity Return on equity 26 Copyright South-Western, a division of Thomson, Inc.

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. 27 Copyright South-Western, a division of Thomson, Inc.

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 28 Copyright South-Western, a division of Thomson, Inc.

NEW SERVICES l Credit cards l Innovative lending l Automated teller machines (ATMs) l Smart cards l Online banking 29 Copyright South-Western, a division of Thomson, Inc.

Lesson 1. 4 OTHER FINANCIAL INSTITUTIONS GOALS Explain depository financial institutions Explain nondepository financial institutions Slide 30 Copyright South-Western, a division of Thomson, Inc.

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 31 Copyright South-Western, a division of Thomson, Inc.

DEPOSITORY INTERMEDIARIES l Commercial banks l Savings and loan associations l Mutual savings banks l Credit unions 32 Copyright South-Western, a division of Thomson, Inc.

NONDEPOSITORY INTERMEDIARIES l Insurance companies l Trusts companies/pension funds l Brokerage houses l Loan companies l Currency exchanges 33 Copyright South-Western, a division of Thomson, Inc.