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Banking Basics. Banking and the Financial Services Industry. What is a bank?. What is a bank? Depository institution = engages in the traditional banking activities of accepting deposits and making loans Types of depository institutions Commercial Bank Savings Institution Credit Union

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banking basics

Banking Basics

Banking and the Financial Services Industry

what is a bank
What is a bank?
  • What is a bank?
    • Depository institution = engages in the traditional banking activities of accepting deposits and making loans
      • Types of depository institutions
        • Commercial Bank
        • Savings Institution
        • Credit Union
    • Investment bank = assists in the buying and selling of stocks and bonds
types of depository institutions
Types of Depository Institutions
  • Commercial Bank
    • Purpose - maximize shareholder (stock owner) wealth by accepting deposits and investing these funds into loans
    • Services - historically
      • Accept a variety of deposits (savings, demand)
      • Short-term business loans
      • Short-term business lines of credit
      • Short-term consumer loans
      • Mortgages
    • Examples
      • Citibank (NV – Federal)
      • SunTrust Bank (GA)
      • Regions Bank (AL)
types of depository institutions1
Types of Depository Institutions
  • Savings Bank
    • AKA – savings and loan association, mutual savings bank, thrift
    • Purpose - maximize shareholder (stock owner or mutual owner) wealth by accepting deposits and investing these funds into loans
    • Services - historically
      • Accept savings (time) deposits
      • Real estate loans – primarily residential
    • Examples
      • ING Bank (DE – Federal)
      • Apple Bank for Savings (NY)
types of depository institutions2
Types of Depository Institutions
  • Credit Union
    • Purpose – encourage savings and provide loans within a community at a low cost to their members
    • Members – have a “common bond”; deposit money
    • Do not pay state or federal income taxes
    • Services – historically
      • Accept savings (time) deposits
      • Loans to members
    • Examples
      • Navy Federal Credit Union (VA - Federal)
      • Suncoast Schools (FL)
      • Boeing Employees (WA)
depository institution services today
Depository Institution Services - Today
  • Accept demand deposits – checking account
  • Accept savings (time) deposits – saving account, money market account, certificates of deposit (CD)
  • Variety of short-term loans to individuals
  • Variety of short-term loans to businesses
  • Real estate loans
  • Credit cards
depository institution regulation
Depository Institution Regulation
  • Regulators
    • Office of the Comptroller of the Currency (OCC)
      • Commercial bank with national charter
    • Office of Thrift Supervision (OTS)
      • Savings bank with federal charter
    • National Credit Union Administration (NCUA)
      • Credit Union with federal charter
    • State Depository Supervising Authorities
      • Commercial bank, savings bank, credit union with state charter
    • Federal Deposit Insurance Corporation (FDIC)
      • Commercial bank, savings bank with FDIC insured deposits
    • National Credit Union Share Insurance Fund (NCUSIF)
      • Credit union with NCUSIF insured deposits
    • Federal Reserve System (Fed)
      • All
why are depository institutions regulated
Why are Depository Institutions Regulated?
  • Promote a safe, sound, stable system
  • Provide an efficient and competitive system
  • Provide monetary stability
  • Maintain the integrity of the nation’s payments system
  • Protect consumers from abuses by credit-granting institutions
depository institution pros cons
Depository Institution Pros & Cons
  • What are the advantages of being a depository institution?
    • Deposits may be FDIC/NCUSIF insured
    • Have access to relatively inexpensive funds
    • Deposits are stable even during difficult times
  • What are the disadvantages of being a depository institution?
    • Interest rate paid to deposit holders is regulated
    • Interest rate charged on loans is regulated
    • Products and services offered are regulated
    • Reserve amounts are regulated
    • Are periodically examined by the regulator(s)
    • Hard to compete with non-depository institutions offering similar products
trends in regulation
Trends in Regulation
  • Prior to 1970
    • Limit geographic expansion
      • McFadden Act of 1927
    • Limit product expansion
      • Glass-Stegall Act of 1933
    • Restrict interest rates paid on deposits
    • Restrict interest rates charged for loans
      • Truth in Lending Act of 1968
  • Since 1970
    • Expand geographic market
      • Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994
    • Expand products offered
      • Gramm-Leach-Bliley Act of 1999
    • Increase competition
  • Today
    • Discussing regulation modification

Period of Regulation

Period of Deregulation

what is a holding company
What is a holding company?
  • What is a holding company?
    • Holding company = engages in a wide range of financial activities not permitted in a depository institution
    • Today the majority of depository institutions are part of a holding company
bank lines of business
Bank Lines of Business
  • Accept deposits & make loans
  • Underwrite insurance
  • Underwrite securities
  • Manage trusts
  • Real estate
  • Advise/consult
bank performance
Bank Performance
  • What is a high performance bank?
    • Provides an exceptional return to shareholders
    • Maintains an acceptable level of risk
measuring bank performance
Measuring Bank Performance
  • What are financial statements?
    • Balance Sheet = snap shot of a particular day or point in time
    • Income Statement = covers a period of time
      • Bank income is categorized as interest income or noninterest income.
      • In 1980, 80% of bank income was from interest. In 2008, only 58% of bank income was from interest.

Assets = Liabilities + Owner’s Equity

Income – Expenses = Net Income/Loss

measuring bank performance1
Measuring Bank Performance
  • What are performance ratios?
    • Enables the evaluation of bank profits relative to risks taken.
      • Return on Equity
      • Return on Assets
      • Equity Multiplier
      • Expense Ratio
      • Tax Ratio
      • Asset Utilization
    • Financial statements and the Uniform Bank Performance Report (UBPR) must be compiled quarterly.
bank risk
Bank Risk
  • Credit Risk
    • Risk that a borrower will not pay principal and interest
      • Lending in a narrow geographic area, in a certain industry, or to a country affect credit risk
  • Liquidity Risk
    • Risk that the bank will not have enough cash available for people to withdraw
  • Market Risk
    • Risk that stockholder’s earnings will go down because of market rates or prices
      • Changes in interest rates and foreign exchange rates affect market risk
bank risk1
Bank Risk
  • Operational Risk
    • Risk that operating expenses will go up
      • Poor management, natural disaster, and theft affect operational risk
  • Legal Risk
    • Risk that unenforceable contracts, lawsuits, or adverse judgments have a negative impact
      • Failing to comply with regulations affects legal risk
  • Reputation Risk
    • Risk of negative publicity