Principles of Banking. Lecture 1. Prepared By: Mohammad Kamrul Arefin. An Overview of Banks and Their Services.
Banks are among the most important financial institutions in the economy. They are the principal source of credit (loanable funds) for millions of individuals, families, businesses and many units of governments.
What is Bank: A financial intermediary accepting deposits and granting loans; offers the widest menu of services of any financial institution. Banks are those financial institutions that offer the widest range of financial services- especially credit, savings, and payment services-and perform the widest range of financial functions of any business firm in the economy. This multiplicity of bank services and functions has led to banks being lebeled “financial department stores”
Nonbank Banks: Depository institutions offering checking accounts or commercial loans but not both.
The credit (loan) function
The insurance (risk mgt. function
The thrift (savings) function
The Investment/financial planning function
The Modern Bank
The Security Brokerage(trading) Function
The investment banking (security underwriting) function
The real estate & community dev. function
The merchant banking (temporary stock inv.
The cash mgt function
Figure: Service Areas in the Modern Bank
Insurance Companies and Pension Plans, providing customers with long term savings plans, risk protection, and credit
Mutual Funds, supplying professional cash management and investing services for longer term savers
Credit Unions and other Thrift Institutions offering customers credit, payments and savings deposit services often fully comparable to what banks offer
Real Estate Developers and Mortgage Companies supplying building and construction expense/ financing
The Modern Bank
Check-Cashing Firms, Small Loan Vendors, and Finance Companies supplying customers with ready cash (liquidity) and short to medium term loans for everything from daily household and operating expenses to the purchase of appliances and equipment
Security Brokers and Dealers, providing investment and savings planning, executing security purchases and sales, and providing credit cards to their customers
Figure: The Key Nonbank Competitors Bankers Face Today
Offering Savings Deposits: Banks offer thrift accounts that pay interest and encourage people to save. Making loans proved so profitable that banks began searching for ways to raise additional loanable funds and one of the earliest sources of funds consisted of offering savings deposit, interest bearing funds left with banks for a period of weeks, months or years.
Supporting Govt Activities with Credit: Banks purchase Govt bonds with a portion of any deposits they received to finance govt expenditure to maintain growth in the economy.
Equipment Leasing Services: An alternative to lending in which a bank buys equipment and rents it to its customers.
Selling Retirement Plans: Retirement plans are pension programs that individuals to save money for retirement. Bank trust departments are active in managing the retirement plans that most businesses make available to their employees, investing incoming funds and dispensing payments to qualified recipients who have reached retirement or become disabled. Bank also sell deposit retirement plans (known as IRAs and keoghs) to individuals holding these deposits until the funds are needed for income after retirement.
Offering Mutual Funds and Annuities: Annuities consist of long term savings plans that promise the payment of a stream of income to the annuity holder beginning on a designated future date (such as at retirement). In contrast, mutual funds are professionally managed investment programs that acquire stocks, bonds, and other securities that appear to fit the funds’ announced goals.