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Banking Basics

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

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  1. Banking Basics Banking and the Financial Services Industry

  2. 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

  3. 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)

  4. 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)

  5. 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)

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Financial Holding Company Structure

  13. Bank Lines of Business • Accept deposits & make loans • Underwrite insurance • Underwrite securities • Manage trusts • Real estate • Advise/consult

  14. Bank Performance • What is a high performance bank? • Provides an exceptional return to shareholders • Maintains an acceptable level of risk

  15. 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

  16. 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.

  17. 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

  18. 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

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