Introduction to Financial

Services and Operations

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Financial Services Firms and Institutions
• A service that enables and executes financial transactions
• Agents for a market for money and asset transactions

• Examples?
• Central banks (of a country)
• Banks (commercial, retail)
• Investment banks
• Credit unions
• Insurance companies
• Fund management companies
• Security firms
• Credit card companies, payment companies
• …

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Macro-Markets: Central Banks
Promotes
Employment

Issues Maintains
Currency Stability

Central
Sets Growth
Bank Lends to
Targets Governments

Sets Interest Inflation

Rates Targets
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Central Banks: History
• Swedish Riksbank, 1668
• Post US Revolution: The First Bank of the US, 1790
• Central Banks are the governing institutions behind commercial and
investment banks
• Typically independent of political government
• Support the economy
• Maintains an objective national or even world macroeconomic view
• European Central Bank and Deutsche Bundesbank
• Prominent roles in the Greek financial crisis of 2009-2018

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 Commercial and Investment Banks
Assets US Trillions

Netherlands ING Group

Italy Intesa Sanpaolo
Canada Toronto-Dominion Bank
Canada Royal Bank of Canada
Germany Deutsche Bank
France Groupe BPCE
France Société Générale
Japan Mizuho Financial Group
United States Citigroup Inc.
Japan Japan Post Bank
France BNP Paribas
United States JPMorgan Chase
Japan Mitsubishi UFJ Financial Group
China Agricultural Bank of China
China Industrial and Commercial Bank of China
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Micro-Markets: Commercial and Retail Banks
• Accept deposits from public (individuals or corporations) and make
loans to the public, including local and central governments
• Retail banks:
• serving individual customers or households – accept deposits, make loans, facilitate
payments,
• Commercial banks (also merchant banks):
• Serving corporations and governments, accept deposits, provide loans (buy goods,
expand business operations, paying off debts, facilitate payments), currency exchange,
• Wholesale banks:
• Serving between merchant banks and other financial institutions; deal with large
institutions, and large amounts per transactions

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Micro-Markets: Investment Banks
• Take deposit from institutional and private investors
• Services to investors and borrowers
• underwriting of debts and equity offerings (IPO)
• large public and private share offerings,
• mergers and acquisitions (M&A)…
• Glass-Steagall Act of 1933
• Separated US investment banking operations from commercial banking
• High risk (investment bank) vs low risk (commercial banks
• Glass-Steagall Repealed in 1999
• Led to financial crisis of 2008
• Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010

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Retail and Commercial Banking Framework
Branches, Agents, Customer Analytics, Statutory
SWIFT, BACS,
Mail, Call Center, Life Cycle Execution, Risk
CHAPS
Salesforce Management Management

Customer Relationship Management Regulatory

ENGINES
Core Banking, Insurance, Asset Finance, Capital Markets, Fund Management, Credit and
Debit Cards, Mortgages, Stock Broking

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 Functional View of Retail/Commercial Banking

Leadership

Operations Collections Finance

Transaction Information Facilities Design Real Estate/

Investments Trading
Processing Systems and Layout Mortgage

Check
clearing/collectio Data Security Maintenance Vault and Safes Securities Private Clients Loans/Debt Proprietary Clients
ns

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 Investment Banking Operations
Back Office: Admin and Infrastructure

Middle Office: Business Operations and Risk Management

Front Office: Client Management, Sales and Trading

Capture Trade Settle

News, Value
Report
added Market
services

Clients
Control
Institutional Corporate Wealth

Market Business Risk

Execution Delivery
Analysis Intelligence Management
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 Insurance Company Operations
Sales and Marketing Customer acquisition, growth, and retention
• Online transactions
• Relationships with insurance brokers
• Advertise, develop relationships with customers
Underwriting Rate Making and Risk Pricing
• Evaluate exposure to customer risks
• Accept or reject customer risks
• Improve risk profile
Reinsurance Transferring portfolio risk
• Re-package risks into broader portfolios
• Hedging against systemic risks by re-insuring portfolios

Production Claims and Customer service

• Support customers during risk events, and evaluate their losses
• Absorb minimum warranted losses for customers
• Arbitration with third party insurance companies; follow up with customers
Investing Managing cash flows
• Investing customer premiums
• Generating returns to support claim payments
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Credit Card Value Chain Perspectives
Information Core Card Interfacing and
Suppliers Governance
Services Operations Communications

New customer
Admin Customer Data and merchant Account security Audit committees
accounts

Risk profiles and Transaction Consumer

Bank Branches Fraud alerts
reports processing Protection

Merchant
Statements and Regulatory
Courier Services Lending rates payment and
reminders compliance
settlements

Fund processors Contracts and Dispute Risk exposure

Dispute resolution
(Visa/Mastercard) terms management management

Internal reports Privacy rights

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Financial Markets Overview

Interbank (lending) Foreign exchange markets The Stock Market The Bond market
• Institutional borrowing – mostly • Governs trade and supply chains • Capital access to firms • Debt access to firms
short term • Risk access to investors • Lower risk assets for investors
• Maintains liquidity

The Insurance Market
• Trading and exchange of risks
• Enables firms to take on risk
The Commodities Market
• Access to industrial resources
and agricultural products
• Enables market pricing of mass
resources
The Futures market The Money Market
• Hedging against price risks • Market for cash
• Access to Derivatives • Access to liquidity for firms
• Inventory of surplus cash flows

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Stock Market Capitalization (2017-18)

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China Market Cap 2003-2018

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 Corporate Government
• Secured • T-Bills

Bond Markets • Unsecured • Municipal

Mortgage Backed Collateralized Debt

• Residential • Cash
• Commercial • Synthetic

Issuers: Organizations that sell bonds to raise funds for their operations (banks, corporations,
municipal and central governments)

Underwriters: Mainly investment banks and leading FI in the investing business. They perform
the key role of middlemen and perform the critical activities like preparing legal documents,
prospectus, and other collaterals to simplify transactions. (Packaging the bond.) They are also
responsible for the validity of the information related directly to the bond.

Purchasers: Corporations and governments that buy the bonds, fund management companies
(like mutual fund management companies, trusts, etc. where individual investors can invest in
their products: including unit-investment trusts, bond funds, ..)

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Global Bond Markets

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Foreign Exchange Markets

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Money Markets
• A financial market where buyers and sellers buy or issue/sell short term loans (less than a year). These
bonds/securities are also known as financial instruments (called papers).
• Supply Chain and trade finance, operating capital
• Smoothen functioning of banks;
• increase the efficiency of the central bank…

• Participants: Banks, retail money market funds, trading companies, central banks, trading companies, cash
management funds
• Products
• Commercial paper (shirt term loans)
• T-Bills
• Letter of credit for supply chain financing
• Repurchase agreements (Repos)- overnight borrowing

• Money markets freezing causes liquidity problems for the economy

• 2008 Financial crisis
• Barometer of banking confidence

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 Top Commodity Markets (2018)
Brent crude (oil) • Commodity Market:
Steel • A physical or virtual market-place where buyers
WTI crude (oil) and sellers trade raw or primary products or the
Soybean future contracts of these products.
• Hard commodities: gold, oil, copper, …
Iron
• Soft commodities: agricultural products like wheat, rice,
Corn sugar, cocoa, coffee, pork, …
Gold • There are over 50 commodity markets over the world
Copper • China alone has over 1000 of these markets all over the
Aluminum country
Silver
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 Derivative Markets
• National Stock Exchange of • Derivative markets
India (India)
• Contract between two or more parties agreeing on selling/buying certain
• Chicago Mercantile Exchange assets.
(US)
• Security with a price derived (or dependent upon) from a set of underlying
• Intercontinental Exchange assets: stocks, bonds, currencies, interest rates, commodities, market
(US)
indexes…
• CBOE Holdings (US)
• Futures market (standardized and regulated)
• 5 Eurex (Europe)
• over the counter (OTC) market. (non-standardized and not regulated)
• NASDAQ (US+ Europe)
• Notional value can be 10xGDP, but face value is smaller
• Moscow Exchange (Russia)
• Korea Exchange (South • Futures market (futures exchange)
Korea) • Participants trade standardized futures contracts (options e.g.)
• Shanghai Futures Exchange • Specific quantities of a commodity or securities at a specified price with
(China)
delivery at a specific time in the future.

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