2/24/21

B A N K S A S
S E R V I C E
P R O V I D E R S
B A N K S A S
B U S I N E S S E S

BANKS AS SERVICE
PROVIDERS

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LEARNING OBJECTIVES
• Explain the role of bank employees
• Describe how banks serve customer needs
• Describe the role of banks in their community
• Identify major bank competitors
• Identify bank regulators and major banking laws and
regulations
• Discuss future trends in banking

BANK EMPLOYEES
• The center of every banking interaction
• Responsible for professionally representing the bank’s interest in every
interaction
• Must have good judgment, address request promptly and follow
procedures
• Primary attributes of bank employees:
• Service – give customers exceptional personal service, maintain complete
confidentiality and conduct business in a professional manner
• Responsibility – observing the bank’s policies and procedures, responsible to the
bank’s shareholders and customers
• Trustworthiness – hold the highest standard of business ethics which are explained
in the bank’s code of conduct
• Professionalism – keep professional attitude and appearance of bank employees

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BASIC PRODUCT USERS

• Grow their • Set up investment • Loan money to • Larger in size and

Businesses
Investors

Borrowers
High-end savers

balances in accounts those who need it scope

checking and • Annuities, bonds, • Critical bank • Business checking
saving accounts mutual funds and customers and savings
• Look to invest their stocks • Home-purchase accounts
money in bank • Provide managed loans, auto loans, • Check and credit
savings vehicles money accounts credit cards card processing,
• Money-market and asset small business and
accounts, higher- management agricultural loans,
dollar value savings accounts dealer financing,
accounts, certificate cash management
of deposits, long- services, employer
term saving services, etc.
products

BASIC SERVICES
DEPOSIT CREDIT PAYMENT
•Taking demand deposits, time •Lending •Opening payment accounts for
deposits, savings deposits and •Discounting and re-discounting clients.
other types negotiable instruments and other •Providing payment instruments.
•Issuing deposit certificate, valuable papers •Providing the following payment
promissory notes, treasury bills •Providing bank guarantee services:
and bonds •Issuing credit cards •Domestic payment services,
•Domestic factoring, international including check, payment order,
factoring for banks licensed for authorized payment, collection,
international payment LC authorized collection, letter of
•Other forms of credit after credit and bank card, and
obtaining the State Bank's collection and payment
approval services.
•Providing international payment
services and other payment
services after obtaining the
State Bank's approval.

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OTHER SERVICES
• Provision of services and products to domestic and overseas clients :
a. Foreign exchange;
b. Derivatives regarding exchange rates, interest rates, foreign exchange, currency and other
financial products.
• Entrust, undertake entrustment or act as agents in sectors relating to banking
operations, insurance business and asset management
• Provision of such services as cash management, banking and financial consultancy,
asset management and preservation, and safe keeping.
• Consultancy of corporate finance, business acquisition, sale, consolidation and merger
and investment.
• Trading in government bonds and corporate bonds.
• Monetary brokerage services.
• Securities depository, gold trading and other business activities related to banking
operations after obtaining the State Bank's written approval.

BANKS AS FINANCIAL
INTERMEDIARIES
• Accept funds from customers who want to save
• Lend funds to customers who want to borrow
• Be central to money creation function in the economy
• Be controlled by the Central bank via reserve requirement,
discount operations and open-market operations

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MONETARY POLICIES AND ITS

EFFECTS
Reserve requirements Increase Rarely used because its effects can be too
disruptive, decreases the money supply
Decrease Stimulates the economy by increasing the supply of
loanable funds; rarely used
Discount operations Increase discount Can have moderately fast effect on banks and
rate economy
Borrowing can lead to a reduction in the money
supply when inflation is becoming a problem
Decrease discount Has opposite effect during economic slumps when
rate the government wants to expand business activity
Open-market Purchase securities Immediate, powerful effect on the economy;
operations increase the money supply available for purchases
by crediting the reserve accounts of bank
Sell securities Tightens credit by reducing the money supply in
times of rising inflation
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MONEY
CREATION
Deposit multiplier = 1/reserve requirement

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• Credit unions
• Collect deposits from and make loans to their
members as nonprofit associations of
individuals sharing common bond (such as
same employer)
• Saving institutions
• Provide mortgage loan to customers by
taking deposits. Saving institutions may be
stock companies or mutual companies owned
BANKS by depositors.
• Brokage firms
COMPETITORS • Arrange contracts for customers to purchase
stocks, bonds and mutual funds.
• Finance companies
• Offer small-to medium sized loans to
consumers or small businesses using funds
borrowed in the open market or from other
financial institutions. These companies attract
the high-risk borrower who may have a
negative credit history.

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• Insurance companies
• Protect against risks to persons or property and
manage the pension plans of businesses and the
retirement funds of individuals. These companies
accumulate funds received from premiums and
place them in relatively risk-free, long-term
investment
• Mutual funds (investment companies)
• Sell shares to the public representing an interest in
BANKS a professionally managed pool of stocks, bonds
and other securities

COMPETITORS • Money market funds

• Like mutual funds, but only invest in short-term
instruments such as certificate of deposit,
commercial paper, banker’s acceptances and
Treasury bills.
• Mortgage companies
• Specialize in financing loans backed by real estate
• Money service business
• Cash check for consumers for a fee and also
provide remittance transfer and other money
services

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BANK REGULATORS
• State bank of Vietnam
• Law on credit institutions
• Circular - limits and prudential ratios of banks and foreign
bank branches
• Circular - prescribing lending transactions of credit institutions
and/or foreign bank branches with customers
• Decree on banking e-transactions
• Circular on bank card operations

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THE FUTURE OF BANKING

• Regulation will continue to evolve
• Services will expand
• Competition will continue
• Technological innovations will multiply
• Branches will become smaller and more innovative
• New ways will be found to target and reach customers

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REGULATORY EVOLUTION
• Government regulation increases in areas like national
security, bank safety and soundness
• Direction of regulation is uncertain in other areas like
technology and product offerings
• State regulators will continue to seek to minimize risk in the
banking system

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FINANCIAL SERVICES EXPANSION

• Offer more premium and fee-bases services
• Broaden their services as customers and business preferences
change and changes in demographics

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CONTINUED COMPETITION
• The distinction between banks and their competitors are blur
• Non-bank competitors will compete and take over the
traditionally bank-dominated business such as payment
systems, deposit gathering and lending
• Banks must strive to remain the one-step, full-service provider
of financial-related services for consumers and businesses

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TECHNOLOGICAL ADVANCES
• Automation – electronic delivery and maintenance of bank
services and related operations
• Shift from employee-driven to technological solutions

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SMALLER AND MORE INNOVATIVE

BRANCHES
• Traditional stand-alone brick-and-mortar branch will be
opened in places like stores and cafes

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ONLINE AND SOCIAL MEDIA

MARKETING
• Shift from traditional media to online and social media
• Online marketing and social media offer banks the
opportunity to more precisely target customers and to better
analyze the results of their marketing efforts

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BANKS AS BUSINESS

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LEARNING OBJECTIVES
• Describe a bank’s organizational structure
• Identify bank assets and liabilities and explain how they are
managed to achieve bank objectives
• Identity the primary sources of bank income and expenses
• Explain how banks maximize loan and investment returns and
fee income
• Identify typical performance measures in banking and how
they are used in budgeting to achieve bank objectives

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BANKS
STRUCTURE

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Bank Deposit accounts:

• Transaction Deposits

Sources of • Savings Deposits

• Time Deposits

Funds: • Money Market Deposit Accounts

Borrowed Funds:
• Federal Funds purchased (borrowed)
• Borrowing from the Federal Reserve Banks
• Repurchase agreements
• Eurodollar Borrowings
Long-term Sources of Funds:
• Bonds issued by the Bank
• Bank Chartered Capital
• Reserve Capital
• Trust Capital

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Deposit Accounts
• Another type of Transaction account is
Negotiable Order of Withdrawal(NOW).
Transaction Deposits:
It provides checking services as well as
interest. It requires large minimum
• The demand deposit account, or balance.
checking account, is offered to
customers who desire to write checks
• Electronic Transactions: Customers now
against their account.
use electronic banking to pay utility bills,
check account balances, add deposits,
• From the bank’s perspective, demand Credit card payments, funds transfer,
cash withdrawals (ATM). Debit cards
deposit accounts are classified as
transaction accounts that provide a allow customers to make purchases and
source of funds that can be used until their accounts are debited by the
withdrawn by customers. amount.

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Savings Deposits

• The traditional savings account is the passbook savings account, which

does not permit check writing.

• The passbook savings account continues to attract savers with a small

amount of funds, as it often has no required minimum balance.

• Another type of saving account is Automatic Transfer Service (ATS). It

allows customers to write checks and the required amount is transferred
to checking account while on remaining balance, interest is earned.

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Time Deposits

Negotiable Certificate of Deposit:

• Time deposits can not be withdrawn • Another type of time deposit is a
until a specified maturity. Two types negotiable CD offered by some large
of Time deposits are: banks to corporations. They have a
specific maturity and require
minimum balance.
1. Certificate of Deposit
2. Negotiable Certificate of Deposit
• Their maturities are typically short
term, and their minimum deposit
requirement is $100,000. A
secondary marked for NCDs does
exist.

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Certificate of Deposit

• A common type of time deposit known as • Some CD rates are tied to the performance of
retail certificate of deposit requires a a stock market index but guarantee a
specified minimum amount of funds to be minimum rate regardless of the stock markets
deposited for a specified period of time. performance.

• Banks are now able to offer a CD that better • Callable CDs are also offered which can be
meets an individual’s needs. called back before maturity.

• Most offer a wide variety, with maturities as • No organized secondary market exist for
short as seven days and annualized interest CDs.
rates that vary among banks, and even
among maturity types within a single bank.

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Money Market Deposit Accounts

• These accounts do not have specific maturity and are more

liquid as compared to retail CDs.

• They provide limited check writing facility, require large

minimum balance and offer higher return.

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Borrowed Funds

• Federal Funds Purchased:

• The interest rate charged in the federal funds
market is called the federal funds rate which
• The federal funds market allows depository
changes according to demand and supply of
institutions to accommodate the short-term funds.
liquidity needs of other financial institutions.

• If many banks have excess funds and few

• Federal funds purchased represent a liability
banks are short of funds, the federal funds
to the borrowing bank and an asset to the rate would be low.
lending bank that sells them.

• Federal funds rate is generally between

• Loans are made from one day to seven days. 0.25% and 1% higher than T-Bill rate.

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Borrowing from the Federal Reserve Bank

• Federal Reserve District banks regulate certain • When a bank needs temporary funds, it must decide
activities of banks and also provide short-term loans to whether borrowing through the discount window is
banks. This form of borrowing by banks is often more feasible than alternative non depository sources
referred to as borrowing at the Discount Window. of funds, such as the federal funds market.

• The interest rate charged on these loans is known as
the discount rate.
• Loans from the discount windows are short term,
commonly from one day to a few weeks.
• Like the federal funds market, the discount window is
mainly used to resolve a temporary shortage of funds.
• The federal funds rate is more volatile than the
discount rate because it is market determined, as it
adjusts to demand and supply conditions on a daily
basis.
• Conversely, the discount rate is set by Federal Reserve
and adjusted only periodically to keep it inline with
other market rates.

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Repurchase Agreements

• A repurchase agreement represents the sale of securities by one party to

another with an agreement to repurchase the securities at a specified
date and price.
• The government securities involved in the repo transaction serve as
collateral for the corporation providing funds to the bank.
• Repurchase agreements transactions occur through a
telecommunications network connecting large banks, other
corporations, government securities dealers, and federal funds brokers.
• The yield on repurchase agreements is slightly less than the federal
funds rate at any given point in time, since the funds loaned out are
backed by collateral and are therefore less risky.

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Eurodollar Borrowings: Bonds Issued by the Bank:

• If a U.S bank is in need of short- • Like other corporations, banks

term funds, it may borrow from own some fixed assets such as
those banks outside the United land, buildings, and equipment.
States that accept dollar
dominated deposits, or Euro
dollars. • These assets often have an
expected life of 20 years or more
and are usually financed with long
term sources of funds, such as
through the issuance of bonds.

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Bank Capital

• It generally represents funds obtained through the issuance of stock or

through retaining earnings.
• Primary capital results from issuing common or preferred stock or
retaining earnings, while secondary capital results from issuing
subordinated notes and debentures.
• A bank’s capital provides a cushion to absorb losses, therefore, a bank
must maintain a specific minimum capital required by law.
• When banks issue new stock, they dilute the ownership of the bank,
since the proportion of the bank owned by existing shareholders
decreases.

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OWNERS’ EQUITY
• The owners’ equity equals (=) Tier 1 capital plus (+) and Tier 2
capital minus (-) the deductions stipulated in Appendix 1 of
“Circular Limits And Prudential Ratios Of Banks And Foreign
Bank Branches”

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BANK CAPITAL REQUIREMENT

• Capital adequacy ratio (CAR) of the commercial banks
(individual CAR), the commercial banks and their subsidiaries
(consolidated CAR) and the foreign bank branches in Vietnam
(CAR) should maintain at 9%.
Individual Equity
Individual CAR % = ×100%
Total individual risk − weighted assets

Consolidated Equity
Consolidated CAR % = ×100%
Total individual risk − weighted assets

Equity
CAR % = ×100%
Total individual risk − weighted assets

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USES OF • Cash
FUNDS BY • Bank loans
BANKS • Investment securities
• Federal Funds Sold
• Repurchase Agreements
• Eurodollar loans
• Fixed Assets

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Cash

• Banks are required to hold some cash as reserves, since they

must abide by reserve requirements enforced by the Federal
Reserve or central bank

• Banks also hold cash to retain some liquidity and

accommodate any withdrawal requests by depositors.

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Bank Loans
Types of Business loans:

• A common type of business loan is the working capital loan designed

to support on going business operations.
• A working capital loan can support the business until sufficient cash
inflows are generated. These loans are typically short term, yet they may
be needed by businesses on a frequent basis.
• Banks also offer term loans, primarily to finance the purchase of fixed
assets such as machinery.
• A term loan involves a specified amount of funds to be loaned out, for a
specified period of time, and for a specified purpose.

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Bank Loans
• The bank can periodically request interest payments, with the loan
principal to be paid off in one lump sum at a specified date in the
future. This is called bullet loan.
• As an alternative to providing a term loan, the bank may consider
purchasing the assets and leasing them to the firm in need. This
method known as, direct lease loan.
• A more flexible financing arrangement is Informal Line of credit; it
allows the businesses to borrow up to some specified maximum
amount of fund over a specified period of time. Interest is charged
on borrowed amount in line with market rates. Banks are not legally
obligated to provide funds.

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Bank Loans
• Revolving credit loan obligates the bank to offer up to some
specified maximum amount of fund over a specified period of
time typically less than 5 years.
• Bank is committed to provide funds when requested; it
charges a commitment fee on unused funds.
• The interest rate charged by banks on loans to their most
creditworthy customers is known as the prime rate.

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Bank Loans
Loan Participations:
• Several banks may be willing to pool
any available funds they have to
accommodate a corporation in what
is referred to as a loan participation.
• The main role of the other banks is to
supply funds to lead bank which are
channeled to the borrower.
Types of Consumer Loans:
• Commercial banks provide
installment loans to individuals to
finance purchases of cars and
household products. These loans
require the borrowers to make
periodic payments over time.
• Real Estate Loans:
• Banks also provide real estate loans.
They give residential and commercial
real estate loans.

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Loan Supporting Leverage Buyouts
• One of the latest trend in commercial banking
is financing leverage buyouts. The loan amount
provided by a single bank to support an LBO is
usually between $15 million and $40 million.
• Financing part of LBO is no different than
financing other privately held businesses.
• These businesses are highly leveraged and
experience cash flow pressure during periods
where sales are lower than normal.
• Many firms involved in LBOs represent
diversified conglomerates that will be split into
various divisions and sold.
• A commercial banks risk may rise as it
increases its financing of LBOs.
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Investment Securities
• Banks purchase treasury securities as
well as securities issued by the agencies
of the federal government.
• Government agency securities can be
sold in the secondary market, but the
market is not as active as it is for treasury
securities.
• Government agency securities are not a
direct obligation of the federal
government.
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• Banks that reduce their most conservative assets
to finance LBOs will incur a higher degree of risk.
Many LBOs were financed with junk bonds, which
suggest a high degree of risk.
• Some banks originate the loans designed for
LBOs and then sell them to other financial
institutions such as insurance companies, pension
funds and foreign banks. In this way, they can
generate fee income by servicing the loans while
avoiding the credit risk associated with the loans.
• Bank regulators now monitor the amount of bank
financing provided to corporate borrowers that
will have a relatively high degree of financial
leverage. These loans, known as highly leveraged
transactions.
• Federal agency securities are commonly
issued by federal agencies, such as the
Federal Home Loan Mortgage
Corporation and the Federal National
Mortgage Association.
• Banks purchase only investment grade
securities which have a low degree of
default risk.
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Federal Funds Sold:

• Banks often lend funds in the federal
funds market. The funds sold, or lend
out, will be returned at the time specified
in the loan agreement with interest.
Repurchase Agreements:
Fixed Assets:
• Banks must maintain some amount of
fixed Assets, such as office buildings and
land, so that they can conduct their
business operations.

• Recall that from the borrower’s

perspective, the repurchase agreement
transaction involves repurchasing the
securities that it had previously sold.

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OFF-BALANCE
SHEET • Loan commitments
ACTIVITIES • Standby letter of credit
• Forward contracts
• Swap contracts

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Off-Balance Sheet Activities

Loan Commitments:
• A loan commitment is an obligation by a bank to provide a
specified loan amount to a particular firm upon the firm’s
request.
• The interest rate and purpose of the loan may also be
specified. The bank charges a fee for offering the
commitment.

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Off-Balance Sheet Activities

Standby Letter of Credit:

• A Standby letter of credit backs a customer’s obligation to a third party.

• If the customer does not meet its obligation, the bank will.
• The third party may require that the customer obtain an SLC to complete a
business transaction.

Forward Contracts:
• Many banks engage in forward contracts in which they agree to exchange one
currency for another on a particular future date at a specified exchange rate.

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Off-Balance Sheet Activities

Swap Contracts:

• Banks also serve as intermediaries for interest rate swaps, whereby two parties agree to
periodically exchange interest payments on a specified notional amount of principal.

• Some banks facilitate currency swaps by finding parties with optimistic future currency
needs and executing a swap agreement.

• Currency swaps are somewhat similar to forward contracts, except that they are usually
for more distant future dates.

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BANK INCOME AND

EXPENSES

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BANK INCOME
• Interest and fees earned on loans (loan income)
• Interest and dividends earned on investment (investment
income)
• Fees, commissions and service charges (fee income)

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BANK EXPENSES
• Interest paid on deposits (deposit interest expense)
• Salaries, wages and benefits (employee expenses)
• Occupancy and equipment expense (occupancy expense)
• Taxes (income tax expense)

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EVALUATING BANK PERFORMANCE

• Financial ratios offer a bank’s financial strength
• Local economy and the bank’s management strategy must
also be considered
Net income
ROA = ×100 Net interest earned = Interest earned − Interest paid
Total Assets

Net income
ROE = ×100 Net income
Total equity EPS =
Average number of share outstanding
Capital
Capital ratio = ×100
Ass𝑒ts

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