FINC 401

BANK MANAGEMENT

Session 1 – The need for Banking

Lecturer: Dr. Lord Mensah, UGBS

Contact Information: lmensah@ug.edu.gh

College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
 Session Overview
• The session seeks to equip students with
– the banking business environment
– the importance of banking in Ghana
– the management of the banks’ balance sheet
– the knowledge of bank intermediary services

Lecture by: Dr. Lord Mensah Slide 2

 Session Outline
The key topics to be covered in the session are as follows:
• Banking as business
• Why study bank Management
• How Banks Earn Profits
• Bank Asset, Liabilities and Net Worth
• Bank Intermediary services

Slide 3
 Reading List
• Refer to students to relevant text/chapter or reading materials
you will make available on Sakai

Slide 4
Topic One

BANKING AS BUSINESS

Slide 5
Lecture by Dr. Lord Mensah
28/02/2018
6

Banking as business
• Banking is a Business
• Banks fill a market need by providing a service and
earn a profit by charging customers for that service
• Banks acquire funds at cost from savers and lend
those funds to borrowers
• Like any other business, banks act to maximize their
profit
Lecture by Dr. Lord Mensah
28/02/2018
7

• The difference between the return bank earns from

lending and the cost of obtaining the funds to lend is
called the spread
– The banks profit
• Ultimately, we say that banks acquires deposits and
other funds and lends them to borrowers and
provides other services.
Topic Two

WHY STUDY BANK MANAGEMENT?

Slide 8
9
28/02/2018

Why study bank Management?

• Leading financial intermediary in developed and
developing economies
• In Ghana, the banking sector is key
– in resource mobilization
– Integral part of the payment and settlement system
• This functions are vital to the efficient functioning of
the economy
• The understanding of the financial systems will not
be complete without knowledge of how banks
operate and remain strong
Topic Three

HOW BANKS EARN PROFIT

Slide 10
 How Banks Earn Profits
• Identify bank’s sources and uses of funds
• A balance sheet lists assets, liabilities, and net worth.
• Bank liabilities are the funds the bank acquires from
savers.
• Bank assets are the uses of acquired funds.
• Bank net worth is the difference between assets and
liabilities.
12

Balance Sheet of Commercial Banks

Topic Four

BANKS ASSET, LIABILITIES AND NET

WORTH
Slide 13
Bank Liabilities and Net Worth
• Checkable deposits: accounts that grant a depositor
the right to write checks to individuals, businesses, or
the government
• Nontransaction deposits: savings accounts, money
market deposit accounts (MMDAs), and time deposits
(CDs).
• Borrowings: Banks borrow funds to finance loans; they
profit if the interest rate to borrow the funds is lower
than the rate it earns by lending
• Net worth: the difference between the bank’s
liabilities and assets (equity capital)
 Bank Assets
• Cash Items: The most liquid asset held by banks is
reserves, which consist of vault cash
– cash on hand in the bank or in deposits at other banks
– deposits with the central bank
• Securities: liquid assets that banks trade in securities
markets.
• Loans: Largest category of Banks Assets
• Other Assets: equipment and buildings the bank
owns and collateral received from borrowers in
default
 Bank Net Worth
• Assets are things of value the bank owns, whereas
liabilities are things of value that the banks owes to
others.
• The difference between Assets and liabilities equals
the bank net worth or equity capital
• Therefore, changes in the banks assets or liabilities on
the financial markets changes the banks net worth
Bank Net Worth continue
• Saver expose themselves to risk after depositing
their funds in the banks
– Risk that if banks incur losses from outside investments
• Bank with high net worth is appealing to savers
– Net worth provides buffer against the risk of losses
• Conflict of interest:
– Banks have the incentive to reduce their equity to increase
their expected rate of return, but depositors prefer
substantial equity cushion
 References
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Slide 18