Banking Operations Chapter 1

BANKING OPERATIONS

PhD. Nguyen Thi Thu Trang

General rules

 Duration: 45 subcredits
 Mid-term test : 50%
 Final test: 50%

MAIN CONTENT

 CHAPTER I: OVERVIEW OF BANKING

ACTIVITIES
 CHAPTER II. DEPOSITS IN BANKS
 CHAPTER III. BANK LOANS
 CHAPTER IV. INVESTMENT FUNCTIONS IN
BANKING
 CHAPTER V. FINANCIAL SERVICES

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Course material

Curriculum
 [1] Center for Financial Training. (2010). Banking systems,
2nd edition. Mason: South-Western Cengage Learning.
 [2] Peter Rose & Sylvia Hudgins. (2008). Bank Management
and Financial Services, 7th edition. McGraw-Hill Press.
 [3] Athony Saunders & Marcia Million Cornett. (2007).
Financial markets and institutions: An introduction to risk
management approach, 3rd edition. McGraw-Hill Press.
References
 [4] Bùi Diệu Anh. (2013). Hoạt động kinh doanh ngân hàng.
Nhà xuất bản Phương Đông.

CHAPTER I
OVERVIEW OF BANKING ACTIVITIES

 1.1. Introduction to banking

 1.2. Roles of banks in the economy
 1.3. How the banking system works
 1.4. Commercial banks and other financial
institutions
 1.5. Risks in banking activities

Introduction to banking

Concept:
 Bank is a type of credit institution that can carry
out all banking activities according to the
provisions of the Law on Credit
Institutions. According to the nature and
operation objectives, the types of banks include
commercial banks, policy banks, cooperative
banks. (Law on Credit Institutions 2010)

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Introduction to banking

 Banking activities are monetary business and

banking services with the regular content
of receiving deposits , using this money
to extend credit and provide payment
services .

 Commercial bank means a type of bank that is

permitted to conduct all banking activities and other
business activities in accordance with this Law with
the aim of making profits.

 Cooperative bank is the bank of all people's credit

funds established by the people's credit funds and
some legal entities in accordance with the provisions
of this Law for the main purpose of linking the
system, financial support, capital regulation in the
system of people's credit funds.

Introduction to banking

Types of banks
- Based on the form of ownership
 State commercial banks
 Joint-stock commercial bank
 Joint-venture bank
 Foreign bank branch

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Types of banks
- Based on business strategy
 Wholesale banking: is a term used to refer to transactions between
banks and large customers (companies) or transactions with large sums
of money (deposits up to hundreds of thousands and loans up to
millions of dollars or millions of dollars). pound). The term wholesale
also refers to transactions between banks conducted through the
interbank market separate from customers.
 Retail banking: A concept that refers to large, multi-branch banking
systems that are usually served by individual customers, individual and
centralized units, and whose services are savings, account creation.
transactions, payments, mortgages, personal loans, credit cards,...
 Retail and wholesale banking.

Types of banks

- Based on organizational relationship

 Headquarters Bank
 Bank branch
 Transaction office or transaction point affiliated to
the branch

CREDIT INSTITUTION

Definition:
(i) An undertaking whose business is to receive
deposits or other repayable funds from the public
and to grant credit for its own account; or

(ii) an undertaking or any other legal person,

other than those under (i), which issues means of
payment in the form of electronic money.
(European Central Bank, 2004, Annual Report: 2004, ECB, Frankfurt, Glossary.)

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CREDIT INSTITUTION

 Credit institution is an enterprise performing

one, several or banking activities. Credit
institutions include banks, non-bank credit
institutions, microfinance institutions and
people's credit funds.
(Law on Credit Institutions 2010)

Roles of banks in the economy

 The source of capital for the economy, an important

tool to promote the development of the productive
forces
 Connecting between businesses and the market
 A tool for the state to regulate the macro economy
 Connecting national finance with international
finance

How the banking system works

 Money at work
- The spread
- Other funds
- Assets and liabilities

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BANKING BUSINESS OPERATIONS

 Assets

 Liabilities

 Off-balance sheet DETAIL

BANKING BUSINESS OPERATIONS

 Assets
– Reserves
– Credits
– Investment
– Other Assets

Assets

- Reserve: Part of the capital is not used to be ready to

meet payment needs. This is called reserve.
- Credits: The remaining capital after setting aside a part
of the reserve, commercial banks can use to provide
credit to organizations and individuals, including:
– Loans
– Discount
– Financial leasing
– Bank Guarantee
– Other

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Assets

- Investment : Raising capital to buy shares and shares

of companies; Capital contribution to buy shares is
only allowed with the bank's capital. Buy government
bonds, local governments, corporate bonds...
- Other Assets: Remaining items of assets There are
mainly current assets for: Construction or purchase of
additional houses for office use, equipment,
machinery, means of transport, construction of
systems treasury… in addition, there are receivables,
other accounts…

Liabilities & equity

– Charter Capital
– Reserve funds
– Mobilized Capital
– Borrowed Capital
– Trust capital
– Other Capital

Liabilities & equity

- Charter capital: The bank's charter capital and funds

are called the bank's own capital.
- Resever funds: required to be set aside during the
existence and operation of the bank.
- Mobilized capital: is the biggest resource.

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Liabilities & equity

- Borrowed capital: plays an important role in the total

capital of commercial banks. This category includes:
+ Domestic loans
+ Loans from foreign banks
- Trust capital:
- Other capital: This is the source received from banking
and financial institutions, from the state budget... to
finance programs and projects on socio-economic
development, environmental improvement...

Spread?

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Commercial banks and other

financial institutions

RISKS IN BANKING BUSINESS

Concept
 Risk is an uncertainty or a state of
uncertainty.
 Only an uncertain situation that can be
predicted is considered a risk.

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Main risks

Credit

Liquidity

Risks in
Incapacitated
Intersted rate
banking business
pay
Interest rate
Market
Moneytary

Goods
Operational Stocks

Credit risk

Credit risk is defined as the possibility that

a bank borrower or a counterparty will not
meet its debt obligations on agreed terms.
Credit risk has two main indicators:
–Possibility of default (PD)
–Potential loss of capital if default (EL)

Credit risk
Credit risk comes from many factors and can be
divided into 2 main groups:
- The group belongs to the mechanism, policy and
the bank itself
- The group belongs to people, including
commercial bank staff and borrowers.

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Some principles to ensure credit safety

Banking organization

Staff

Inspection and control work

Credit policy

Credit granting process

Credit Information

Liquidity risk

Liquidity is the ability to raise additional

resources or refinance existing debt
obligations – at ‘normal costs’ – to meet
commitments as they come due and finance
new commitments.

Liquidity risk

 Occurs when the supply of money is less than

the demand for money, liquidity risk involves
the ability to convert major assets into money
quickly without incurring a loss in price.
 The risk that the bank does not have enough
money to meet the payables when the payment
is due, or because of some event that the
customer withdraws money in a hurry.

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Market risk
 Market risk is the risk of loss on the
balance sheet or off the balance sheet
due to fluctuations in market prices.
 The subgroups of market risk are
equity market risk, interest rate risk,
currency and commodity risk – all
parameters that can change the value
of a trading instrument.

Interest rate risk

Interest rate risk is the risk of falling

earnings due to adverse movements in
interest rates.
Interest rate risk is a normal part of
banking. Most items on a bank's balance
sheet generate income and expenses that are
tied to interest.

Currency risk

 Currency risk occurs when a bank has

products and funds in different currencies.
 Currency risk needs to be considered on a
per-currency basis.

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Operational risk

Operational risk is the risk of loss due to faulty

or inadequate internal processes, people or
systems, or external events. This definition
includes legal risk but excludes reputational risk
and strategic risk.

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Operational risk
Operational risk arises at two levels:
 Technical level, where information systems or
risk measures are not warranted
 Organization level, which deals with risk
reporting and monitoring, compliance with specific
rules, controls and policies, and the commensurate
extent of these factors.

Operational risk
There are many potential causes of operational risk.
Furthermore, operational risk is difficult to quantify:
 Internal scam
 Scam from the outside
 Recruitment practices and occupational safety
 Customers, products and business practices
 Damage to tangible property
 Business interruptions and system failures
 Process implementation and management

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