BANKING OPERATION

CHAPTER 1 – BANKING

OPERATIONS OVERVIEW

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 CONTENTS
1 Why banks

2 What banks
CHAPTER 1

3 Role of banks

4 Type of banks

5 Banks’ competitors
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1. Why banks

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 1. Bank history
Demand of finding a safe place for gold (deposit, loans, payment)
In the 13th, 14th and 15th centuries – the Italian merchants - Benches (banco)
Bills of exchange, letters of credit, book entry for money and double entry bookkeeping.
Investment banking (financing trade, bills of exchange and raising money for
governments by selling bonds)
In the 18th to early 19th, industrialization and urbanization in Europe, different types of
banking: "merchant” and “commercial”.

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https://www.youtube.com/watch?v=fTTGALaRZoc

• What is the original name of bank in the old time?

1
• Why banks follow rules?
2
• What does institution offer a small loan?
3
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2. What banks?
The Economic functions it serves

The services it offers its customers

The legal basis for its existence

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 The economic functions it serves

They are involved in transferring funds from savers and

borrowers (financial intermediation) and in paying for goods

and services.

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 The services of banks

Banks no longer limit their service offerings to traditional services but

have increasingly become general financial service providers.

Other financial institutions are trying to be as similar to banks as possible

in the services they offer.

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 The services of banks
Carrying Out Currency Exchanges

Discounting Commercial Notes and Making Business Loans Offering Checking Accounts (Demand Deposits)

Discounting Commercial Notes and Making Business Loans Offering Trust Services (testament)

Safekeeping of Valuables and Certification of Value

Supporting Government Activities with Credit

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 The services of banks
Granting Consumer Loans

Financial Advising Dealing in Securities: Offering Security Brokerage

and Investment Banking Services

Managing Cash
Offering Mutual Funds, Annuities, and Other Investment Products

Offering Equipment Leasing

Offering Risk Management and Hedging Services
Making Venture Capital Loans

Selling Insurance Policies

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 The legal basis
Law on Credit Institutions - Article 4. Interpretation of terms
In this Law. the terms below are construed as follows:
1. Credit institution: an enterprise conducting banking operation(s). Banks, non-bank credit
institutions, microfinance institutions and people's credit funds.
2. Bank: a type of credit institution which may conduct all banking operations Banks
include commercial banks, policy banks and cooperative banks.
3. Commercial bank: type of bank which may conduct all banking operations and other
business activities for profit.

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3. Role of banks?

Deficit- Surplus-
spending spending

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3. Role of banks?

Who can be deficit-spending?

Who can be surplus-spending?
Between borrower and depositor, which one has larger size?
Holding for longer time? And riskier?

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3. Role of banks?
Borrower requirements:
Funds at a particular specified date
For a specific period of time (prefer long-term)
At the lowest possible cost

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3. Role of banks?
Lender requirements:
Minimization of risk
Minimization of cost
Liquidity

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 3. Role of banks?
Bank exists to bridge the gap between the depositors and borrowers
by performing transformation function:
Size transformation: from small size deposit and repackage in to
larger size loans
Maturity transformation: short-period of time into medium and
long-term loans
Risk transformation: Minimize the risk of default
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3. Role of banks?

Borrowers: As a whole:
Lender:
Longer time More efficient
Liquidity, less risk,
period, larger utilization of
marketable
amounts, lower funds, higher level
securities,
transaction costs, of transaction,
transaction cost,
lower interest more opportunity
lending decision
rate, available for higher risk
is simplified
when require ventures,

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3. Role of banks?

Rose & Hudgins, 2010

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 4. Types of banks?
Commercial banks Retail banks
Money center banks Limited-purpose banks
Community banks
Bankers’ banks Minority banks
Savings banks Cooperative banks
National banks State banks
Mortgage banks Investment banks
Insured banks Member banks
Merchant banks Industrial banks
Affiliated banks Virtual banks
International banks Wholesale banks
Fringe banks Universal banks

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 Commercial banks
Are the major financial intermediary in any economy.

Main providers of credit to the household

Deal with both retail and corporate customers, have well-diversified

deposit and lending books.

The largest banks in most countries are commercial banks.

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Commercial banks

5 largest commercial banks in Vietnam? (Total assets)

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 Investment banks
Mainly deal with companies and other large institutions.
Typically do not deal with retail customers.
Help company and governments raise funds in the capital market
though issue stock or debt.
Main activities: M&A, Underwriting of securities issues, trading and
investing securities, asset management.
Have an important influence on the economic system
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Investment banks

3 typical investment banks in Vietnam?

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4. Types of banks?

Rose & Hudgins, 2010

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 5. Who are the banks’ competitors
Specialize in selling saving deposits and granting home
mortgage loans and other forms of credit to individuals and
families.
Can be owned by ‘shareholder’ or individual who deposit.
Saving associations have to maintain the certain percent of
Atlas Savings and Loan Association
American Federal Savings Bank
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 5. Who are the banks’ competitors

Collect deposits from and make loans to their members

as nonprofit associations of individuals sharing a

common bond.

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 5. Who are the banks’ competitors

Offer loans to commercial enterprises and to

individuals and families using funds borrowed in

the open market or from other financial institutions.

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5. Who are the banks’ competitors

Rose & Hudgins, 2010

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 REVIEW

CHAPTER 1: AN OVERVIEW OF BANKS