Lecture 2

X
X
Please note:
For copyright reasons it may not be possible to reproduce all images.
T
SHTE
R APTLHACCLEY D
OEF BUUS SE IFNUELS L
International Financial
Markets and Banking
S ESACRHNOI N
OGL
Juliane Thamm
SW 3.07, Ext.: 3889, juliane.thamm@strath.ac.uk

Office hours: see myplace for details and/or email for an appointment
X
S T R AT H C LY D E B U S I N E S S S C H O O L
Lecture 2
Retail, Wholesale and
Investment Banking
© Juliane Thamm – University of Strathclyde

X
An overview of the different aspects of banking slides 1 & 2
Source: Arnold (2012, p.38)
Access via our library's ebook collection: Modern Financial

Markets & Institutions
https://www.dawsonera.com/readonline/9780273778028/startPag
e/63

X
Retail Banking
What does a bank do?

Takes deposits
Makes loans
Retail banks focus on individuals and smaller businesses
This is high volume / low value business
How does a retail bank make money?

X
Financial Intermediation
Remember what we said about financial intermediaries ‘transforming’

financial claims
Maturity
Banks borrow short term, but lend long
Risk
Banks diversify loans, so deposits are safer
Size
Banks pool small savings to make large loans

X
Risks in Banking
Liquidity risk
The bank issues liabilities (deposits) that are payable on demand, while
holding assets (loans) with longer terms to maturity
Asset risk
The bank may not be able to recover all of the funds it has lent to a
borrower, e.g. when the borrower becomes bankrupt

X
Managing Liquidity Risk

If all depositors asked for their money back on one day, the bank would
not be able to pay
In practice, with a diversified base of depositors the cash required to

meet withdrawals each day will be quite predictable
However, the bank will still need to hold reserves - a margin of error

X
Reserve & Liability Management

New Deposits New Loans
RESERVES
(Liquid Assets)
Withdrawals Loan Repayments

X
Managing Asset Risk

How can a bank reduce default risk?
1) Credit scoring can help the bank to avoid lending to ‘bad risks’
2) The bank can require some form of security from the borrower, e.g. a
charge on assets
3) Diversification across different borrowers can reduce the impact of

any default
Graphic on next slide: http://www.conceptdraw.com/How-To-Guide/picture/flowchart-example-

template/flowchart-types.png
X
“competitors” to retail banks

building societies and other mutuals are owned by their customers, or

members
they serve their members’ saving and borrowing needs, not those of
external shareholders
4,500 mutuals in Europe alone and with 50 million members

X
Building Societies
offer a wide range of financial services

required to dedicate 75% of their total operations towards residential
mortgage loans and associated home loan products
most operate as mutual institutions
Buildings Societies Act 1986 gives power to seek incorporation

(demutualisation)
Butterfill Act 2007 allows mergers without loss of mutual status

X
Building Society sector assets 1996-2018

(in £million)
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source:
compiled from data available at https://www.bsa.org.uk/statistics/sector-info-performance/sector-information

EXAMPLES:
X
Scottish Building Society Nationwide

oldest UK building society still operating today founded in Dec. 1848
founded in March 1848 largest UK building society
£431m in assets £ 245,732m in assets
does not provide current accounts provides current accounts
http://www.scottishbs.co.uk/ http://www.nationwide.co.uk

X
Mortgage lending
January – June 2015 January – March 2022

Net mortgage lending by £6.5bn £3.9bn
Building Societies
compared to … by other £4.9bn £15.7bn
lenders, that is a market
share of… 57% 25%
mortgages approved by 189,700 111,697
Building Societies
that is a … market share 29% 28%
Source: https://www.bsa.org.uk/statistics/bsa-statistics
Image: https://www.bsa.org.uk/getmedia/ea3f9c01-1db9-4c75-b26a-
f7e45bec297d/Infographic.aspx?width=600&height=462
X
Retail Banking Trends

Online and telephone banking, mobile banking apps, self-service lending
Entry into the retail banking market:

by former building societies
by supermarkets and other retailers
by other types of financial institutions e.g. insurance companies
Banks selling other financial products:

mortgages
pensions and insurance contracts
X
Next two slides
Challenger Banks
See article at : http://www.ft.com/cms/s/0/78b8590a-2155-11e4-b96e-
00144feabdc0.html#axzz4KKMgCfSF Image on the slide is no longer
available online, similar information on challenger banks can be found at:
https://www.which.co.uk/money/banking/bank-accounts/challenger-and-
mobile-banks-aj0mj7w688r5
Image:
https://i.pinimg.com/originals/ab/77/35/ab77354d8c993f48abe2d8fcfb84c63f.jpg
More on challenger banks in the UK can be found in this report by KPMG (optional
reading):
https://home.kpmg/uk/en/home/insights/2019/06/challenger-banks-opportunities-and-
challenges.html

X
Image:
https://www.consultancy.uk/illustrations/ne
ws/detail/2018-11-06-143111910-The-
magnitude-of-industry-structure-change-
varies-by-country.jpg
The UK remains a leading hub in terms of FinTech development and implementation, new
entrants accounted for 63% of the financial players in Britain. These players captured
nearly 14% of total banking and payment revenue last year, according to Accenture.
Source: https://www.consultancy.uk/news/19326/fintech-and-challenger-banks-rapidly-changing-financial-landscape
X
Online / Mobile Banking

The first British financial business to introduce Internet banking was the Nationwide Building
Society in 1997. Recent figures show that more than 26 million people now use online banking
in the UK. (https://www.cashfloat.co.uk/blog/money-borrowing/mobile-internet-banking-uk/)
In the UK in 2017, 22 million people managed their current account on their phone and it has
been predicted by the CACI that 35 million people - or 72% of the UK adult population - will bank
via a phone app by 2023. (https://www.bbc.co.uk/news/business-44166991 )
Banking via smartphone is predicted to overtake online banking in 2019 and it’s forecast that
around 72% of adults will use mobile banking apps by 2023. (https://www.expatica.com/uk/finance/banking/mobile-banking-
in-the-uk-291627/)

X
Next two slides

A joint report by the BBA and EY in 2017 shows an increased trend for app based financial services.
Source: https://www.bba.org.uk/wp-content/uploads/2017/06/WWBN-IV.pdf
The image is from page of the report, available via the link above.
Image: https://www.consulting.us/illustrations/news/detail/2020-08-03-140143916-Popular-types-
of-contactless-payments.jpg
Publicis Sapient suggests that new consumer priorities due to Covid-19 are expected to persist
indefinitely and that this shift to contactless payments presents a significant opportunity in the
payments landscape. (https://www.consulting.us/news/4640/contactless-payments-win-out-among-health-and-safety-concerns )

X
Wholesale / Investment Banks

Wholesale banking is simply the provision of traditional banking

services (deposits / loans) to large companies
However, in recent years most wholesale banks have become involved

in capital market activities
We call this ‘investment banking’
One key trend is for banks to remove lending risks from their balance
sheets, selling them on to other types of investors

X
Wholesale Banking
Retail banks diversify across a large number of small customers
Wholesale banks will have a smaller number of large customers
What impact should this difference have on the way a wholesale bank
manages its reserves / liabilities compared to a retail bank?

X
Wholesale Banking
Liability management – a bank that becomes short of liquidity can

borrow from other banks with a surplus
Wholesale banks have also sought to manage risk through

“securitisation”
This involves taking assets that would be on the bank’s balance sheet,
parcelling them up as tradable securities and selling them on to other
investors such as insurance companies

Extra information
X specifically on
securitisation can also be
Securitisation
found in chapter 13 in
Howells & Bain (2007).
Loan
BANK BORROWER
Interest
Capital Interest
Note: SPV is Special
Purpose Vehicle
SPV
Interest Question: How does the
Capital bank make money on
this?
INVESTOR

X
Investment Banking
Key investment banking activities include:

Managing equity and debt issues for companies
Advising on corporate transactions such as mergers & acquisitions
Most banks also engage in other capital market activities such as market
making, brokerage and asset management
Banks earn fees for most of these activities
Many banks also trade stocks and bonds on their own account, looking to
earn profits
X
Next two slides

Investment banking’s downward trend Source: https://www.ft.com/content/3074d05c-cf28-11e9-99a4-b5ded7a7fe3f

FICC = fixed-income and commodities trading
IBD = investment banking division
Image location: https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.upp-prod-

us.s3.amazonaws.com%2F10890d04-cf31-11e9-99a4-b5ded7a7fe3f?source=google-amp&fit=scale-down&width=500
FT league table top 10 banks by fees

Source: Financial Times https://markets.ft.com/data/league-tables/tables-and-trends

X
Investment Banking
The best way to understand the scope of investment banking is to look at a

couple of examples:
Goldman Sachs
http://www.goldmansachs.com/what-we-do/investment-banking/index.html
Morgan Stanley
http://www.morganstanley.com/institutional/invest_bank/index.html?page=inv_
bank

X
Universal Banks
financial service conglomerate combining retail, wholesale

and investment banking services
benefit from economies of scale in information technology

and access to capital
Examples: JPMorgan Chase, Bank of America Merrill Lynch,

Barclays
X

Economies of scale
Image
Diversification of activities
Source: Resource utilisation
http://www.economist.com/node/21560577?zid=300&ah=e7b
9370e170850b88ef129fa625b13c4
_
Conflicts of interest
Monopoly status
Too-big-to-fail / too-interconnected-to-fail

X
Next three slides

Image
Source: https://www2.deloitte.com/content/dam/Deloitte/cn/Images/inline_images/ind-fs/fsi-outlooks-2022-banking-industry-
outlook-01.jpg
Deloitte’s 2022 banking and capital markets outlook -full report available at:
https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/financial-services/deloitte-cn-fs-banking-and-capital-markets-
outlook-en-220121.pdf
Image
source: https://thefinanser.com/wp-content/uploads/2017/08/Euro-Bank-Investors-Fintech-Investments-V2-768x641.png
more information at: https://thefinanser.com/2017/08/fintech-world-investment-banking.html/
Image
source: https://bulletins.bfconsulting.com/wp-content/uploads/2022/02/Infogr_01_en.jpg
More information at: https://bulletins.bfconsulting.com/en/10-trends-poised-to-shape-banking-in-2022/

X
next steps
Please review the lecture 2 material and complete the week 2 required
reading, then attempt to answer the workshop 2 questions.
Try self-assessment quiz 2 and don’t forget about podcase 1 and the
Survey home work.
Vote for next Tuesday’s lecture topic and e-mail topic suggestions for
future Tuesdays.
You’ll find all details on the AG991 myplace page in the week 2 section.
… and attend tomorrow’s session!

X
further help:
Come to any office hours – these are drop-in sessions, no appointment

needed! All details are on the AG991 myplace page.
Send any questions you may have by e-mail.
If you wish to see me outside of office hours, please e-mail to make

arrangements.
X
X T
SHTE
R APTLHACCLEY D
OEF BUUS SE IFNUELS L
S ESACRHNOI N
OGL

Lecture 2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lecture 2

Uploaded by

Copyright:

Available Formats

X

SW 3.07, Ext.: 3889, juliane.thamm@strath.ac.uk

© Juliane Thamm – University of Strathclyde

An overview of the different aspects of banking slides 1 & 2

Source: Arnold (2012, p.38)

Access via our library's ebook collection: Modern Financial

© Juliane Thamm – University of Strathclyde

What does a bank do?

Retail banks focus on individuals and smaller businesses

This is high volume / low value business

How does a retail bank make money?

Remember what we said about financial intermediaries ‘transforming’

© Juliane Thamm – University of Strathclyde

© Juliane Thamm – University of Strathclyde

Managing Liquidity Risk

In practice, with a diversified base of depositors the cash required to

© Juliane Thamm – University of Strathclyde

Reserve & Liability Management

New Deposits New Loans

© Juliane Thamm – University of Strathclyde

Managing Asset Risk

How can a bank reduce default risk?

3) Diversification across different borrowers can reduce the impact of

Graphic on next slide: http://www.conceptdraw.com/How-To-Guide/picture/flowchart-example-

“competitors” to retail banks

building societies and other mutuals are owned by their customers, or

4,500 mutuals in Europe alone and with 50 million members

© Juliane Thamm – University of Strathclyde

offer a wide range of financial services

Buildings Societies Act 1986 gives power to seek incorporation

© Juliane Thamm – University of Strathclyde

Building Society sector assets 1996-2018

© Juliane Thamm – University of Strathclyde

Scottish Building Society Nationwide

£431m in assets £ 245,732m in assets

does not provide current accounts provides current accounts

© Juliane Thamm – University of Strathclyde

January – June 2015 January – March 2022

Retail Banking Trends

Online and telephone banking, mobile banking apps, self-service lending

Entry into the retail banking market:

Banks selling other financial products:

© Juliane Thamm – University of Strathclyde

Online / Mobile Banking

© Juliane Thamm – University of Strathclyde

Next two slides

© Juliane Thamm – University of Strathclyde

Wholesale / Investment Banks

Wholesale banking is simply the provision of traditional banking

However, in recent years most wholesale banks have become involved

We call this ‘investment banking’

© Juliane Thamm – University of Strathclyde

Retail banks diversify across a large number of small customers

Wholesale banks will have a smaller number of large customers

© Juliane Thamm – University of Strathclyde

Liability management – a bank that becomes short of liquidity can

Wholesale banks have also sought to manage risk through

© Juliane Thamm – University of Strathclyde

© Juliane Thamm – University of Strathclyde

Key investment banking activities include:

Next two slides

Investment banking’s downward trend Source: https://www.ft.com/content/3074d05c-cf28-11e9-99a4-b5ded7a7fe3f

Image location: https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.upp-prod-

FT league table top 10 banks by fees