Introduction To Banking 3Rd Edition Claudia Girardone Full Chapter

Introduction to Banking 3rd Edition
Claudia Girardone
Visit to download the full and correct content document:
https://ebookmass.com/product/introduction-to-banking-3rd-edition-claudia-girardone/
Introduction to Banking
A01 Introduction to Banking 40336.indd 1 17/09/2021 12:36

At Pearson, we have a simple mission: to help people
make more of their lives through learning.
We combine innovative learning technology with trusted

content and educational expertise to provide engaging
and effective learning experiences that serve people
wherever and whenever they are learning.
From classroom to boardroom, our curriculum materials, digital

learning tools and testing programmes help to educate millions
of people worldwide – more than any other private enterprise.
Every day our work helps learning flourish, and

wherever learning flourishes, so do people.
To learn more, please visit us at www.pearson.com/uk

Third Edition
Introduction to Banking
Barbara Casu
Bayes Business School, City, University of London
Claudia Girardone
Essex Business School, University of Essex
Philip Molyneux
Bangor Business School, Bangor University
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan

PEARSON EDUCATION LIMITED
KAO Two
KAO Park
Harlow CM17 9SR
United Kingdom
Tel: +44 (0)1279 623623
Web: www.pearson.com/uk
First published 2006 (print and electronic)

Second edition published 2015 (print and electronic)
Third edition published 2022 (print and electronic)
© Pearson Education Limited 2006, 2015, 2022 (print and electronic)
The rights of Barbara Casu, Claudia Girardone and Philip Molyneux to be identified as authors of this work have been
asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system,
distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission
should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom
should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN.
The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased,
licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as
allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright
law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s
rights and those responsible may be liable in law accordingly.
All trademarks used herein are the property of their respective owners. The use of any trademark in this text does
not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such owners.
Pearson Education is not responsible for the content of third-party internet sites.
The Financial Times. With a worldwide network of highly respected journalists, The Financial Times provides global
business news, insightful opinion and expert analysis of business, finance and politics. With over 500 journalists
reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and
analysed from an independent, global perspective. To find out more, visit www.ft.com/pearsonoffer.
ISBN: 978-1-292-24033-6 (print)

978-1-292-24035-0 (PDF)
978-1-292-24037-4 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Casu, Barbara, author. | Girardone, Claudia, author. | Molyneux,
Philip, author.
Title: Introduction to banking / Barbara Casu, Claudia Girardone, Philip
Molyneux.
Description: Third edition. | Harlow, England ; New York : Pearson, 2022. |
Includes bibliographical references and index. | Summary: “The aim of
this textbook is to provide a comprehensive introduction to theoretical
and applied issues relating to the global banking industry. Despite the
fears of Henry Ford, we do not think reading this book will cause a
revolution but we do hope it will at least provide you with an enjoyable
and interesting insight into the business of banking”-- Provided by
publisher.
Identifiers: LCCN 2021034509 (print) | LCCN 2021034510 (ebook) | ISBN
9781292240336 (paperback) | ISBN 9781292240374 (epub)
Subjects: LCSH: Banks and banking--Europe. | Banks and banking. | Bank
management--Europe. | Bank management.
Classification: LCC HG2974 .C375 2022 (print) | LCC HG2974 (ebook) | DDC
332.1--dc23
LC record available at https://lccn.loc.gov/2021034509
LC ebook record available at https://lccn.loc.gov/2021034510
10 9 8 7 6 5 4 3 2 1
26 25 24 23 22
Cover image: Andrey Suslov/iStock/Getty Images Plus/Getty Images
Cover designed by Two Associates
Print edition typeset in 9.5/12.5pt Charter ITC Std by Straive
Printed and bound in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

To my late father, Antonio. To Martin, Lila, Milan, Monika and to Beth.
And to my mum and sister (BC)
To Marc, Matteo and Leonardo. To my parents Nieves and Sandro (CG)
To Delyth, Alun, Catrin, Gareth, Gethin, Lois and Rhiannnon (PM)

Contents
List of figures xiv

List of tables xviii
List of boxes xxi
Preface xxiv
Acknowledgements xxx
List of acronyms and abbreviations xxxii
Part 1 Introduction to banking
1 What is special about banks? 3

1.1 Introduction 3
1.2 The nature of financial intermediation 3
1.3 The role of banks 7
1.4 Information economies 8
1.5 Why do banks exist? Theories of financial intermediation 14
1.6 The benefits of financial intermediation 16
1.7 Conclusion 17
Key terms 18
Key reading 18
Revision questions and problems 19
2 Bank activities and services 20

2.1 Introduction 20
2.2 What do banks do? 20
2.3 Banks and other financial institutions 21
2.4 Banking services 24
2.5 Banks and the FinTech revolution 39
2.6 Conclusions 43
Key terms 43
Key readings 43
Appendix 2.1 FinTech: a selected glossary 45
3 Types of banking 48
3.1 Introduction 48
3.2 Traditional versus modern banking 49
3.3 Types of banking 51
3.4 Retail or personal banking 52
3.5 Private banking 53
3.6 Corporate banking 56
vii

Contents
3.7 Investment banking 67

3.8 Types of banks 72
3.9 Conclusions 79
Key terms 79
Key readings 79
4 International banking 81
4.1 Introduction 81
4.2 What is international banking? 81
4.3 Brief history of international banking 84
4.4 Why do banks go overseas? 85
4.5 Types of bank entry into foreign markets 92
4.6 Advantages and disadvantages of international and cross-border banking 97
4.7 International banking services 98
4.8 Conclusions 113
Key terms 114
Key reading 115
Appendix 4.1 Syndicated lending: a selected glossary 116
5 Islamic banking 119

5.1 Introduction 119
5.2 A brief history 120
5.3 How an Islamic bank operates 123
5.4 Industry features 127
5.5 Balance sheet and income statement features 130
5.6 Regulating Islamic banks 132
5.7 Comparing Islamic and conventional banks 135
5.8 Conclusion 136
Key terms 136
Key reading 136
Part 2 Central banking and bank regulation
6 Central banking 141

6.2 What are the main functions of a central bank? 142
6.3 How does monetary policy work? 143
6.4 Monetary policy functions of a central bank 147
6.5 Why do banks need a central bank? 167
6.6 Should central banks be independent? 170
6.7 Conclusion 173
Key terms 173
Key reading 174
viii

Contents
7 Bank regulation and supervision 175

7.2 The rationale for regulation 176
7.3 Types of regulation 178
7.4 The financial safety net 181
7.5 Limitations of regulation 191
7.6 Causes of regulatory reform 194
7.7 Bank capital regulation 195
7.8 The 1988 Basel Capital Accord (Basel I) 197
7.9 The 1996 amendments to the 1988 Accord 201
7.10 The second Capital Accord (Basel II) 202
7.11 The third Capital Accord (Basel III) 205
7.12 Finalising Basel III 213
7.13 Conclusion 214
Key terms 214
Key reading 215
8 Bank failures and banking crises 216

8.2 The determinants of bank failure 217
8.3 Early warning systems for bank soundness 224
8.4 Bank restructuring 230
8.5 Banking crises 237
8.6 Conclusion 244
Key terms 245
Key reading 245
Part 3 Issues in bank management
9 Banks’ balance sheet and income structure 249

9.2 Retail banks’ balance sheet structure 250
9.3 Investment banks’ financial statements 264
9.4 Bank performance and financial ratio analysis 269
9.5 Conclusion 287
Key terms 288
Key reading 288
10 Bank financial management 289

10.2 Asset–liability management (ALM) 290
10.3 Liquidity management and the importance of reserves 295
10.4 Capital adequacy management 296
ix

Contents
10.5 Off-balance-sheet (OBS) business in banking 297

10.6 Loan sales and the process of securitisation 301
10.7 Derivative business in banking 304
10.8 Conclusion 321
Key terms 322
Key reading 322
11 Banking risks 324

11.2 Credit risk 324
11.3 Interest rate risk 327
11.4 Liquidity (or funding) risk 331
11.5 Foreign exchange risk 335
11.6 Market (or trading) risk 337
11.7 Country and sovereign risk 340
11.8 Operational and cyber risks 342
11.9 Off-balance-sheet risk 344
11.10 Sustainability (or ESG) risks 344
11.11 Other risks 349
11.12 Capital risk and solvency 350
11.13 Interrelation of risks 350
11.14 Conclusion 351
Key terms 352
Key reading 352
12 Bank risk management 354

12.2 General risk management 355
12.3 Credit risk management 362
12.4 Managing the lending function 365
12.5 Managing interest rate risk 372
12.6 Managing liquidity risk 379
12.7 Managing market risk 381
12.8 Managing operational risk 389
12.9 International risk assessment 393
12.10 Conclusion 399
Key terms 399
Key reading 400
Part 4 Comparative banking markets
13 Banking in the UK 403

13.2 The crisis in UK banking 404
x

Contents
13.3 Regulatory reforms and the changing face of UK banking 413

13.4 The structure of the UK banking sector 424
13.5 Profits and the financial features of UK banks 426
13.6 The UK payment system 431
13.7 Competition in UK banking 435
13.8 Conclusion 441
Key terms 442
Key reading 443
Appendix 13.1 Demutualisation of the UK building society sector 444
14 Banking in Europe 445

14.2 The European Union 446
14.3 The Single European Market for financial services 449
14.4 Building a new EU financial architecture 458
14.5 Structural features and the consolidation trend 478
14.6 Balance sheet structure and performance in European banking 489
14.7 Conclusion 494
Key terms 494
Key reading 495
15 Banking in the US 496

15.2 The financial crisis in the US 497
15.3 Structure of the US banking and financial systems 504
15.4 US payments systems 512
15.5 Balance sheet features of US commercial banks 515
15.6 Performance of US commercial banks 515
15.7 Regulation of the US banking system 521
15.8 Conclusion 530
Key terms 531
Key reading 531
16 Banking in Japan 533

16.2 Structure of banking system 534
16.3 Payment systems 542
16.4 Banking crises in Japan 547
16.5 Changing structure of the financial system 552
16.6 Conclusion 560
Key terms 561
Key reading 561
xi

Contents
17 Banking in emerging markets 563

17.2 Benchmarking financial development 564
17.3 Finance and growth 569
17.4 The macroeconomic outlook 573
17.5 Structural features and trends 579
17.6 Conclusion 593
Key terms 593
Key reading 594
Part 5 Advanced topics in banking
18 Banks and markets 597

18.2 Bank intermediation, markets and information 598
18.3 The development of the securitisation market 602
18.4 Modern securitisation process 606
18.5 The ‘new wave’ of securitisation 613
18.6 Types of securitisation 614
18.7 Securitisation, credit-rating agencies and monoline insurers 616
18.8 The future of securitisation 620
18.9 Conclusion 624
Key terms 624
Key reading 624
19 Mergers and acquisitions 626

19.2 Mergers and acquisitions: definitions and types 627
19.3 Recent trends in bank M&As 630
19.4 M&A and bank performance 639
19.5 Managerial motives for M&As 642
19.6 The impact of M&As on bank customers 643
19.7 M&As and bank diversification 644
19.8 The exploitation of safety-net subsidies and systemic risk 647
19.9 Conclusion 652
Key terms 652
Key reading 653
20 Bank competition and financial stability 654

20.2 Structure-conduct-performance (SCP) 655
20.3 Non-structural measures of banking sector competition 664
20.4 Comparing competition measures – are they consistent? 671
xii

Contents
20.5 Competition and risk in banking 673

20.6 Bank competition and stability 676
20.7 Conclusion 679
Key terms 680
Key reading 680
Appendix A1 Interest rates, bonds and yields 681

Appendix A2 Introduction to portfolio theory 691
Glossary 701
References and further reading 742
Index 775
xiii

List of figures
1.1 The intermediation function 4

1.2 Direct finance 4
1.3 Direct and indirect finance 6
1.4 Modern financial intermediation 6
1.5 Adverse selection in loan pricing 11
2.1 Classification of financial intermediaries in the UK 22
2.2 Banks’ core activities 25
2.3 Cheque transactions in the UK 26
2.4 The way we pay 27
2.5 ‘Next gen’ payment technologies 29
2.6 ATM transactions crash in the UK 30
2.7 UK goes cashless during lockdown 31
2.8 Typical current account usage 33
2.9 PPI payouts 35
2.10 Total cost of PPI per bank, including compensation and administration (£bn) 37
2.11 The FinTech tree 41
2.12 FinTech innovations by sector 41
3.1 Types of banking 52
3.2 High net worth individuals by wealth band 54
3.3 HNWI financial wealth by region (US$tn), 2011–2018 55
3.4 Breakdown of HNWI financial assets, Q1 2019 (global and regions) 56
3.5 The UK payment schemes 58
3.6 Bond features 65
3.7 Largest investment banks by revenue, 2021 70
3.8 Top commercial banks (total assets, $mil), 2012–2018 73
3.9 The decline of US savings banks, 1990–2019 74
3.10 Bank business models in Europe 78
4.1 The product life cycle 89
4.2 The role of banks in international trade 100
4.3 Syndicated lending – basic structure 102
4.4 The syndication process 105
4.5 US leveraged loans outstanding 108
4.6 European leveraged loans outstanding 109
4.7 Collateralised loan obligations outstanding ($bn) 111
5.1 A timeline of Islamic banking 122
5.2 Growth in Islamic Banking Assets 2008 to 2019 (US $bn) 128
5.3 Islamic Banking Share in Total Banking Assets by Country 2019 (%) 128
5.4 Shares of Global Islamic Banking Assets (2019) 129
5.5 Islamic Banking Assets (US $bn) and Market Share (%) (2019) 129
6.1 Dates of establishment of central banks 143
6.2 Monetary policy instruments, targets and goals 149
6.3 Open market operations: outright purchases of government securities 153
6.4 Discount window 154
xiv

List of figures
6.5 Reserve requirements 156

6.6 The key issues in monetary policy transmission 159
6.7 Channels of monetary policy transmission 160
6.8 Transmission lags of monetary policy 160
6.9 The room for monetary policy manoeuvre keeps narrowing 166
7.1 A timeline of financial regulation 176
7.2 Elements of the financial safety net 181
7.3 A timeline of DIS introduction 182
7.4 Measures of bank capital 199
7.5 Basel II: the three pillars 203
7.6 Elements of the capital ratio affected by Basel III 206
7.7 Basel III: enhancing the three-pillar approach 206
8.1 Eurozone banks’ NPLs 2015Q2–2020Q2 (€bn, %) 219
8.2 Average and distribution of CAMELS rating, 1990–2011 227
8.3 Percentage of strong and weak banks, 1990–2011 227
8.4 Banking crises 238
9.1 Breakdown of UK banks’ sterling deposits, end-year 2019 254
9.2 Barclays Bank main assets (%), end-year 2017 256
9.3 Barclays Bank main liabilities (%), end-year 2017 256
9.4 Banks vs. manufacturing firms – balance sheet composition 261
9.5 Goldman Sachs: asset composition and primary sources of funding, 2019 267
9.6 Goldman Sachs: sources of revenue, 2019 268
9.7 Goldman Sachs: net revenues by geographic regions, 2019 268
9.8 Goldman Sachs: non-interest expenses, 2019 269
9.9 Goldman Sachs: breakdown of costs, 2019 269
9.10 Who is interested in bank performance? 270
9.11 The ROE decomposition 274
9.12 CDS spreads evolution for three former large US investment banks (%),
2015–2020 277
9.13 Texas ratios by bank, 2015–2019 278
9.14 Investors braced for a rise in European bank loan losses 279
9.15 Bank stocks are underperforming the wider market 280
10.1 Forms of asset management versus liability management 291
10.2 Goals of ALM and liquidity management 291
10.3 Profit centres and the FTP process 294
10.4 Body with primary oversight over balance sheet management (a) and
ALM unit reporting line (b) 295
10.5 Simple example of a letter of credit 299
10.6 Securities underwriting syndicate 299
10.7 A default swap 306
10.8 A total-rate-of-return swap 307
10.9 A credit-spread put option 307
10.10 Global OTC derivatives market 309
10.11 Payoffs and profits on call options at expiration (from the perspective
of the buyer of the option) 316
10.12 Payoffs and profits on put options at expiration (from the perspective
of the buyer of the option) 317
11.1 Refinancing risk 330
xv

List of figures
11.2 Reinvestment risk 331

11.3 The foreign asset and liability position of a Spanish bank: a net long asset
position in US$ 337
11.4 Banking vs. trading books 339
11.5 Theoretical examples on the ESG cycle – impact of environmental and
social factors on an institution’s risk profile: (a) impact through physical risk;
(b) impact through transition risk; and (c) impact of social factors 346
11.6 Incorporation of ESG risks at the point of loan origination 347
11.7 Visualisation of the 2018 EU action plan on financing sustainable growth 348
12.1 Gender breakdown of executive functions in UK financial services 360
12.2 Corporate governance and risk in banking 362
12.3 Home repossessions in the UK 368
12.4 Probability distribution of portfolio losses 372
12.5 Rate sensitivity and positive gap 373
12.6 Strategic matrix for profit maximisation 375
12.7 Backtesting VaR (UBS), 1 January 2019–31 December 2019 386
12.8 Comparison between value-at-risk and expected shortfall 387
12.9 The three lines of defence for sound operational risk management 390
13.1 Northern Rock balance sheet growth and liability structure, June 1998–June
2007 405
13.2 Northern Rock: from nationalisation to sale 407
13.3 RBS capitalisation 411
13.4 Outstanding guarantees to the UK banking sector 413
13.5 The new ICE LIBOR arrangements 417
13.6 MiFID 2 422
13.7 UK banks – return on equity 428
13.8 Investment and retail banking profitability in the UK 429
13.9 Capital strength of UK banks 430
13.10 De-risking – major UK banks risk-weights 431
13.11 Liquid assets and short-term funding of large UK banks 432
14.1 The Lamfalussy procedure 455
14.2 Interest rates, loans to non-financial corporates 457
14.3 The three crises in the eurozone 459
14.4 Proposals for EU financial supervision – de Larosiére Report 467
14.5 The European system of financial supervision 469
14.6 The Banking Union 470
14.7 The Single Supervisory Mechanism 472
14.8 Total assets of credit institutions in the EU-27, 2018 479
14.9 Number of MFIs in the EU and euro area, enlargement period 481
14.10 Number of MFIs (by country and category), February 2021 482
14.11 Size of selected EU banks, 2020 (assets in €bn and as % of national GDP) 487
14.12 Funding base stability ratio and interbank market dependency ratio 491
14.13 EU non-performing loans, trends and volumes, 2014–2019 493
14.14 Tier 1 capital ratio, 2015–2020 493
15.1 US mortgage-related issuance 499
15.2 TARP funds outstanding 502
15.3 Number of commercial banks and branches in the US (1935–2019) 505
15.4 Share of industry assets according to bank size (%), 1984–2020 506
15.5 Performance of US commercial banks – return on equity (ROE), 1984–2020 518
xvi

List of figures
15.6 Performance of US commercial banks – return on assets (ROA), 1984–2020 519

16.1 Structure of the Co-operative system 540
16.2 Changes to the structure of the Japan Post Group 543
16.3 World’s largest banks by total deposits 543
16.4 Banknotes and coins in circulation as percentage of GDP 547
16.5 The performance of Japanese banks – some international comparisons 557
16.6 Capitalisation of Japanese banks 560
17.1 The uneven sizes of financial systems 568
17.2 Banking and economic growth 573
17.3 Economic growth in advanced and emerging economies 579
17.4 Total assets of state-owned banks in selected central European countries 581
17.5 Trends in government ownership of banks 585
17.6 Government ownership across developing regions, 1970–2009 585
17.7 Foreign bank presence, 2009 590
18.1 How the US mortgage market works 604
18.2 Securitisation rates by type of mortgage, 2001 and 2006 606
18.3 Creation of an ABS security: participants and functions 608
18.4 Capital structure and prioritisation 612
18.5 Example of tranching and credit enhancement 613
18.6 US Mortgage-Backed Securities issuance ($ billion) 1996–2020 621
18.7 US Asset-Backed Securities issuance, by asset classes ($ million), 1990–2020 621
18.8 European Securitisation Issuance (€ Billions) 2010–2020 622
19.1 Bank M&As in Europe and the US (value of transactions $bn), 1985–2006 631
19.2 JPMorgan’s US acquisitions 633
19.3 Real assets of US banking organisations, 1990–2016 634
19.4 EU Bank M&A number and value of transactions 635
19.5 Average deal size between Europe’s banks at 12-year high 636
19.6 Banks diversify and multiply, 1998–2008 645
20.1 The structure-conduct-performance (SCP) paradigm 657
20.2 Herfindahl index: foreign exchange derivatives markets 661
20.3 Concentration levels in UK retail banking (measured by HHI) 663
xvii
A01 Introduction to Banking 40336.indd 17 29/09/21 1:44 PM

List of tables
2.1 A simplified bank balance sheet 21

2.2 A cashless society: advantages and disadvantages 29
2.3 Top ten financial scandals in UK retail banking 38
3.1 Traditional versus modern banking 50
3.2 Top ten global private banks by assets under management 55
3.3 The end of an era for US investment banks 68
3.4 Top 15 commercial banks (by Tier 1 capital) 73
3.5 Credit unions in the world, 2018 76
4.1 Type of entry in foreign markets 96
4.2 Opportunities and challenges of cross-border banking 98
4.3 Letters of credit 101
4.4 Credit risk ratings – Moody’s and Standard & Poor’s 106
5.1 Key instruments and concepts in Islamic banking and finance 125
5.2 Breakdown of Islamic Financial Services Industry by Sector and Region
(US $bn and %, 2019) 127
5.3 Top Islamic banks by assets size (US$mil), 2018 130
5.4 Dubai Islamic Bank PJSC balance sheet 131
5.5 Dubai Islamic Bank PJSC profit and loss statement 132
6.1 A simplified central bank balance sheet 150
6.2 Balance sheet, Bank of England 151
6.3 Eurosystem monetary policy operation 155
6.4 Pros and cons of discretion vs. fixed rules in monetary policy 161
6.5 UK and US asset purchase programmes (in figures) 164
6.6 Central bank independence (CBI) 172
7.1 Bank regulation: key concepts 178
7.2 Micro- and macro-prudential policy tools 180
7.3 DIS cross-country comparison 186
7.4 Bank resolution authorities: a cross-country comparison 189
7.5 Bank Greedy balance sheet 196
7.6 Bank Greedy balance sheet after £4 billion loans go bad 196
7.7 Bank Greedy balance sheet after £7 billion loans go bad 196
7.8 Rationale for Basel II: more flexibility and risk sensitivity 202
7.9 Components of regulatory capital 208
7.10 G-SIBs and additional capital requirements 212
7.11 Finalising Basel III: a roadmap 213
8.1 CAMELS rating 226
8.2 Bank resolution terminology 231
8.3 Bank resolution methods 235
8.4 Regulatory initiatives 236
8.5 The costs of banking crises 239
8.6 Comparing the costs of the Asian and global crises 240
xviii

List of tables
9.1 Simplified commercial bank balance sheet 250

9.2 Bank of England aggregate assets of UK banks (end-year 2019, £bn
amounts) 252
9.3 Bank of England aggregate liabilities of UK banks (end-year 2019, £bn
amounts) 255
9.4 Barclays Bank assets, 2013–2017 (£mil) 257
9.5 Barclays Bank liabilities, 2003–2017 (£mil) 258
9.6 Bank ABC: shares fair value vs historical cost 258
9.7 Banks vs. manufacturing firms – balance sheet composition 260
9.8 A simplified bank income statement 262
9.9 Barclays Bank PLC profit and loss account, 2013–2017 (£mil) 263
9.10 A simplified investment bank balance sheet 265
9.11 Key performance indicators (KPIs) 271
9.12 Australian major banks’ (the ‘Majors’) performance at a glance, 2020 275
9.13 Selected ratios for three former large US investment banks (%) 276
9.14 Cost of equity capital for RBS, HSBC, Barclays and Lloyds in 2021 284
9.15 Cost of equity capital for selected US and EU banks in 2021 285
9.16 An illustration of the trade-off between solvency and profitability 286
10.1 Profit centres and FTP process: a simple example 294
10.2 Simplified bank balance sheet before and after loan sales (in £mil) 301
10.3 Simplified bank balance sheet before and after securitisation (in £mil) 303
10.4 Eurodollar interest rate futures 311
10.5 Example of long hedge using Eurodollar futures 312
10.6 Fixed–floating rate currency swap (millions) 321
11.1 Selected sovereign foreign currency ratings 342
11.2 Operational risk event types 343
12.1 Selected definitions of risk culture 358
12.2 Maturity bucket gap (£mil) 374
12.3 Selected elements of internal and standard models approaches in the
January 2016 revised market risk framework 382
12.4 Value-at-risk at UBS (1-day, 95% confidence, 5 years of historical data) 385
12.5 Example of OECD country risk classification of the participants to the
arrangement on officially supported export credits (as of 16 October
2020) 398
13.1 Government support to UK banks, 2007–2012 409
13.2 HSBC Bank Plc: consolidated income statement 2019–2020 (£mil) 427
14.1 The European Union: a timeline 447
14.2 Macroeconomic outlook 448
14.3 Euro area member states 451
14.4 Regulatory measures affecting the EU banking and financial sectors 452
14.5 Obstacles to full integration of EU financial retail markets 456
14.6 The development of Dexia’s balance sheet and income (in €bn) 462
14.7 Financial assistance facilities for euro area countries 465
14.8 Towards a banking union: timeline and milestones 467
14.9 Number of credit institutions in the euro area, 1999–2019 480
14.10 Number of MFIs by country and percentage change 483
14.11 European Union Indicators of banking sector capacity, 2019 484
14.12 Number and total assets of foreign branches and subsidiaries in the euro
area, 2012–2019 485
xix

List of tables
14.13 Five-firm concentration ratio as percentage of total banking sector assets and
Herfindahl index, 2008 to 2019 487
14.14 Selected balance sheet items (€bn and as % of total assets), 2013 490
14.15 Selected income statement items (EU banks), crisis period (2008–2013) 492
15.1 Sub-prime home purchase loans (%) pre-crisis period 499
15.2 Ten largest US banking companies, ranked by assets ($mil) 507
15.3 Leading US property and casualty insurance companies, March 2020 509
15.4 Leading US life insurance companies, 2019 509
15.5 US financial intermediaries (market share, total assets) 512
15.6 Number of non-cash payments ($bn), 2000–2019 514
15.7 Assets of US commercial banks, 1995–2019 ($bn) 516
15.8 Liabilities and equity capital of US commercial banks, 1995–2019 ($bn) 517
15.9 Bank profitability by state, 2019 520
15.10 US financial regulators 522
15.11 Supervisors and regulators of US banks 525
16.1 Japanese domestic banking groups 535
16.2 Licensed financial institutions in Japan (as of early 2021) 537
16.3 Payments processed by selected interbank funds transfer systems 546
16.4 Japan’s 1998 banking crisis – major events 549
16.5 Financial assets of Japan by sectors 2015 and 2016 (billion yen) 552
16.6 Regulation and supervision by bank type 554
16.7 Performance indicators of Japanese banking sector (2014–2016, Sept) 555
16.8 Balance sheet (September 2017, values in million yen) 558
16.9 Income statement (September 2017, values in million yen) 559
17.1 The World Bank’s ‘4 × 2 matrix of financial system characteristics’ 566
17.2 Financial institution characteristics by country, 2008–2010 average 568
17.3 Finance and growth: a review of the literature 571
17.4 Emerging economies – geographical region 574
17.5 Emerging economies – income classification 575
17.6 Nominal GDP growth (at constant prices) (%) – emerging and other economies 578
17.7 Banking in Asia 580
17.8 Number of banks by host country, aggregates by income level and regions 591
17.9 Foreign ownership limits in South East Asian banking 592
18.1 True sale vs. synthetic securitisation 615
19.1 Motives for bank M&As 631
19.2 Major US bank mergers & acquisitions since 2000 632
19.3 European banks M&As, 2007–2013 637
19.4 Bank acquisition of FinTech companies, 2010–2018 638
20.1 Bank size and concentration 658
20.2 Herfindahl index and 5-bank concentration ratio (by assets) 660
20.3 H-statistics: interpretation 665
20.4 Panzar–Rosse H-statistic 667
20.5 Interpretation of the CV parameter (λ) 668
20.6 Lerner index – Banks in Asia Pacific (average figures, 2003–2010) 669
20.7 Competition measures and ranks for selected EU countries (average values,
2000–2009) 672
20.8 Correlation matrix for the competition measures 672
20.9 Empirical evidence of the competition-stability relationship 677
xx

List of boxes
2.1 Universal banking: an optimal model of banking? 23

2.2 Coronavirus accelerates shift away from cash 30
2.3 After PPI, what could be the next banking mis-selling scandal? 35
3.1 Recent trends in wealth management and private banking 55
3.2 The end of an era: US investment banks and the conversion into BHCs 69
3.3 For today’s investment bankers, job cuts are a one-way street 71
3.4 Diversity in the banking ecosystem 77
4.1 From international to multinational banking? 82
4.2 Some definitions 83
4.3 Trade barriers and banking 87
4.4 Correspondent banking and cross-border payments 94
4.5 Leveraged loans 108
4.6 Designers of CLOs say that structures are much safer than crises-era cousins 111
4.7 Banks complete first syndicated loan on blockchain 112
5.1 Timeline of the Development of Islamic Banking and Finance 122
5.2 How an Islamic bank works 124
5.3 Frequently asked questions about Islamic banking 126
5.4 Ensuring financial stability in countries with Islamic banking – country case
studies – overall findings 133
6.1 The concept and functions of money and monetary aggregates 144
6.2 Monetary policy objectives 147
6.3 Bank of England and the official interest rate 152
6.4 Quantitative easing in Japan 162
6.5 Relationship between liquidity and solvency 168
6.6 Who owns the central bank? 171
7.1 Core principles for effective deposit insurance systems 183
7.2 Moral hazard and government safety net arrangements 192
7.3 Details of capital elements (established 1988 and applied in 1992) 198
7.4 RAR (risk-asset ratio) approach 199
7.5 Five capital-adequacy categories of banks 201
8.1 EU banks urged to prepare for bad loans as pandemic hits economy 220
8.2 Rogue traders and bank losses 222
8.3 The European Banking Authority and EU-wide stress tests 228
8.4 Aims of an effective bank resolution regime 232
8.5 The Icelandic meltdown 241
9.1 Assets and liabilities valuation in banking 258
9.2 Typical capital structure of a manufacturing firm versus a retail bank 260
9.3 Goldman Sachs financial statements (2019) 267
9.4 What are key performance indicators (KPIs)? 271
9.5 The ROE decomposition 273
9.6 Banks across Europe braced for further heavy loan loss charges 278
9.7 Value maximisation for the banking firm 281
xxi

List of boxes
9.8 What is EVA? 283

9.9 Calculating the cost of equity capital 284
10.1 Asset–liability management in practice 292
10.2 The ‘bank within the bank’ and the fund transfer pricing (FTP) process 293
10.3 The process of deconstruction of lending activity 300
10.4 European loan sales on course for 30 per cent fall in 2019 to €140.8 billion 303
10.5 Financial derivatives from off to on the balance sheet 305
10.6 How can credit derivatives be used in bank financial management? 306
10.7 Derivative products: official exchanges and OTC markets 307
10.8 Example of three-month Eurodollar time deposit futures 310
10.9 Example of forward rate agreement 314
10.10 Option contracts: payoff and profit profiles 316
10.11 Example of interest rate swap 319
10.12 Example of fixed–floating currency swap 320
11.1 Credit culture and equity culture in banking 326
11.2 US banks trim expectations in era of low interest rates 329
11.3 Liquidity risk and information asymmetries 332
11.4 The Federal Reserve has gone well past the point of ‘QE infinity’ 333
11.5 Exchange rates and foreign exchange markets 335
11.6 A revised framework for market risk 339
11.7 European banks load up on government bonds, raising concerns over
‘doom loop’ 341
11.8 The vision for sustainable finance in the EU 347
11.9 Examples of the social impacts of the Covid-19 pandemic 351
12.1 The corporate governance of banks 358
12.2 Mortgage market, equity withdrawal and negative equity 367
12.3 Credit scoring: how to score high 369
12.4 Example of Macaulay duration 376
12.5 Example of duration gap 377
12.6 Example of VaR 384
12.7 Investors bet vaccine-led recovery will lift emerging markets 388
12.8 Structure of the internal measurement approach 392
12.9 Factors affecting country risk 396
12.10 OECD country risk-weighting calculations 397
13.1 The failure and resolution of Northern Rock 405
13.2 Why did RBS fail? 410
13.3 LIBOR fixing 415
13.4 Just the facts: the Vickers Report 418
13.5 Europe’s banks told to keep planning for full Brexit in 2019 423
13.6 A brief history of TSB 426
13.7 Components of bank profits 427
13.8 TSB customers suffer fifth day of IT problems as payday looms 434
13.9 UK challenger banks braced for fresh wave of consolidation 435
14.1 The creation of a single market for financial services in the European Union 450
14.2 The Lamfalussy procedure 454
14.3 The failure of cross-border banks: the case of Fortis and Dexia 461
14.4 European System of Financial Supervision (ESFS) 469
14.5 EU reaches deal on final piece of Banking Union 474
14.6 EU agrees Deposit Guarantee Scheme deal 477
15.1 US mortgage basics 497
xxii

List of boxes
15.2 Key events in the US credit crisis 500

15.3 Volcker rule comes of age in spite of protests 527
15.4 Failures of the Dodd–Frank Act 529
16.1 Japan Post Bank plans $1.5bn in-house hedge fund 544
16.2 Japan’s regional banks warned of ‘grave’ situation 551
17.1 China banking war heats up with launch of online investment app 583
17.2 Two views on the role of state banks 587
18.1 A history of Freddie Mac and Fannie Mae 603
18.2 What is credit enhancement? 610
18.3 CDS: modern day weapons of mass destruction 617
18.4 AIG saga shows dangers of credit default swaps 619
19.1 The emergence of financial conglomerates 629
19.2 European bank dealmaking raises hopes for cross-border M&A 636
19.3 How to perform an event study 640
19.4 A winner’s curse that haunts the banking behemoths 641
19.5 Bank diversification 645
19.6 Out to break the banks 648
20.1 Competition in UK banking 663
xxiii

Preface
It is well enough that people of the nation do not understand our banking and monetary
system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford
The aim of this textbook is to provide a comprehensive introduction to theoretical and applied
issues relating to the global banking industry. Despite the fears of Henry Ford, we do not
think reading this book will cause a revolution but we do hope it will at least provide you
with an enjoyable and interesting insight into the business of banking.
A major motivation for writing this text has been to fill a gap in the market. For a number of
years we have all taught banking courses and we have become aware of students’ frustration
about the lack of a comprehensive yet accessible textbook that deals with a broad spectrum
of introductory banking issues. Most introductory texts that cover banking issues tend to be
broad-based, focusing on economics and finance, and these (in our view) do not provide
sufficient detail or coverage of the theoretical and institutional detail that is essential for an
accurate understanding of critical banking issues. While there are textbooks that provide
such coverage targeted at advanced undergraduates and the postgraduate market, there is
no text that has comprehensive coverage of such issues for those new to the study of banking.
In addition, many textbooks that cover banking as part of broadly based money and banking
courses tend to provide only limited attention to international experiences. As such, we have
written this text to provide (we hope) an essential teaching and learning resource for anyone
who has to lecture introductory undergraduates as well as professional banking courses.
The first edition of this book (2006) described a world where the banking industry expe-
rienced marked changes and deregulation allowed banking firms to diversify into broader
financial services areas. Commercial banks became full-service financial firms, offering a
range of non-traditional financial services including insurance, securities business, pensions
and the like. Many banks dropped the word ‘Bank’ from their titles to emphasise their much
broader role in the provision of financial services to households and corporations. In addi-
tion, various trends such as industry consolidation, securitisation and disintermediation
were having a significant effect resulting in a smaller number of major players operating in
credit, capital and money markets business that increasingly overlapped. As banking systems
opened up, many institutions were pursuing international strategies thereby changing the
traditional focus on banking as a mainly domestic business. This rapidly evolving environ-
ment posed both threats and opportunities to bank managers and owners. The former had
to be increasingly aware of both domestic and international developments in the manage-
ment process and in particular of the various risk–return trade-offs in all areas of a bank’s
activities. Capital needed to be managed effectively, so as to adhere to minimum regulatory
requirements and also to generate returns in excess of the cost of capital to boost sharehold-
ers returns. The market pressure on banks to generate good returns for shareholders was
a key element of bank strategy – bankers were forced to cut costs, boost revenues (mainly
through fee and commission income sources) and to manage their capital resources much
more efficiently.
xxiv

Preface
This golden era of banking came to an abrupt end in the summer of 2007, when the demise
of the US sub-prime mortgage lending market led to financial losses, government bailouts
of banks (and other financial institutions), a credit crunch and a prolonged economic reces-
sion, mainly in developed countries, ensued. Since the onset of the crisis in 2007, there has
been a large body of research investigating its causes and consequences. What had started as
trouble in a small segment of the US financial markets became a fully-fledged global financial
crisis, following the demise of the US investment bank Lehman Brothers in September 2008.
The unfolding of the sub-prime crisis and how it became a financial crisis, and its impact on
European countries in the form of a sovereign debt crisis, can be described in various phases
or waves that include the: (i) US sub-prime crisis (August 2007 to September 2008); (ii)
systemic or global crisis (September 2008 to March 2009); (iii) economic crisis (March 2009
to January 2010); and (iv) the sovereign debt crisis (January 2010 to June 2012). In this
textbook, we will refer to the sub-prime crisis period as the 2007 crisis; to the global financial
crisis period as the 2008–2009 crisis and to the sovereign debt crisis or eurozone crisis as the
period 2010–2012. These crises years have had a tremendous impact on the world of banking
and have brought about dramatic changes in the global financial architecture. Against this
background of global changes, the second edition (2015) was published.
As the dust has begun to settle on the crises period and the new shape of the world’s bank-
ing markets has started to take form, we have thoroughly revised this textbook to account
for more recent changes. In the decade since the global financial crisis, the banking industry
has faced renewed challenges. Increased competition from non-bank financial providers has
intensified, as the FinTech industry boomed. The digitalisation of banking is transforming
the provision of financial services. Big Tech’s entry into financial services has also increased,
focusing mostly on the customers’ experience.
The coronavirus pandemic also poses challenges for banks, but also shows that they still
play a key role in helping the real economy deal with the crisis. The industry has shown
resilience and it is in a much better health than it was a decade ago. It has also benefited
from extraordinary measures taken by governments to support their economies, including
monetary, fiscal and regulatory actions. For example, in the Spring of 2020, the European
Central Bank (ECB) introduced a €1,850 billion Pandemic Emergency Purchase Programme
of public and private sector assets (PEPP), enhanced its long-term refinancing operations,
and kept key interest rates at historically low levels. As countries move towards an exit from
the global health crisis, national and international regulators and supervisors are working
on potential strategies that will not result in increased systemic risk.
Banks are also grappling with other complex issues, from climate change to green finance
opportunities. The attention to environmental, social and governance (ESG) concerns is
likely to increase as the global economy recovers from the COVID-19 pandemic, and aspects
of sustainability are crucial for banks’ business models.
The new edition of this textbook introduces and discusses many of these emerging issues,
offering a detailed insight into a fast-changing industry.
The text is organised into five main parts:
● Part 1: Introduction to banking
– Chapter 1 What is special about banks?
– Chapter 2 Bank activities and services
– Chapter 3 Types of banking
– Chapter 4 International banking
– Chapter 5 Islamic banking
xxv

Preface
This part of the text provides an introduction to the nature of financial intermediation, cov-
ers the main reasons proposed as to why banks exist, focusing on key issues such as adverse
selection, moral hazard and delegated monitoring. It also covers the information produc-
tion, liquidity transformation and consumption smoothing role of banks as well as various
other issues relating to the bank intermediation process. We then go on to provide a detailed
account of the main activities and services provided by banks, changes in the payment sys-
tems and the growing importance of ethical investments and sustainable banking strategies.
As the financial sector in many countries comprises a wide range of different types of banking
firms, these are then explained covering commercial banks, mutual banks, investment banks,
private banks as well as different forms of banking activity such as universal versus specialist
banking. Given the increasing role of banks on the global scene, Chapter 4 looks at the main
features of international banking highlighting the reasons as to why banks locate overseas or
conduct international activity. We also outline the main services provided by international
banks covering payments, credit, money and capital markets activity highlighting the role
of the Euromarkets – Eurobonds and Eurocurrency activity – and also syndicated lending.
Finally, Chapter 5 provides an introduction to Islamic banking, given the growing importance
of Islamic banking and finance in many countries. This chapter is new in this edition of the
textbook.
The main aim of Part 1 is to familiarise students with the reasons why banks exist, the
main services they offer, recent trends impacting on business areas, types of banking firms
and the differences between domestic and international banking business. This part provides
the reader with the relevant knowledge of global banking business and should also heighten
awareness of contemporary banking issues that put the following parts into context.
● Part 2: Central banking and bank regulation

– Chapter 6 Central banking
– Chapter 7 Bank regulation and supervision
– Chapter 8 Bank failures and banking crises
As the banking system is the main conduit of monetary policy, it is important that students
of banking are aware of the main roles of a central bank, its monetary policy role and its
other functions. The first chapter of Part 2 deals with the theory of central banking outlin-
ing the roles and functions of central banks, as well as the rationale for their existence. We
also discuss the conduct of monetary policy, distinguishing between instruments, targets
and goals, as well as the benefits of central bank independence. We also cover how central
banks conduct monetary policy and the role of banks in this process. Chapter 7 focuses on
bank regulation and supervision. We discuss the pivotal role played by banks in the economy
to understand the rationale for regulation, outline the aims and objectives of regulation
and different types of regulation. We next discuss the elements of the financial safety next
as well as the limitations of regulation and the possible reasons behind regulatory failure.
In this chapter we also review the causes for regulatory reform and discuss key interna-
tional policy initiatives, such as the Basel Capital Adequacy Accords. The final chapter of
Part 2 focuses on bank failures and banking crises. The impact of the global financial and
eurozone crises on the world’s banking markets made it all the more relevant to include
a detailed discussion of the determinants of bank failure. We then discuss the main strat-
egies used to identify problem banks, with a focus on early warning systems (EWS) for
bank soundness and the recently introduced stress tests. We also outline the key issues of
xxvi

Preface
bank restructuring and the regulatory toolkits to intervene in the banking sector. Finally, we
discuss the causes and consequences of banking and financial crises.
By the end of Part 2 students should be aware of the pivotal role played by monetary
policy and supervisory regulation and their impact on the banking sector (and economy as a
whole). The reader should be familiar with the rationale for central banking, the main tools
and instruments of monetary policy and how various major central banks undertake their
operations. Students should be able to identify the reasons as to why banks are so heavily
regulated and why having adequate solvency and liquidity is critical to maintain a safe and
sound banking system. In particular, readers should understand the important role played
by capital in the banking sector as well as the relevance of the Basel Capital Accords. Readers
should become aware of the determinants of bank failure as well as the toolkits at regulators’
disposal to supervise bank risk-taking. Readers should also become familiar with the causes
of banking and financial crises as well as effective crisis-management mechanisms.
● Part 3: Issues in bank management

– Chapter 9 Banks’ balance sheet and income structure
– Chapter 10 Bank financial management
– Chapter 11 Banking risks
– Chapter 12 Bank risk management
Part 3 of the text provides a detailed insight into the financial features of banking firms.
The first chapter focuses on the balance sheet and income features of both commercial and
investment banks, highlighting the main differences between the two types of institutions.
Substantial attention to detail is paid to the components of the financial statements of these
types of banks. In addition, we outline the role of traditional ratio analysis for evaluating
bank performance and asset quality as well as performance indicators relating to shareholder
value creation. Chapter 10 provides a detailed introduction to bank financial management
issues, covering asset and liability management, capital management, liquidity management
and off-balance-sheet management. The important role played by derivative business is intro-
duced, together with a discussion of loan sales and securitisation. We then go on to discuss
the various forms of risks faced by banks (including credit, interest rate, foreign exchange,
market, operational, sustainability and other risk types). The final chapter in the part intro-
duces a number of key approaches to bank risk management. It also includes a discussion of
the growing importance of banks’ corporate governance frameworks in setting the standards
of good practice and risk culture within banking organisations.
By the end of Part 3 students should be familiar with the main components of banks’ bal-
ance sheet and income statements, be aware of off-balance-sheet activity and should be able
to analyse bank performance and other issues using traditional ratio analysis. In addition,
they should have an insight into how banks manage their on- and off-balance-sheet positions
and be familiar with the main risks faced in banking operations. After reading this part, stu-
dents should be familiar with the main risk management approaches undertaken in banking.
● Part 4: Comparative banking markets

– Chapter 13 Banking in the UK
– Chapter 14 Banking in Europe
– Chapter 15 Banking in the US
– Chapter 16 Banking in Japan
– Chapter 17 Banking in emerging markets
xxvii

Preface
Part 4 focuses on the features of various banking systems, highlighting the main institutional
features of these systems (types of banks, non-bank deposit firms, role of other financial
firms) as well as various structural trends (number of banks, branches, M&A activity, market
concentration and such like). We have tried to cover systems that (we hope) will be of interest
to as wide an audience as possible covering the UK, Europe, US, Japan and various emerging
banking markets. We have paid particular attention to regulatory developments in the wake
of the global financial and eurozone crises. The emerging regulatory financial architecture
is discussed in detail for the UK, the European Union and the United States. It is interesting
to note that similar trends are apparent in most of these systems, namely, a decline in the
number of banks, consolidation and concentration, the increased role of foreign banks, the
broadening of banks’ business into other financial services areas, greater disintermediation
and the ongoing and omnipresent role of regulatory change. The final chapter provides a
discussion of the relationship between finance and growth, illustrating how a sound and
efficient financial system can aid economic development. We also provide a detailed insight
into various emerging banking systems which we hope will be of interest and also of practi-
cal use for anyone wishing to be aware of banking sector features and developments across
the globe. These include a discussion of the main forces of change and how these have influ-
enced the structure of the banking industries in emerging and transition economies in terms
of deregulation and the liberalisation process, the role of the state, M&As and the entry of
foreign banks.
By the end of Part 4 students should be familiar with the institutional features of the
banking/financial systems of the UK, US, Europe, Japan and various emerging markets and
transition economies. They should be aware of how the institutional features of the different
banking systems are changing and the trends that are common to all systems. A full under-
standing of these characteristics will provide students with the relevant framework to analyse
and discuss the structural and performance features of these (and other) banking systems.
● Part 5: Advanced topics in banking

– Chapter 18 Banks and markets
– Chapter 19 Mergers and acquisitions
– Chapter 20 Bank competition and financial stability
Part 5 focuses on some key issues in banking markets. Specifically, in the first chapter of this
part we focus on the bank intermediation process, on the increasing integration of banks
and markets and discuss the growth of the ‘shadow banking’ system. The aim of this chapter
is to outline the key linkages between banks and markets with a particular focus on the rise
and fall of securitisation. We then move on to explain the main processes involved in issu-
ing mortgage-backed securities (MBS) (and other asset-backed securities, ABS). We note
the broad impact of securitisation on bank activities and highlight how it has come under
increased regulatory scrutiny. The next chapter in this part focuses on mergers and acquisi-
tions (M&As) in banking markets, providing a classification of the different types of bank
mergers as well as a summary of the main reasons as to why banks merge. We outline the
trends in bank M&A activity as well as the impact of M&As on bank performance. The final
chapter focuses on the possible trade-off between banking sector competition and stabil-
ity. We provide a comparative analysis of the different measures of competition in banking
markets. Next we discuss different indicators of bank risk, including accounting indicators
and market-based measures of risk. We then explore the link between competition and risk
xxviii

Preface
in banking systems and outline the competition-fragility view (which posits that competition
induces increased risk-taking and therefore is detrimental for stability) and the competition-
stability view, which argues that competition promotes financial stability.
By the end of Part 5 students should be familiar with some of the current issues in bank-
ing and with the academic literature that has sought to investigate these issues empirically.
We have written this text to provide an introductory grounding to the theory and practice
of banking which we hope will serve as a useful guide for anyone studying banking subjects
at an introductory level and for those who are perhaps considering a career in the banking/
financial services industry.
We hope you enjoy reading the text and we encourage correspondence regarding any
omissions or any recommendations regarding improvement of the content.
Barbara Casu (Bayes Business School, City, University of London)
Claudia Girardone (Essex Business School, University of Essex)
Philip Molyneux (Bangor Business School, Bangor University)
xxix

Acknowledgements
This text could never have been completed without the direct and indirect help and support
of a wide range of individuals. First and foremost, we must acknowledge the role of our stu-
dents in helping to develop our course and lecture material which has been a critical element
in encouraging us to write this text. In addition, numerous discussions with fellow banking
researchers and professionals have also helped us greatly. We also want to acknowledge the
support of our home institutions: Bayes Business School, City University London; Essex Busi-
ness School, University of Essex; and Bangor Business School, Bangor University.
Particular thanks must go to members of the European Association of Banking and Finance
Professors (known as the Wolpertinger Club), who have emphasised the need for a compre-
hensive introductory book on banking issues – we hope this text goes some way to meet this
objective.
We would also like to offer a tribute to the late Shelagh Heffernan, an outstanding banking
scholar, a great teacher and a good friend.
In compiling this textbook, we would like to acknowledge the comments and discussions
provided by various individuals with whom we have undertaken collaborative banking
research in the past. In addition, thanks also to the many colleagues who have discussed
teaching and other matters relating to the study of banking and also to those who have
given us valuable feedback on the text including outside referees. We would like to thank a
number of individuals who have given us help and suggestions and provided feedback on
draft chapters currently and in the past. Yener Altunbas, Francesca Arnaboldi, Rym Ayadi,
Elena Beccalli, Thorsten Beck, Allen N. Berger, Paola Bongini, Laura Chiaramonte, Dimitris
Chronopoulos, Ettore Croci, Doriana Cucinelli, Marta Degl’Innocenti, Bob DeYoung, Dan-
iela Fabbri, Alessandra Ferrari, Franco Fiordelisi, Angela Gallo, Ted Gardener, John God-
dard, Jens Hagendorff, Iftekhar Hasan, Elena Kalotychou, Hong (Frank) Liu, David Maude,
David Marquez-Ibanez, Donal McKillop, Anna Sarkisyan, Steven Ongena, Fotios Pasiouras,
Nemanja Radic, Francesc Rodriguez Tous, Amine Tarazi, Alexia Ventouri, Dmitri Vinogradov,
Jonathan Williams, John O.S. Wilson.
Finally, thanks also to our families for the encouragement and support in accommodating
our academic foibles and helping us to complete a large project of this kind.
Barbara Casu thanks her husband, Martin, for endless patience and support (and lots
of hours on child-minding duties, particularly during the pandemic and home-schooling
period). And her children, despite their best attempts to make sure this third edition was
never completed, they are all very proud of it.
xxx

Acknowledgements
Claudia Girardone thanks her husband Marc for his encouragement and patience, her
wonderful sons Matteo and Leonardo for motivating her to always move forward with energy
and enthusiasm, and her parents, Nieves and Sandro, for being a constant source of strength
and inspiration. She also thanks Annie and Jean for their continued support.
Philip Molyneux thanks his children (who are now no longer children!) and his wife Del,
for their kind and generous support during the completion of this text. They still cannot
understand how he finds the subject of banking of any interest – we are sure they will ‘see
the light’ soon?
xxxi

List of acronyms and abbreviations
$bn billions of United States dollars

£bn billions of Great Britain pounds
€bn billions of euros
$mil millions of United States dollars
£mil millions of Great Britain pounds
€mil millions of euros
2-BCD EU Second Banking Co-ordination Directive
AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions
ABCP asset-backed commercial paper
ABS asset-backed securities
ACH automated clearing house
ACP Autorité de contrôle prudentiel
AES advanced execution services
AGP asset guarantee programme
AI artificial intelligence
AIG American International Group
AIM Alternative Investment Market
ALCO asset and liability committee
ALM asset–liability management
AMA advanced measurement approach
AML anti-money laundering
ANZ Australia and New Zealand Banking Group Ltd
APACS Association for Payment Clearing Services
APF asset purchase facility
API application programming interface
APRA Australian Prudential Regulation Authority
ARM adjustable-rate mortgage
ASEAN Association of Southeast Asian Nations
ASF American Securitisation Forum
ATM automated teller machine
B2B business-to-business
Bacs Banks Automated Clearing System
BBA British Bankers’ Association
BBAA British Business Angels Association
BBVA Banco Bilbao Vizcaya Argentaria
BCB Banco Central do Brasil
BCBS Basel Committee on Banking Supervision
BCCSs bill and cheque clearing systems
BCRA Banco Central de la Republica Argentina
BFP Business Finance Partnership
xxxii

BHC bank holding company

BHCA Bank Holding Company Act
BIP Bank Insolvency Procedure
BIS Bank for International Settlements
BNM Bank Negara Malaysia
BoE Bank of England
BOJ-NET Bank of Japan Financial Network System
bps basis points
BRRD Bank Recovery and Resolution Directive
BSC Banking Supervision Committee
BTS Binding Technical Standards
BU Banking Union
BU bottom-up approach
BVCA British Private Equity & Venture Capital Association
C&CC cheque and clearing company
C/I cost-to-income ratio
CAD EU Capital Adequacy Directive
CAGR compound annual growth rate
CAMELS Capital, Asset, Management, Earnings, Liquidity, Sensitivity to Market Risk
CAP Capital Assistance Programme
CAPM capital asset pricing model
CBA Commonwealth Bank of Australia
CBFA Commission Bancaire, Financière et des Assurances
CBO collateralised bond obligations
CBPP covered bond purchase programme
CBR Central Bank of the Russian Federation
CBRC China Banking Regulatory Commission
CC Competition Commission
CCAR comprehensive capital analysis and review
CCB China Construction Bank
CCBM Correspondent Central Banking Model
CCBS Centre for Central Banking Studies
CCCL Cheque and Credit Clearing Company Limited
CD certificate of deposit
CDCI Community Development Capital Initiative
CDFIs Community Development Financial Institutions
CDIC Canada Deposit Insurance Corporation
CDO collateralised debt obligations
CDS credit default swaps
CEBS Committee of European Banking Supervisors
CEE Central and Eastern Europe
CEIOPS Committee of European Insurance and Occupational Pensions Supervisors
CEO chief executive officer
CESR Committee of European Securities Regulators
CFO chief financial officer
CFPB Consumer Financial Protection Bureau
CGFS Committee on the Global Financial System
xxxiii

CGS credit guarantee scheme

CHAPS Clearing House Automated Payments System
CHIPS Clearing House Interbank Payments System
CI credit institutions
CIBC Canadian Imperial Bank of Commerce
CLO collateralised loan obligations
CLS Continuous Linked Settlement
CMA Competition and Markets Authority
CME Chicago Mercantile Exchange
CMGs crisis management groups
CML Council of Mortgage Lenders
CMU Capital Markets Union
COAGs cross-border co-operation agreements
CORF corporate operational risk function
CP commercial paper
CPP Capital Purchase Programme
CPSS Committee on Payment and Settlement Systems
CRA credit-rating agencies
CRAM country risk assessment model
CRD Capital Requirements Directive
CRDs cash ratio deposits
CRIS control risks information services
CR-n n-firms concentration ratio
CRR Capital Requirements Regulation
CTF counter-terrorism financing
CV conjectural variations
CVF competing values framework
DD distance to default
DEFRA Department for Environment, Food & Rural Affairs
DFAST Dodd–Frank Act stress tests
DG duration gap
DGS deposit guarantee scheme
DIS deposit insurance scheme
DLT distributed ledger technology
DMO debt management office
DNB De Nederlandsche Bank
DTI debt-to-income ratio
DTIs deposit-taking institutions
DWF discount window facility
EBA European Banking Authority
EBC European Banking Committee
ECB European Central Bank
ECOFIN Economic and Financial Affairs Council
ECSC European Coal and Steel Community
ECTR extended collateral term repo facilities
EDF expected default frequency
EDI electronic data interchange
xxxiv

EDP excessive deficit procedure

EEA European Economic Area
EEC European Economic Community
EFDI European Forum of Deposit Insurers
EFN European Forecasting Network
EFSF European Financial Stability Facility
EFTPOS electronic funds transfer at point of sale
EGD European Green Deal
EIOPA European Insurance and Occupational Pensions Authority
EIOPC European Insurance and Occupational Pensions Committee
EIRIS Ethical Investing Research Service
EIU Economist Intelligence Unit
EL expected loss
ELs eligible liabilities
ELA emergency liquidity assistance
EM equity multiplier
EMI European Monetary Institute
EMS European Monetary System
EMU economic and monetary union
EPS earnings per share
ERM Exchange Rate Mechanism
ERM II Exchange Rate Mechanism II
ES expected shortfall
ESAs European Supervisory Authorities
ESC European Securities Committee
ESCB European System of Central Banks
ESF European Securitisation Forum
ESFS European System of Financial Supervision
ESFS European System of Financial Supervisors
ESG environmental, social and governance
ESM European Stability Mechanism
ESMA European Securities and Markets Authority
ESRB European Systemic Risk Board
ESRC European Systemic Risk Council
ESS efficient scale hypothesis
ESX efficient structure hypothesis (x-efficiency)
EU European Union
euro area EU member states that have adopted the euro
eurozone EU member states that have adopted the euro
EVA economic value added
EVCA European Private Equity & Venture Capital Association
EVE economic value of equity
EWS early warning systems
F gap financing gap
FAC Federal Advisory Council
FCA Financial Conduct Authority
FCC Financial Conglomerates Committee
xxxv

FDI foreign direct investment

FDIC Federal Deposit Insurance Corporation
Fed Federal Reserve Bank
FEDNET Federal Reserve’s national communications network
FFIEC Federal Financial Institutions Examination Council
FHFA Federal Housing Finance Agency
FHLMC Federal Home Loan Mortgage Corporation (Freddie Mac)
FICC Fixed Income, Currencies and Commodities Department
FINMA Swiss Financial Market Supervisory Authority
FLS Funding for Lending Scheme
FMSA Federal Agency for Financial Market Stabilisation
FNMA Federal National Mortgage Association (Fannie Mae)
FOMC Federal Open Market Committee
FPC Financial Policy Committee
FPS Faster Payments Service
FR Federal Reserve
FRA forward rate agreement
FRB Federal Reserve Board
FRNs floating rate notes
FROB Fondo de Reestructuración Ordenada Bancaria
FRS Federal Reserve System
FSA Financial Services Agency (Japan)
FSA Financial Services Authority (UK)
FSAP Financial Services Action Plan
FSB Financial Stability Board
FSCS Financial Services Compensation Scheme
FSF Financial Stability Forum
FSMA Financial Services and Markets Act 2000
FSOC Financial Stability Oversight Council
FSU Former Soviet Union
FTP fund transfer pricing
FXYCS Foreign Exchange Yen Clearing System
G10 Group of Ten
GAFA Google, Amazon, Facebook, Apple
GAFAA Google, Amazon, Facebook, Apple, Alibaba
GAO Government Accountability Office
GCC Gulf Cooperation Council
GDP gross domestic product
GNI gross national income
GNMA Government National Mortgage Association (Ginnie Mae)
GSE government-sponsored enterprise
G-SIBs global systemically important banks
G-SIFIs global systemically important financial institutions
HHI Herfindahl–Hirschman index
HICP Harmonised Index of Consumer Prices
HKMA Hong Kong Monetary Authority
HNWI high net worth individual
xxxvi

HQLA high-quality liquid assets

HTBEL Help to Buy equity loan scheme
IADI International Association of Deposit Insurers
IAIS International Association of Insurance Supervisors
IASB International Accounting Standards Board
IB Islamic bank
IBFs international banking facilities
ICAEW Institute of Chartered Accountants in England and Wales
ICB Independent Commission on Banking
ICBC Industrial and Commercial Bank of China
ICICI Industrial Credit and Investment Corporation of India
ICRG International Country Risk Guide
IDB Islamic Development Bank
IDIC Indonesia Deposit Insurance Corporation
IFC International Finance Corporation
IFI Islamic financial institution
IFRS International Financial Reporting Standards
IFSB Islamic Financial Services Board
IIFM International Islamic Financial Market
ILTROs indexed long-term repo open market operations
IM information memo
IMA Investment Management Association
IMF International Monetary Fund
IMM International Money Market
IOSCO International Accounting Standards Board
IoT Internet of Things
IPAB Instituto para la Protección al Ahorro Bancario
IPO initial public offering
IRB internal ratings based
IRR investment risk reserve
IRS interest rate swap
ISAs individual savings accounts
ISD Investment Services Directive
ISP internet service provider
KA key attributes
KDIC Korea Deposit Insurance Corporation
KPIs key performance indicators
KYC know your customer
L gap liquidity gap
LBO leveraged buyouts
LBS RMS London Business School Risk Measurement Service
LCBGs large and complex banking groups
LCDS loan credit default swaps
LCFIs large and complex financial institutions
LCR least-cost resolution
LCR liquidity coverage ratio
LDA loss distribution approach
xxxvii

LGD loss given default

LGE loss given event
LIBOR London Interbank Offered Rate
LOC letter of credit
LOLR lender of last resort
LPFCs limited-purpose finance companies
LRAC long-run average cost
LRMC long-run marginal cost
LSAPs large-scale asset purchases
LTRO longer-term refinancing operation
LTV loan-to-value ratio
M gap maturity gap
M&As mergers and acquisitions
M1 narrow money
M2 intermediate money
M3 broad money
MAC material adverse change
MAS Monetary Authority of Singapore
MBBGs Major British Banking Groups
MBS mortgage-backed securities
MC marginal cost
MCOB mortgage conduct of business
MENA Middle East and North Africa
MEW mortgage equity withdrawal
MFIs monetary financial institutions
MHFG Mizuho Financial Group
MiFID Markets in Financial Instruments Directive
MIP macroeconomic imbalance procedure
ML machine learning
MLA mandated lead arranger
MMF money market fund
MMOLR market maker of last resort
MNC multinational company
MPC Monetary Policy Committee
MPs Members of Parliament
MROs main refinancing operations
MTFG Mitsubishi Tokyo Financial Group
MUFJ Mitsubishi UFJ Financial Group
MVE market value of equity
NAB National Australia Bank
NBB National Bank of Belgium
NCAs national competent authorities
NCB national central bank
NCUA National Credit Union Administration
NDTI non-deposit taking institution
NEIO new empirical industrial organisation
NIF note issuance facilities
xxxviii

NII net interest income

NIM net interest margin
NIM-8 five Central and Eastern European countries and three Baltic States
NMSs new member states
NOPAT net operating profit after tax
NPLs non-performing loans
NPLS non-profit and loss sharing
NRAM Northern Rock Asset Management
NSFR net stable funding ratio
NYSE New York Stock Exchange
OBA open bank assistance
OBS off-balance-sheet
OCC Office of the Comptroller of the Currency
OECD Organisation for Economic Co-operation and Development
OFHEO Office of Federal Housing Enterprise Oversight
OFT Office of Fair Trading
OIC Organization of Islamic Cooperation
OIS overnight index swap
OLA Orderly Liquidation Authority
OMOs open market operations
OMT Outright Monetary Transactions
OSFs operational standing facilities
OTC over the counter
OTS Office of Thrift Supervision
P&A purchase and assumption
P&L profit and loss
P2P peer-to-peer
P/B price to book value
PBC People’s Bank of China
PC personal computer
PD probability of default
PER profit equalisation reserves
PIN personal identification number
PISP payment initiation services provider
PLL provision for loan losses
PLS profit and loss sharing
POP persistence of profits
PPI payment protection insurance
PPIP public–private investment programme
PPT partial property transfers
PRA Prudential Regulation Authority
PSIA profit-sharing investment accounts
PSPs private sector purchasers
PwC PricewaterhouseCoopers
QE quantitative easing
QR quick response
R&D research and development
xxxix

RAMSI Risk Assessment Model of Systemic Institutions

RAP resolvability assessment process
RAPM risk-adjusted performance measurement
RAR risk–asset ratio
RAROC risk-adjusted return on capital
RBI Reserve Bank of India
RBS Royal Bank of Scotland
RBSG Royal Bank of Scotland Group
REPO repurchase agreement
RMBS residential mortgage-backed securities
RMP relative market power
ROA return on assets
ROCHs recognised overseas clearing houses
ROE return on equity
ROIEs recognised overseas investment exchanges
RPD relative profit differences
RSA rate-sensitive assets
RSL rate-sensitive liabilities
RTGS real-time gross settlement
S&LA Savings and Loan Association
S&Ls savings and loans
S&P Standard & Poor’s
SAMA Saudi Arabian Monetary Agency
SBA scenario-based approach
SCAP Supervisory Capital Assessment Programme
SCDIS Shariah-compliant deposit insurance schemes
SCP structure-conduct-performance
SDG sustainable development goals
SDGS Single Deposit Guarantee Scheme
SDM Single Deposit Guarantee Mechanism
SEE South-Eastern Europe
SEPA Single Euro Payments Area
SFT securities financing transaction
SGP Stability and Growth Pact
SHIBOR Shanghai Interbank Offered Rate
SIFIs systemically important financial institutions
SIFMA Securities Industry and Financial Markets Association
SIVs structured investment vehicles
SLS special liquidity scheme
SMEs small and medium enterprises
SMFG Sumitomo Mitsui Financial Group
SMP Securities Markets Programme
SMTB Sumitomo Mitsui Trust Bank Ltd
SPV special-purpose vehicle
SRB Single Resolution Board
SRF Single Bank Resolution Fund
SRM Single Resolution Mechanism
xl

SRR special resolution regime

SRU Special Resolution Unit
SSM Single Supervisory Mechanism
SWIFT Society for Worldwide Interbank Financial Telecommunication
TAF term auction facility
TARGET Trans-European Automated Real-time Gross settlement Express Transfer
system
TARP Troubled Asset Relief Program
T-bills Treasury bills
T-bonds Treasury bonds
TBTDA too big to discipline adequately
TBTF too big to fail
TD top-down approach
TIP targeted investment programme
TITF too important to fail
TITF too interconnected to fail
TLAC Total Loss-Absorbing Capacity
TPO temporary public ownership
TRS total-return swaps
TSTF too systemic to fail
UCITS Directive Undertaking for Collective Investment in Transferable Securities
UKFI UK Financial Investments Limited
UKPA UK Payments Administration Ltd
URIA unrestricted investment account
VaR value at risk
WBC Westpac Banking Corporation
WOCCU World Council of Credit Unions
WSE Warsaw Stock Exchange
WTO World Trade Organization
YTD year to date
YTM yield to maturity
AT Austria
BE Belgium
BG Bulgaria
CY Cyprus
CZ Czech Republic
DE Germany
DK Denmark
EE Estonia
ES Spain
FI Finland
FR France
GB Great Britain (which consists of England, Wales and Scotland)
GR Greece
HR Croatia
HU Hungary
xli

IE Ireland
IT Italy
LT Lithuania
LV Latvia
MT Malta
NL the Netherlands
PL Poland
PT Portugal
RO Romania
SE Sweden
SI Slovenia
SK Slovakia
UAE United Arab Emirates
UK United Kingdom (which consists of Great Britain together with Northern Ireland)
US United States (of America)
xlii

PART 1
Introduction to banking
1 What is special about banks? 3

2 Bank activities and services 20
3 Types of banking 48
4 International banking 81
5 Islamic banking 119
M01 Introduction to Banking 40336.indd 1 15/09/2021 10:52

M01 Introduction to Banking 40336.indd 2 15/09/2021 10:52
Another random document with
no related content on Scribd:
more conscious of the divine within him—is a better man. Spinoza
regarded his skill in making lenses to be as essential a part of his life
as his philosophical interest.
Every advance in civilization changes the perspective, and new
views and truths appear. Within a few years we have seen in
America almost an entire change of attitude regarding many
essential political and social questions. Throughout the world,
Christianity, by clearer interpretation of its spirit, is gaining new
influence in practical fields. New problems have not the enchantment
of distance; history and poetry have not thrown a halo about them;
but they have the interest of present, practical, living issues. Every
great man has attained his self-realization as a creative factor in the
work of his own age. Take a hand in making current history.
Successful men have shown at the close of their student life only
the hope of what they finally became. But they were men who knew
how to cherish every helpful impulse, to learn from every experience,
to profit by each fresh insight, to concentrate their powers upon
single tasks, and at each fulfilment look forward to still greater
undertakings. Such minds wear the beauty of promise,
“that which sets

The budding rose above the rose full blown.”
The realization of ideal promise is not merely intellectual power

and practical attainment. A man may have these, and yet lack a rich
mind. Sympathy, pure ideals, morality, religious sentiment belong to
a complete nature. Without them one is not a fit leader or a choice
companion. A wholly irreligious man is not conscious of his soul. As
the years advance, with the progressive man there is more heart,
more simplicity and truth, more moral and spiritual interest.
In the “Memoir of Lord Tennyson” by his son, a chapter on the “In
Memoriam” throws brilliant side lights on the essential character of
the great poet. One would almost take the truths there expressed as
his creed, and the inner life there revealed as the consummation of a
personal ideal. We note his “splendid faith in the growing purpose of
the sum of life, and in the noble destiny of the individual man;” his
belief that “it is the great purpose which consecrates life;” his feeling
that “only under the inspiration of ideals, and with his ‘sword bathed
in heaven,’ can a man combat the cynical indifference, the
intellectual selfishness, the sloth of will, the utilitarian materialism of
a transition age;” his faith that “the truth must be larger, purer, nobler
than any mere human expression of it;” his affirmation that, if you
“take away belief in the self-conscious personality of God, you take
away the backbone of the world.” He believed in prayer. In his own
words: “Prayer is like opening a sluice between the great ocean and
our little channels when the great sea gathers itself together and
flows in at full tide.”
Ideals do not belong to a mystical realm, to a remote age or to an
indefinite future. They are not the exclusive possession of sage,
saint, or poet. They belong to this day, here, to us. They belong to
the professional man, as a man, as much as to the man of liberal
culture.
To see the idyllic in what is familiar, to realize the heroic in
ourselves, to make the lessons of greatness our own, to work with
the spirit of our time are the means of growth. Every thought and
every act, flowing from the conscious will, fashion the soul.
“I held it truth, with him who sings

To one clear harp in divers tones,
That men may rise on stepping-stones
Of their dead selves to higher things.”
THE GREEK VIRTUES IN MODERN
APPLICATION.
At the risk of imitating the severe logical discourses which proceed
at least as far as fifthly, let us enumerate some essential conditions
that by the agreement of thoughtful men are requisite for a
satisfactory life: (1) a sound body; (2) courage; (3) intellectual ideals;
(4) moral ideals; (5) reverence. While these elements are selected
for their intrinsic value, without reference to the history of ethical
thought, the discovery that they show more than a fancied similarity
to the ancient and the early Christian ideals strengthens our belief in
their value, and suggests that essential human standards are not for
one people or one age, but for all peoples and all time, and that they
are spontaneously recognized even in an age like ours, when men
readily turn toward utilitarian ends.
If we go back to the dawn of philosophic thought and listen to the
early revelators of the nature of man and his relation to the world and
society—converse with Plato in the groves of Academus, or walk
with Aristotle in the shady avenues of the Lyceum—we find them
proclaiming the great truths which have been confirmed by the
experience of ages, and urging upon men Moderation, Courage,
Wisdom, Justice, and the Good, or God, as aim. If we cross over
from the ancient world to the Christian Empire, where old ethical
thought was already taking on deeper meaning, broader application,
and richer life, we find in the Cardinal Virtues of St. Ambrose and St.
Augustine a new and vitalized form of the Greek Virtues:
Temperance, Christian Fortitude, Christian Wisdom, Christian
Justice, God as aim. If we come down to modern times, and catch
the spirit of ideals that still dwell among the people, we find that
human nature is everywhere the same, and that the experience of
human life in all ages discovers through the organization of society
the same divine principles—laws to be reverenced and obeyed, to
be followed as practical guides to success.
Modern psychology has rendered a service of far-reaching
practical benefit in showing more definitely the intimate connection
between the brain and mental action. In this connection of body and
soul the two are correlated; the brain is organic to the functions of
the soul. The health of the brain is largely dependent upon general
physical conditions, and the old apothegm, “Mens sana in corpore
sano,” is interpreted with a new meaning not fully known in the days
of Juvenal. Maxims of health, sifted by the experience of ages,
transmitted from generation to generation, and confirmed by the
proofs of modern science, are wisdom of inestimable value for our
instruction. He who wastes energy of the body wastes vigor and
duration of mental power. Rev. William R. Alger used to say: “Keep
yourself at highest working capacity by preserving the vigor of the
body.” The various ways of wasting physical energy are susceptible
of classification, and it is well worth the while to make a thoughtful
analysis of the subject. We admire the firm step, erect bearing, clear
eye, and bright brain that belong to healthful habits and noble
manhood. Many a man by carefully conserving the vital forces will
outlive and outdo others who, with stronger bodies, waste their
energy.
Physical sins react upon the mind and debase character. They are
signs of a character already weak, and the interaction between mind
and body doubly hastens the relaxing of just restraint. The ancient
virtue of moderation, or temperance, meant more than temperate
habit; it meant the submission of animal unreason to reason—the
“observance of due measure in all conduct.”
In accord with the maxims of health are the Greek Virtue of
Moderation, the Cardinal Virtue of Temperance, the Hebrew Purity.
Regard for these maxims is an important condition of success.
Courage appears in the Greek Category as heart for energetic

action, and in the Cardinal Virtues as firmness for the right and
against the wrong. Courage is the sine qua non of success. The
student must have courage to overcome his inertia. A venerable
professor of my college days used to say: “Every young man is
naturally as lazy as he can be, and the greatest problem of
education is to gain an energetic will.” Courage is required to
undertake an enterprise demanding long years of toil. A volume
recently published contains the early experience of celebrated
authors now living, and nearly every one owes his success to a
persevering determination, in spite of poverty, rebuffs, criticism, and
repeated failures. Their genius lies in their courage. We need the
courage of our convictions to stand by the right. The great reformers
have shared this kind of confidence of soul. Nearly all of Carlyle’s
types of the world’s great heroes possessed it to an almost sublime
degree, and, most of all, the hero of the Reformation. Waiving all
religious controversies that centre about the doctrines of Martin
Luther, he is a figure for the world to admire. Some of his memorable
words are known as household words, but, like strains of familiar
grand music, are ever grateful—they lose nothing by repeating.
When warned that Duke George of Leipzig was his enemy he said:
“Had I business, I would ride into Leipzig though it rained Duke
Georges for nine days running.” When summoned to the Diet at
Worms, he answered the friends who would dissuade him: “Were
there as many devils in Worms as there are roof tiles, I would on.”
When urged in the presence of that august council to recant, he
replied: “Here I stand; I can do no other; God help me.” And the
courage of his religious faith rose to its climax when he boldly faced
the supernatural and hurled his inkstand at the head of the Devil
himself. The student needs the courage of faith in his own powers
and possibilities. Many a one fails because he has not confidence in
himself. In rare moments of meditation one sometimes discovers
capacities and possibilities of attainment that become a life
inspiration.
We are proud of our Teutonic ancestry; of the bold enterprise that
led the Teutons across Europe in conquest, or impelled them to
embark in their galleys and push forth with adventurous spirit, and
fearlessly ride the tempestuous waves, as their oars kept time to the
music of their songs of victory. Their courageous and progressive
spirit, tamed and refined, reappeared in the religious convictions of
the Puritans, in the settlement of America, in the westward march of
civilization in our own country, in the confidence of the pioneers that
early crossed the plains and pitched their tents by these mighty
mountains, in the energy that has made all that the world holds as
greatest and best in material civilization, invention, government,
science, literature, and moral and religious principle. The young man
who has in his veins the blood of this people, and inherits the
blessings that his race has wrought out, is a recreant to his trust if he
does not stand courageously for all that is best in his own
development, and all that is best in the progress of his age. Thor, the
Norse god, possessed a belt of strength by which his might was
doubled, and a precious hammer which when thrown returned to the
hand of its own accord. When he wielded the hammer, as the
Northern legends relate, he grasped it until the knuckles grew white.
This hammer is an heirloom of the Northern races, handed down
from the Halls of Walhalla. And herein lies the secret of success:
grasp the hammer until the knuckles grow white.
Plato held Wisdom to be the supreme means by which to attain

the great purpose of human existence. The Cardinal Virtue of
Christian Wisdom is to gain knowledge of God. Plato conceived
growth in wisdom to be a gradual realization, in the consciousness of
man, of the eternal ideas. Man came from heaven and in his
progress in knowledge he was but climbing the upward path to
regain his lost estate. The exercise of wisdom marked him off from
the lower order of beings, and he was fulfilling the distinctively
human function only when living a rational life.
If nature is a congeries of metaphors arranged in a system of
relations and constituting a sublime allegory, and we, being the
offspring of God, may interpret this allegory and thereby come to a
consciousness of verities, if there is a spiritual sense that may feel
the presence of great truths and of a personal God—then man
pursues his supreme calling when through the laws of physical
nature, when through the beauty of its forms, when through
knowledge of self, when through the world’s history and literature
and philosophy he aims at a further acquaintance with truth. If
knowledge and the power that comes through knowledge enhance
our material civilization and make more favorable conditions for the
body and more leisure for the mind and more refinement for the
spirit, if to create material things brings us more in accord with the
creative spirit of the universe, then we have the highest incentives to
gain knowledge toward so-called practical ends.
The universities are not always the first discoverers of wisdom, but
they are the storehouses of the wisdom of the ages, and the
distributing points. They are not a substitute for nature and real life,
but they help to interpret both. They are not a substitute for practical
experience, but they bestow the instruments with which to do better
the work of practical experience. They do not create power, but they
develop power.
A few geniuses have in strong degree the intellectual impulse and
follow it until they become original and creative, and contribute to the
world’s insight. But the average youth needs all that the formal
training of the schools can give him. When the student is once
aroused by the sense of his privileges and duties, he will select no
easy goal to attain. He will not be satisfied until he has learned the
secrets of nature’s processes, has examined his own nature, has
made use of the recorded experience of the ages—thereby taking a
giant stride in knowledge that he could not have taken alone—has
given himself the power to help in the work of his own time.
Justice was regarded by Plato as the ground of social uprightness;

Christian justice recognized the brotherhood of man, with all that
follows in moral conduct; “moral ideals” for us has the same
significance. This is not the place for the discussion of ethical
theories, but it is of the highest importance for the young man, after
wandering more or less vaguely over the field of ethical doctrines, to
turn to the nature of his own being and find there written the
supreme fact of moral obligation, with its implications of freedom of
will, a personal God, and immortality of the soul.
Every man knows that even in his ordinary approvable acts he
does not work to the end of pleasure, but that he has impulses that
reach out in fellowship and compassion toward others, impulses that
reach out toward the Truth and Beauty and Supreme Goodness of
the world. Every man knows that he possesses a power to choose
amongst and regulate his impulses; that such aims are to be
employed as will conduce to the perfection of his being and of all
human being; that his reward lies in this perfection, in a noble and
approvable character, which is not to be completed in this life, but is
to attain its full realization in a future life. And hence is revealed to
him the rational necessity of that life, without which the present
struggle and growth would lack meaning.
If there is moral order in the universe, then man will be successful
as he conforms to that order. If he goes against the great silent
forces moving in the direction of Right, his life can but result in
failure. Men who show a disregard for moral law are held to possess
a dangerous malady slowly decaying the tissues of the soul. They
are treated with suspicion in business relations and condemned in
the minds of others and by their own judgment. Sound to the core
must a man be who would make the most of life and receive the
approval which the world bestows upon character.
A true man is bold; he feels that for him all the forces of right will
contend. He has courage for his work, because he knows he is on
the right path and is moving toward ever higher attainments and a
supreme result.
The subject is old as man, the thoughts are trite; why not utter
your maxim and proceed, or rather say nothing? While there are
lives empty of purpose and hearts that bleed in contrition and
tragedies that fill prisons and madhouses, there is much to say and
more to do. Have we no further use for wisdom? Have we ceased to
erect perennial monuments to the memory of saints and reformers?
If the subject is old, the generations of men are new, and the race
has not attained its perfection. The best men and the best thoughts
reveal us to ourselves, are the source of our aspiration; and we of
the present, not half-way toward the goal, have need of our
Socrates, Augustine, Luther, and supremely of the divine Christ. We
still have need of our Pilgrim’s Progress.
The aim of Plato’s philosophy was the Supreme Good, or God.

The Cardinal Virtues were framed in the light of religious faith.
Reverence is the sentiment whose object is God. Says the Sage of
Chelsea: “All that we do springs out of Mystery, Spirit, invisible
Force.” Some, well-versed in Spencer’s works, have failed to note
this passage: “One truth must grow ever clearer—the truth that there
is an Inscrutable Existence everywhere manifested, to which the
man of science can neither find nor conceive either beginning or
end. Amid the mysteries which become the more mysterious the
more they are thought about there will remain the one absolute
certainty, that he is ever in the presence of an Infinite and Eternal
Energy, from which all things proceed.” Add to this the Faith which is
the “substance of things hoped for, the evidence of things not seen,”
and you have the origin of all religions, of all temples of worship. It is
the conception of the philosopher and the insight of the poet; it is
held most strongly by the most profound. Few great men, though
they may reject formal creeds, are without the feeling of Reverence.
Carlyle’s “Everlasting Yea” is the vision of a true seer, and it reveals,
in the spontaneous language of earnest thought, the breadth and
depth of a possible Christian experience. He speaks through the
hero of the “Sartor Resartus.” By disappointment and dim faith the
universe had become to him a vast merciless machine; he was filled
with an indefinable fear. But over his soul came the spirit of
Indignation and Defiance, and he shook off fear of all that is evil, and
all that may happen of evil. In his words: “The Everlasting No had
said: ‘Behold, thou art fatherless, outcast; and the Universe is mine
(the Devil’s)’; to which my whole Me now made answer: ‘I am not
thine, but Free, and forever hate thee!’” This is but the first step, and
only by the “Annihilation of Self” does he awake to a “new Heaven
and a new Earth.” Now nature is seen to be the “Living Garment of
God.” The Universe is no longer “dead and demoniacal,” but “godlike
and his Father’s.” He looks upon his fellow man with an “infinite
Love, an infinite Pity,” and enters the porch of the “Sanctuary of
Sorrow.” Happiness is no longer the aim; happiness cannot be
satisfied. “There is in man a Higher than Love of Happiness; he can
do without Happiness, and instead thereof find Blessedness!” “Love
not pleasure; love God. This is the Everlasting Yea.” The Temple
of Sorrow (the Christian Temple) is partly in ruins, but in a crypt the
sacred lamp still burns for him, and for all. Applied Christianity is
action. He says: “Do the Duty which lies nearest thee: thy second
Duty will already have become clearer.” Thy opportunity is in
whatever thy condition now and here offers thee. “Whatsoever thy
hand findeth to do, do it with thy whole might.” Christianity “flows
through all our hearts and modulates and divinely leads them.” Of
immortality he says: “Know of a truth that only the Time-shadows
have perished, or are perishable; that the real Being of whatever
was, and whatever is, and whatever will be, is even now and
forever.... Believe it thou must; understand it thou canst not.”
If we may draw a lesson from this, Carlyle’s greatest work, it is that
the completeness of life requires vivifying, hope-giving, sin-subduing,
courage-inspiring faith and reverence. To the hero of Carlyle’s prose
poem success did not come, until the “Fire-Baptism” of his soul. He
confesses: “I directly thereupon began to be a man.”
Are these ideals of value for practical success? Yes, for all the
success worth striving for and worth having. Does not craft succeed
better than honesty? Sometimes, and for a time, but honesty
appears to be even the best policy, and it is the essential stamp of
real manhood and womanhood. The genuine heroes of all history
are the morally great. Are not such standards too high—impractical
ideals for the pulpit and platform, which no one is expected to carry
into real life? No one attains even his own ideals, much less the
absolute standards; but they are the steady aim of a fully successful
life.
If a young man is true to himself, the bounties of nature, the good
will of others, the coöperation of the forces of right, and the approval
of God are his. The world waits to see what he will do with his
powers and opportunities. Much is expected of him, and rightly. The
state which has helped educate him expects much; the home which
has made sacrifices for him expects much. Will he have the courage
to stand by his ideals? To progress must be part of his religion.
When the oak has ceased to put forth its leaves and extend its
branches, it has gone into hopeless decay. There is no lasting
happiness but in action and ever new and higher realizations.
Longfellow represents early manhood turning regretfully from the
memory visions of childhood and youth to the earnest work of life.
“Visions of childhood! Stay, O stay!

Ye were so sweet and wild!
And distant voices seem to say,
It cannot be! They pass away!
Other themes demand thy lay;
Thou art no more a child!
“The land of Song within thee lies,

Watered by living springs;
The lids of Fancy’s sleepless eyes
Are gates unto that Paradise,
Holy thoughts, like stars, arise,
Its clouds are angel’s wings.
“Look, then, into thine heart, and write!

Yes, into Life’s deep stream!
All forms of sorrow and delight,
All solemn Voices of the Night,
That can soothe thee, or affright,—
Be these henceforth thy theme.”
THE STUDENT AS CITIZEN.
Solomon, in the fulness of his wisdom and the maturity of his

moral strength, wrote Proverbs. In the third chapter are many
appeals in behalf of ideal manhood, and in behalf of justice and
mercy in relations with one’s fellow men. He exhorts men to depart
from evil and hold fast to truth. He instructs them that intellectual and
moral wisdom is better than silver and gold and rubies; that it gives
long life, riches, power, and peace of mind. The wise shall find favor
in sight of God and man. Reverence for God contributes to worldly
success and the growth of character. With equal force he teaches
regard for the rights and the welfare of others. “Devise not evil
against thy neighbor.” “Strive not with a man without a cause.”
“Choose not the ways of the oppressor.” “Withhold not good from
them to whom it is due, when it is in the power of thine hand to do it.”
And he sums up the whole matter in the sentence: “God blesseth the
habitation of the just.”
Men sometimes question whether ideals and Utopias have any
practical value. Note the words of Professor Jowett, penned after he
had spent years of his intense life in translating and commenting
upon the Dialogues of Plato—writings which, in broad outlines,
represent the best ideals of all philosophy for the individual and for
society. He says: “Human life and conduct are affected by ideals in
the same way that they are affected by the examples of eminent
men. Neither the one nor the other is immediately applicable to
practice, but there is a virtue flowing from them which tends to raise
individuals above the common routine of society or trade, and to
elevate states above the mere interests of commerce or the
necessities of self-defense. Most men live in a corner, and see but a
little way beyond their own home or place or occupation; they ‘do not
lift up their eyes to the hills;’ they are not awake when the dawn
appears. But in Plato, as from some ‘tower of speculation,’ we look
into the distance and behold the future of the world and of
philosophy. The ideal of the state and of the life of the philosopher;
the ideal of an education continuing through life and extending
equally to both sexes; the ideal of the unity and correlation of
knowledge; the faith in good and immortality—are the vacant forms
of light on which Plato is seeking to fix the eye of mankind.”
In Plato’s Ideal Republic the ruler is to be a man of wisdom and
probity, and is to consider only the good of his subjects. “Until
political greatness and wisdom meet in one, cities never will cease
from ill.” The citizen must perfect his calling, however humble, as an
artist perfects his art, and must form a harmonious and useful factor
in the state. States must be organized on the “heavenly,” that is, the
ideal, pattern. After developing the understanding of justice through
the ten books of the “Republic,” Socrates concludes: “Need we hire a
herald, or shall I proclaim the result—that the best and the justest
man is also the happiest, and that this is he who is the most royal
master of himself; and that the worst and most unjust man is also the
most miserable, and that this is he who is the greatest tyrant of
himself and of his state.”
The good citizen is described in Plato’s “Laws” as he who honors
his own soul, obeys the laws, meets the just demands of the state
with endurance; who holds virtue above all other good, teaches
children reverence, instead of bestowing upon them riches; who sets
a good example, holds a contract as sacred, aids the suffering; who
is trusted because of his truthfulness, does no injustice, exerts good
influences, is ambitious without envy; who is gentle, forgives the
penitent, loves not self unduly; who is cheerful and hopeful in
misfortune; who is wise and moderate, and courageous in spirit.
Thus the wisdom of the Greek confirms the wisdom of the Hebrew,
and, were we to trace the Christian teachings that constitute the true
spirit of our modern civilization, we should find these same maxims,
wrought out with fuller understanding, given a richer content and a
broader application. The good citizen is he who is true to his best
nature, and toward others is just, truthful, merciful, and helpful. It
requires no new philosophy to solve the problems of society, only a
better grasp and use of the old; for the germs of essential truths are
as old as man, and have their origin in the mind of the Creator, who
made this a moral world.
Each man, as a part of the universe, is subject to the universal will
of God revealed in him; he, though a free agent, is under universal
law, binding upon him as sharing in the common brotherhood. Did a
different universe walk under your hat and under mine, then there
would be no society, no brotherhood, no individual growth; so far as
a man isolates himself in selfishness and narrowness, he is
detached from the source and life of his being, and perishes by
himself. He remains undeveloped, because the soul comes to know
itself only by reflection in the mirror of kindred natures. The state is
the organization that brings men into the most favorable conditions
for the interplay of mind upon mind and heart upon heart.
As a part of the whole, each man must have his vocation. Man is
conditioned by the needs of his physical being. He is compelled to
make requisition on the fruitfulness of the earth, the abundance of
the sea, and all the forces of nature. This demand upon his energies
develops his intelligence and creative power. By serving his own
needs he also serves others and contributes to a material civilization
favorable to soul growth. The most favorable material conditions,
however, are only the scene for the play of spiritual forces, and on
this scene some find their special vocation in arousing and guiding
mental and moral activities. He who, being able, does not contribute
by his vocation to the common good, is a drain upon the whole; he
takes without giving, and has no just share in the products of earth,
the protection of state, or the favor of the Universal Father.
The ideal scholar is a man of rich thought and feeling, one who
has realized much of his possibility, has come to a consciousness of
universal truths. He has variety, breadth, and definiteness of
knowledge, and, hence, is able more wisely to play his part in the
state. He is the conservator and transmitter of the thought of the
ages. From his acquaintance with the past he may interpret the
present. By his own activity and invention he may add to the store of
wisdom and the progress of civilization. He is able to view broadly
the field of knowledge. He should judge wisely of events, and be
able to sift useless details from essential truths. Upon him rests the
responsibility of having many talents committed to his charge; he
must gain other talents.
But this educated power is not to be merely self-centred. In these
days no man is privileged to live an unproductive life. The
development of his nature and the enjoyment of his powers is every
man’s right; but mere serene pleasure in exalted thought and feeling,
as sought by the mediæval recluse, in an age when ideals must be
followed by action, when utility is yoked to philosophy, is no longer
tolerable in scholar or saint. The world demands the best expression
of every man’s best ability. The educated man should be a man of
action and influence. If he chooses literature, he must give mankind
the result of his deepest insight. If he chooses science, he enters a
vast field, and the world expects of the trained specialist some fresh
contribution to knowledge or skillful application in using the forces of
nature. If he chooses teaching, he holds his only valid commission
from the wise men of all ages. He is a mediator between the whole
world of intellectual and moral wisdom and the needs of the plastic
mind, and he is in large degree responsible for the shape it assumes
and its beauty and worth. Young minds will reflect the richness or
poverty of the thought, feeling, and life of the teacher. College-
trained educators have a greater responsibility in proportion to their
superior advantages. In whatever field, the educated man must use
his trained powers for the honor of his calling.
The world has special claims upon the learned professions. The
client pays for the honest service of the advocate, and, to the full
limit of the justice involved, he may demand the best effort of his
patron. The graduate in medicine has a mission, not alone of drugs
and instruments, but of ministering to the mind diseased. His
relations call for the soul of honor and delicacy and secrecy. The
nature of his profession requires the most devoted service.
This demand for unselfish public service from the educated has
not merely an objective significance. A man’s full growth is, in a large
measure, dependent upon the effective outward expression of his
better self. Man finds his well-being in regard for the well-being of
others.
There are times when the popular clamor of those who see only
the near event must be resisted by the steady courage of citizens of
far-reaching vision. One such man may see a truth more clearly than
a thousand of average judgment. Plato surpassed the race in
discovery of the foundations of truth. Copernicus penetrated to the
centre of the solar system, and, there taking his stand, all the orbs
moved before him in harmony. Such a standpoint, amid all the
complexities of affairs, is always to be sought by men of deep
discernment.
He who is educated by society or by the state stands under a

peculiar obligation. The state says: I offer you as your right the best
opportunities for your development; I provide for the acquisition of
professional and mechanical skill. As a human being, for whom I am
responsible, you have a claim to these privileges; but I give them
also for the further welfare and progress of the whole, and I demand
that you use your opportunities appreciatively and wisely. I expect
you to conserve your physical being, to develop your powers, to train
your mind for service and your heart to regard the claims of society. I
expect no dwarfed and distorted growth, but a growth that has
expanded in normal beauty and strength. The state has trained you
that you may be an active factor for the welfare and glory of the state
—a factor that shall consider the state’s problems, shall take part in
political affairs, shall occupy honestly positions of responsibility, shall
stand for the right and raise its voice vigorously for every just cause,
shall impart of its knowledge and professional skill in proportion to
the full measure that has been received. Good to the state is the
state’s due; withhold not that good when it is in the power of your
hand to do it. If your power is used selfishly, if your cunning is turned
to the harm of your foster mother, if your influence leads men aside
from the path of moral progress, I disown you as unworthy and
ungrateful, and unconscious of your obligations as a man and a
citizen.
The name of a country stands for more than its territory, people,
and government. It represents the principles and conditions that
gave it birth, the battles in defence of its integrity and honor, the civil
conflicts for the triumph of the best elements, the monuments to the
loyalty and sacrifice of its founders, defenders, and preservers. It
represents the glory of its heroes, statesmen, poets, and seers; it
stands for the peculiar genius and mission of the people. It is a
heritage whose glory is to be maintained by the character, wisdom,
and devotion of all its citizens.
I do not take the pessimistic view of political life. Men in places of

responsibility are more disposed toward the right than is allowed by
their political opponents. Respect is due to our rulers, and a man is
not to be charged with wrong motives merely because his judgment
is not in accord with ours, because the affairs of state or municipality
are not perfectly administered, nor because of the exigencies of
party.
That there is much to condemn in political conduct is also true,
and corruption, whether in the primaries or the Presidency, is most
potent in weakening the integrity of ambitious young men. The best
influences of church and school hardly serve to offset the tendency
of daily contact with men who have no ideal standards of citizenship.
The idea of public gain without commensurate public service is a
most insidious tempter, to be resisted by every instinct of true
manhood. This is not a matter of abstract speculation, but a practical
condition here and now, and one that every educated man must
face.
You recall the scene of Shakespeare, where Hotspur on the field
of battle, “breathless and weary” after the conflict, encountered a
certain lord, “perfumed like a milliner,” holding to his nose a pouncet-
box, and calling the soldiers, who bore the dead bodies by, untaught
knaves, “to bring a slovenly, unhandsome corse betwixt the wind and
his nobility.” Hotspur adds: “It made me mad to see him shine so
brisk, and smell so sweet, ... and tell me but for these vile guns, he
would himself have been a soldier.” I mean no undue disrespect to
educated and refined gentlemen who stand aloof from the political
field because it smells of “villainous saltpetre,” and is altogether too
dirty and dangerous for their respectability and ease. The
intelligence of the nation should guide the nation, and any educated
man who stands by and views with indifference or timidity the
struggle for the triumph of the best elements of society and the best
principles, deserves the objurgations of every valiant Hotspur in the
land. A minister recently said: “It is as much your duty to attend the
primaries as the prayer-meeting.” I would have educated young men
take a hand in every contest where order and justice and honesty
are endangered; I would have them independently take a stand with
whatever party or faction, at a given time, may represent the best
cause. I would have them measure public service and public reward
by the strict standard of equity; I would have them recognize the duty
of active practical citizenship.
The people are keen to detect wrong aims in political life, and in
their minds they speedily relegate the politician who shows himself
unworthy to the plane of his motives. They as speedily recognize
probity and patriotism and devotion to the commonwealth, and the
truly royal men in public life are enshrined in their hearts and are
made an example to their children. The majority of citizens are right
in their feeling and purpose; their fault is in their apathy. Edgar W.
Nye, the genial humorist, quaintly expressed a deep thought when
he said: “To-day there is not a crowned head on the continent of
Europe that does not recognize this great truth—viz.: that God alone,
speaking through the united voices of the common people, declares
the rulings of the Supreme Court of the Universe.” In the long run the
voice of all the people is just.
In the sixteenth century literature we find a choice bit of truth and
eloquence: “Of Law there can be no less acknowledged than that her
seat is the Bosom of God; her voice the harmony of the world.” Moral
order is a part of the beneficent law of the world; only by conformity
to it can an individual or a nation prosper. If ideals of truth and right
are existent in the mind of the Creator, are implanted in human
nature and revealed through society, no one can escape from their
authority. One of the old Sophists declared honesty to be “sublime
simplicity,” and those are yet found who subscribe to the creed. The
life that is controlled by mere prudence is likely at some time to
commit a fatal error. That State is sound that lives under the law of
God, that regards principles of right and maintains healthy sentiment.
OPTIMISM AND INTEREST.
Not long ago I met an old acquaintance, and by way of greeting

asked how affairs were with him. “All right,” he replied; “business is
looking up; the city is improving; the State is in a better condition; we
have a good Legislature, a good Governor; it is a beautiful day, a
beautiful world; everything is all right.” And I went on my way,
meditating on interest and optimism. His interest in life was not due
to any recent stroke of good fortune, but was habitual.
The optimist is your best philosopher. He adapts himself to the
world and uses it. He selects the best that life offers, and, when the
sky is gloomy, he lives in hope of bright days. He has faith in the
ultimate beneficent outcome of the plan of the Creator. As there is
light for the eye, sound for the ear, form for the touch, aromas for the
smell, food for the taste, so there is an object in the outer world,
adapted to every human instinct and impulse. The impulse for life
and action, the desire for property, the impulse for friendship, the
impulses of wonder, æsthetic admiration, and religious worship—
each has its objective counterpart. Man is adjusted to his
environment, and his environment includes the whole round world of
utility and sentiment. Human life is perpetual activity, a searching for
objects that will meet material needs and conduce to spiritual
development. The feeling of interest arises when the mind finds the
object of its search or feels that it is on the right track.
Interest is the condition of the mind that makes a thing of value to
us. It is the cry of Eureka when a fitting discovery is made. It is the
magnetic relation between impulse and the end at which it aims,
between man and the outer world, between man and himself. It
makes life worth living, and is the secret of activity and progress.
Inasmuch as interest shows the kind of objects that appeal to the
mind, it is a revelation of character.

Introduction To Banking 3Rd Edition Claudia Girardone Full Chapter

Uploaded by

Document Information

Original Title

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

Introduction To Banking 3Rd Edition Claudia Girardone Full Chapter

Uploaded by

Copyright:

Available Formats

Introduction to Banking 3rd Edition

A01 Introduction to Banking 40336.indd 1 17/09/2021 12:36

We combine innovative learning technology with trusted

From classroom to boardroom, our curriculum materials, digital

Every day our work helps learning flourish, and

To learn more, please visit us at www.pearson.com/uk

A01 Introduction to Banking 40336.indd 2 17/09/2021 12:36

A01 Introduction to Banking 40336.indd 3 17/09/2021 12:36

First published 2006 (print and electronic)

© Pearson Education Limited 2006, 2015, 2022 (print and electronic)

ISBN: 978-1-292-24033-6 (print)

A01 Introduction to Banking 40336.indd 4 17/09/2021 12:36

To Marc, Matteo and Leonardo. To my parents Nieves and Sandro (CG)

To Delyth, Alun, Catrin, Gareth, Gethin, Lois and Rhiannnon (PM)

A01 Introduction to Banking 40336.indd 5 17/09/2021 12:36

List of figures xiv

Part 1 Introduction to banking

1 What is special about banks? 3

2 Bank activities and services 20

A01 Introduction to Banking 40336.indd 7 17/09/2021 12:36

3.7 Investment banking 67

5 Islamic banking 119

Part 2 Central banking and bank regulation

6 Central banking 141

A01 Introduction to Banking 40336.indd 8 17/09/2021 12:36

7 Bank regulation and supervision 175

8 Bank failures and banking crises 216

Part 3 Issues in bank management

9 Banks’ balance sheet and income structure 249

10 Bank financial management 289

A01 Introduction to Banking 40336.indd 9 17/09/2021 12:36

10.5 Off-balance-sheet (OBS) business in banking 297

11 Banking risks 324

12 Bank risk management 354

Part 4 Comparative banking markets

13 Banking in the UK 403

A01 Introduction to Banking 40336.indd 10 17/09/2021 12:36

13.3 Regulatory reforms and the changing face of UK banking 413

14 Banking in Europe 445

15 Banking in the US 496

16 Banking in Japan 533

A01 Introduction to Banking 40336.indd 11 17/09/2021 12:36

17 Banking in emerging markets 563

Part 5 Advanced topics in banking

18 Banks and markets 597

19 Mergers and acquisitions 626

20 Bank competition and financial stability 654

A01 Introduction to Banking 40336.indd 12 17/09/2021 12:36

20.5 Competition and risk in banking 673

Appendix A1 Interest rates, bonds and yields 681

A01 Introduction to Banking 40336.indd 13 17/09/2021 12:36

1.1 The intermediation function 4

A01 Introduction to Banking 40336.indd 14 17/09/2021 12:36

6.5 Reserve requirements 156

A01 Introduction to Banking 40336.indd 15 17/09/2021 12:36

11.2 Reinvestment risk 331

A01 Introduction to Banking 40336.indd 16 17/09/2021 12:36

15.6 Performance of US commercial banks – return on assets (ROA), 1984–2020 519

A01 Introduction to Banking 40336.indd 17 29/09/21 1:44 PM

2.1 A simplified bank balance sheet 21

A01 Introduction to Banking 40336.indd 18 17/09/2021 12:36

9.1 Simplified commercial bank balance sheet 250

A01 Introduction to Banking 40336.indd 19 17/09/2021 12:36