BANKING

Summer Term (I), 2015

Instructor: Sumaira Hamid

Chapter 1:
An Overview of Banks & their Services

What is a bank?
Difference Between Bank (Depository Institution & Non
Banking Institution (Non-Depository Institution)

Bank-Depository Institution:

A financial intermediary accepting deposits and granting loans;

offers the widest menu of services of any financial institution

Banks FUNCTIONAL TASK is to INTERMEDIATE between surplus units

and deficit units by offering financial services to indulge in transferring of
funds from one group to another

Intermediation activity will be profitable as long as spread is positive

A Depository Institution : Authorised to collect deposits and since

it deals with public funds, a depository institution is directly
answerable to the Central Bank (e.g SBP)

Major source of funds Deposit Borrowings

 Non-Depository
Institution
Banking Institution (NBFI)

or

Non

A
financial
intermediary
other
than
depository
institution
offering
checking
accounts or loans but not both example Leasing
company, security firms etc
A
Non-Depository
Institution
is
Authorised to collect deposits like banks
Major
source
of
Borrowings or Equity

funds:

NOT

Non-Deposit

Key Non-Bank Competitors Bankers Face Today

Why banks exist? What essential services do banks

provide that other businesses and individuals cannot
provide for themselves?
Division of large instruments: banks provide a valuable service
in dividing up those instruments which everyone cannot afford into
smaller securities that are readily available for millions of people
Risk Arbitrage: Another contribution banks make is their
willingness to accept risky loans from borrowers, while issuing lowrisk securities to their depositors
Liquidity: banks also satisfy the strong need of many customers
for liquidity
Information asymmetry: Banks have prospered in their superior
ability to evaluate information
Delegate Monitors: The ability of banks to gather & analyze
financial information has given rise to another view of why banks
exist in modern society

Services Banks have offered throughout history

Carrying out currency exchange : trade currencies
Discounting commercial notes & making business loans:

Converting IOUs received by merchants from their customers into cash

Offering saving deposits: Thrift accounts that pay interest &

encourage to save
Safekeeping of valuables
Supporting government activities with credit:
Offering checking accounts (Demand Deposits) Non
Interest
Offering Trust Services: Managing customers property and
investing their funds for a fees

Services Banks have developed more recently

Granting Consumer loans
Financial Advising Financial Planning
Cash Management Manage liquidity / cash accounts
Offering Equipment Leasing Finance & Operating Lease
Making Venture Capital Loans Finance new companies
Selling Insurance Services
Selling Retirement Plans
Offering Security Brokerage Investment Services Trading of securities
Offering Mutual Funds and Annuities
Offering Investment Banking: help Issuance of securities, advisory
services

The Many Different Roles Banks Play in the Economy

Trends Affecting All Banks

Service Proliferation: Product Innovation, wide menu of services
Rising Competition
Deregulation loosening of government control
Rising Funding Costs related to sources of funds / financing
An Increasingly Interest Sensitive Mix of Funds
A Technological Revolution: automation & electronic networks
for ease of transaction, payments etc
Consolidation & Geographic Expansion
Globalization of Banking- Banks competing around the world
Increased Risk of Failure