Introduction to Banking

Introduction
 A bank is a financial institution whose primary activity is to act
as a payment agent for customers and to borrow and lend
money.
 Banks provide funds to allow businesses to purchase
inventory and collect back those funds with interest when the
goods are sold.
 Banks are important players in the financial markets (because
of the financial services they offer).
 For centuries, the banking industry only dealt with
businesses, not consumers.
 Banks have influenced economies and politics for ages.
 Introduction
 In some countries (Germany), banks own large corporations
while in other countries (US), banks are prohibited to own
non-financial corporations.
 In Japan, banks are usually the nexus of cross share holding
entities known as zaibatsu.
 In France, bancassurance is highly present, as most banks
offer insurance services (and now real estate services) to their
clients.
 Nowadays, banking services have expanded to include
services directed at individuals (and risk in these much
smaller transactions are pooled).
 Key Concepts
1. The General Banking Law (RA No. 8791) – an act providing
for the regulation of the organization/operations of banks, quasi-
banks, trust entities and for other purposes; est. Feb. 23, 1995.
2. The Bangko Sentral ng Pilipinas (BSP) – was rechartered on
July 3, 1993, pursuant to the provisions of the 1987 Philippine
Constitution and the New Central Bank Act of 1993. The Central
Bank of the Phils. was established on January 3, 1949, as the
country’s central monetary authority.
3. Bank Regulations – are a form of government regulation which
subject banks to certain requirements, restrictions, and guidelines.
4. Bank secrecy – a legal principle under which banks are allowed
to protect personal information of their customers.
 Key Concepts
5. Capital requirement – is a bank regulation about how banks
must handle their capital. In 1988, the Basel Accord provided a
capital measurement for banks, it was eventually enhanced by Basel I
& II.
6. Deposit account – a savings or current account in a bank that
allows for deposit and withdrawal of funds by account holders.
7. Loan – is a type of debt. A loan entails the distirubution of
financial assets over time between the lender and borrower.
8. Money laundering – the practice of engaging in financial
transactions to conceal the source and destination of dirty money.
9. Universal bank – a bank that participates in all banking activities.
A bank that is both commercial and investment bank.
 What is Banking?
 Banking – is the business of receiving deposits
from the general public, and then lending the
funds to borrowers, or otherwise investing.

 Banking is about dealing in money (and its

substitutes) and providing financial services.
 Why Do We Study Banking?
 Banking is:
– the well-spring of the monetary bloodstream (i.e.,
life blood of business and industry).
– an important component of the economic
system of a country.
– responsible for the rapid development of a
country’s economy (by mobilizing savings into
investments).
 Why Does Banking Work?
Answer: Because of the people's trust and confidence
(that banks can grow and protect its money).

Explanation:
We give a bank our money to keep it safe for us, and
then the bank turns around and gives it to someone else
in order to make money for itself.
Banks can legally extend considerably more credit than
they have cash.
Still, most of us have total trust in the bank's ability to
protect our money and give it to us when we ask for it.
 Historical Background of Banking
 Banks originated in ancient Mesopotamia
thousands of years ago (where royal
palaces and temples provided secure
places for the safekeeping of grains and
commodities).

 In Egypt, the centralization of harvests in

state warehouses also led to the
development of a system of banking.
Written orders for the withdrawal of
separate lots of grains by owners soon
became a more general method of
payment of debts to other persons.
 Historical Background of Banking
 Although the first bank was established during the 14th
century (Banco di San Giorgio) in Genoa, Italy, the
principle of modern banking came during the English
Civil War, 1642–1651.
 During the time, the goldsmiths' warehouses and safes
were a secure place to deposit gold, bullion, jewelries, and
coins.
 “Bank” originated from the Italian word “banko” because
gold, jewelries, and other deposits were piled up on
benches. At the end of the day, these valuables are kept
under lock and key inside chests or vaults.
 Historical Background of Banking
Goldsmith Bankers
 The goldsmiths kept their
inventories in their vaults inside
their warehouses. The extra
spaces in the safes were rented
by owners of coins, gold, and
valuable items.
 A depositor receipt was issued
whenever valuables are received.
 Instructions to goldsmiths to pay
coins to another person
subsequently developed into
what is now known as checks.
 Historical Background of Banking
How the banking system originated from the goldsmiths?
 Since coins are deposited with goldsmiths, depositors will
eventually withdraw these coins whenever they purchase
goods (or avail of services).
 This was a cumbersome task until the buyer of the goods
just signs an endorsement at the back of the depository
receipt, the seller accepts it as payment, then goes to the
goldsmith to withdraw the coins.
 The convenience made by the endorsements made
transactions between buyer and seller easier and resulted
to a bigger volume of trade.
 Historical Background of Banking
How banknotes originated from the goldsmiths?
 To facilitate a faster means of exchange, the goldsmiths
replaced the depository receipt with bearer receipt
(meaning the receipt can be transferred in a number of
times without the need for a signed endorsement).
 There will be no need anymore for the bearer to
withdraw the gold coins because he can use the bearer
receipt (banknote) as payment for anything he buys.
 Historical Background of Banking
How fractional banking originated from the goldsmiths?
 The total amount of gold coins/other valuables should
equal to the total amount of receipts issued. If all
holders of receipts withdraw all their deposits at the
same, there will be enough coins/valuables to cover the
withdrawals.
 Later, the smiths found out that simultaneous
withdrawals rarely occur. So he thought he will issue
more notes way above the amount of coins/valuables
and no one will ever know (fractional banking).
 The Nature of Banking
 Banks = use money and credit (as factors) in the
development of exchange.
= facilitates a form of exchange even w/o handling
of money to make the exchange of goods take place
smoothly.

Recent changes:
 Before, only commercial banks could offer checking
accounts. Today, other types of banks could do so.
 Before, only savings banks could provide housing
loans. Today, commercial banks are into the same
business
 What is a Bank?
 A Bank – receives/holds deposits (of funds) from
depositors, makes loans to borrowers, or otherwise
invests these funds; organized in the form of a stock
corporation.
– derives profit from (a) interest income, (b) fees,
and (c) charges.

Official definition:
“Banks” - shall refer to entities engaged in the
lending of funds obtained in the form of deposits. - The
General Banking Law of 2000 (RA No. 8791).
 Bank’s Primary Function
 The primary function of banks is to put their
depositors' money to use by lending it out to others
who can then use it to buy homes, send kids to college,
business purposes, etc.

Explanation: When you deposit your money in the bank,

your money goes into a big pool of money and your
account is credited with the amount of your deposit.
When you write checks or make withdrawals, that
amount is deducted from your account balance.
Interest you earn on your balance is also added to your
account.
 Development of Banking Functions
 The original concept of banking – just a place for
safekeeping of money (issued receipts for money
received).
 Later, conceived of as a credit institution.
 It loaned to credit seekers what it had previously received
as deposits.
 Now, even though there is still a differentiation between
banks and thrifts, they offer many of the same services.
Commercial banks can offer car loans, thrift institutions
can make commercial loans, and credit unions offer
mortgages.
 Formation of Banks
 The Free Banking Laws – are laws that existed during
the 1800s that facilitated the formation of banks.
 Businesses could obtain banking charters by
complying with a general bank incorporation law.
 In the country, we have BSP Circular-Letter, July 13,
1998 - “Basic Guidelines in Establishing Banks”

Note: An act of government legislation was not

necessary to create a bank.
 The Banker’s Dilemma
How to loan money in such a way as:
a. To meet the demands of those who need
credit.
b. To keep enough funds to meet the demand of
depositors for withdrawals.
 Different Types of Banks
1. Universal bank 8. Building and Loan
2. Commercial bank Association
3. Thrift bank 9. Foreign bank
4. Savings bank 10. Private Development
bank
5. Cooperative bank
11. Credit Union
6. Trust Company 12. Specialized
7. Rural bank Government bank
13. Islamic bank
 Universal Bank
 Universal Banks – are “expanded” commercial banks or
EKBs; represents the largest single group, resource-wise,
of financial institutions in the country.

 Authorized to (1) engage in underwriting and other

functions of investment houses, and (2) invest in the
equity not only of allied undertakings but of non-allied
enterprises (up to 100% of their equity).

 Developed in 1980, in which the resources of KBs are

combined w/ those of investment houses, to allow greater
capacity to generate long-term investment capital.
 KBs and TBs
 Commercial Banks – are privately owned, local or foreign,
most predominant; main functions include accepting deposits,
lending, and safekeeping; also known as KBs.

 Thrift Banks – cater to small savings and provide loans at

longer, easier terms to lower income groups. Loans are usually
for basic social and economic needs and are granted to small
producers.
Thrift banks are composed of (a) Savings and Mortgage
Banks (b) Stock Savings and Loan Associations (c) Private
Development Banks (d) Cooperative Banks, and (e) Credit
Unions.
 What is a Savings Bank?
 A Savings Bank – originally founded for lower-income workers
to save their money; originated in early 18th century.
Note: A Savings and Loan Association – maybe owned by both
shareholders and depositors (if they do, the word “mutual” is
added).

 A Private Development Bank – is organized by private

persons, residing in a given community, for the purpose of
accumulating together their savings and other funds, so that
these funds may be utilized as bank funds for economic
development of the area in which the bank operates.
What is a Cooperative Bank and Credit Union?
 A Cooperative Bank – is a a bank which belongs to its
members, who are at the same time the owners/ customers
of their bank (belonging to the same local/community or
sharing common interest); established during the 1800s.

Note: Cooperative Banks and Savings and Loan

Associations were established to make it possible for
factory workers and other lower-income workers to buy
homes.

 The Credit Union – provides emergency loans for people

who couldn't get loans from traditional lenders. These
loans might be for things like medical costs or home
repairs.
 Trust Company
 A Trust Company – performs a fiduciary function,
administers any trust, property, or deposit, for the use/benefit
of an heir or beneficiary.

Trust – the ability of banks to act as a trustee (i.e.,

someone who administers financial assets on behalf of
another).

A trustee – manages investments, keeps records, manages

assets, prepares court accounting, pays bills and medical
expenses, charitable gifts, inheritances, and/or distributes
income or principal.
 Rural Bank
 A Rural Bank – provides credit facilities to farmers, merchants (or
cooperatives of farmers and merchants and), and people of rural
communities.

Rural Banks vs. Cooperative Banks

– Both are popular banks in the rural communities.
– Both promote and expand the rural economy in an orderly and
effective manner by providing basic financial services.
– Both help farmers through the stages of production, from
buying seedlings to marketing of their produce.
– They are differentiated by ownership.
While rural banks are privately owned and managed, coop
banks are organized/owned by cooperatives or federation of
cooperatives.
 Building and Loan Association and
Foreign Bank
 A Building and Loan Association – an association or
corporation whose aim is to accumulate the savings of its
stockholders and loan fund to other stockholders to
encourage industry, frugality and home building among its
stockholders.
 A Foreign Bank – is any bank formed, organized or existing,
under any laws, other than the laws of the country.
Foreign banks are required to secure license from a securities
and exchange commission and central bank before transacting
business in the country.
In some cases, a bank organized domestically, may be treated
as a foreign, if a majority of its capital stock is owned by
foreigners.
 Other Types of Banks
 An International Bank – is a financial entity that
offers financial services, such as payment
accounts and lending opportunities, to foreign
clients (individuals and companies).
Every international bank has its own policies
outlining with whom they do business.
 Why bank with international banks?
 To invest in the economies of booming countries;
international banks offer better interest rates than domestic
banks, providing money-making opportunities for
customers.
 Since international banks lend and borrow on international
markets, they’re less affected by domestic interest
fluctuations.
 To shelter money from their home country's income and
estate taxes; keep it safe from lawsuits. Ex. the Cayman
Islands, Panama and the Isle of Man.
 Anonymous Banking
 In the past, many international banks offered relative
anonymity and secrecy to their customers.
 Since the terror attacks of September 11, 2001, however,
the US has worked with countries around the world to
eliminate anonymous banking (the purpose being to
uncover the identities of account-holders suspected of
criminal activity).
 The completely anonymous, numbered Swiss account is
a myth. There is always a record of who opened the
account.
 Other Types of Banks
 Specialized Government Banks – were established
to finance the development of agricultural
sector/other specific needs, ex. DBP and Al-Amanah
Islamic Bank.
 Islamic Banks – as its name suggests, were
established by Islamic groups and authorities.
 Entry Regulation
 Commercial banks are regulated by government
entities and require a license to operate.
 The regulator is typically a government owned
bank (CB) and have the monopoly of issuing bank
notes.

 Requirement for the issue of license include:

a. Minimum capital
b. Minimum capital ratio
c. “Fit and Proper” rule – for bank owners, directors,
officers, and employees
d. Approval of the bank's business plan as being
sufficiently prudent and plausible
 Banking Channels
 Branch, banking center, or financial center
 ATM
 Mail
 Telephone banking
 Online banking
 Functions of Banks
1. Creates money
2. Payment mechanism
3. Pooling of savings – the deposit function
4. Extension of credit – the loans and discount
function
5. Facilities for financing foreign trade
6. Trust services
7. Safekeeping of valuables
8. Brokerage services
 Creating Money
 When a bank grants loans to a producer,
money is created and the production of goods
is assured.
 When a bank lends through the issuance of its
own PNs, money is created when the notes are
used to buy goods/services.
 Payment Mechanism
 Buyers and sellers are unable to meet personally, and if
they do, neither would usually carry large sums of money.
 With banks, payment is not a problem.
 Commercial banks are equipped with an effective payment
system, ex. check payment (with clearing), fund transfers,
credit card payments, etc.

Note: A credit card is not only a useful tool for credit but
also as a means for payment since it allows the holder to
borrow money and buy goods up to a certain limit w/o
paying for them immediately.
 Pooling of Savings
 Banks accept savings from customers.
 Individual savings are pooled to form bigger
amounts and made available to borrowers engaged
in production/other ventures.
 With the use of the pooled funds, banks are able
to extend loans for:
– business expansion
– purchase of real estate
– purchase of consumer goods/services
 Extension of Credit
 Banks are primary sources of credit.
 Its lending activities enable people to obtain a
higher standard of living (through increased
production by the various industries, and increased
investments in capital).
 Example: Loans to farmers will enable them to
increase their output (he can buy seeds, feed,
fertilizers, etc.) to produce food enough to feed an
entire nation.
 Financing Foreign Trades
 When a buyer wants to make a purchase from a foreign
country, the following can be a problem
– acceptability of the buyer’s currency
– assurance of payment and shipment of goods
– language barriers
 With banks, such problems can be eliminated.
 Example: The buyer may buy foreign currency in a bank; use
of letters of credit (LC).
Note: An LC – is a written statement of the bank addressed
to the seller guaranteeing that the bank will accept and pay a
draft, up to a specified sum, if presented in accordance with
the terms of the LC. If the seller shows proof (to the
correspondent bank of the buyer) that the goods had already
been shipped, he/she will receive payments.
 Trust/Fiduciary Services
 Banks serve as managers, administrators or trustees of
estate of deceased persons, for the heirs, or for
minors, absentees, or other incompetents who cannot
manage their own properties.
Notes:
1. Trust – is a formal arrangement between trustor, trustee, and
beneficiary.
2.Trustor – creator of trust (could be individual or corp.).
3. Trustee – agent of trustor in the management/ administration
of certain property.
4. Beneficiary – party for whom trust was created.
 Why Banks Act in Fiduciary Capacity?
 Banks are (relatively) permanent institutions – have
perpetual successions.
 Safety – banks have fixed place of business, fixed
hours, no speculation, no false accounts
 Skill – commands the necessary management skills
 Confidentiality – bank records and accounts are
confidential
 Gov’t supervision – supervised by a regulatory
authority
 Financial strength – under a strict capital and reserve
requirements
 Safekeeping of Valuables
 Safekeeping services has become an important function of banks
(although it is one of its oldest function).
 Individuals with valuables may not have the capability of keeping
such valuables safe and secure.
 Classes of protecting valuables:
1. Safe Deposit Boxes (SDB) – is a vault available to customers on
a rental basis. Under this arrangement, only the customer is
allowed to open the box. Access to the box is controlled by the
bank.
2. Safekeeping – the bank takes custody of the valuables and acts as
agent to the customer. Ex. When a bond is placed under the care
of the bank, the principal and interest will be collected by the
bank upon maturity and these are deposited to the customer’s
account.
 Brokerage Services
 Some banks offer to buy and sell securities for
customers.
 This service relieves the buyer and seller of
securities with the difficulties of contacting a
security dealer.
 As banks cover the entire country, the accessibility
of such service becomes more economical and
convenient to clients.
 Other Functions of Banks
 The clearance of checks function
 The note-issue function (performed by the central
bank)
 The exchange function
 The financing foreign travel function
 The remittance and collection function
 Advisory function
 Check Clearing
 Check Clearing – the movement of a check from the bank in which
it was deposited to the bank of which it was drawn. This process
(called “clearing cycle”) normally results in a credit of account at the
bank of deposit, and an equivalent debit to the account of the bank
in which it was drawn.

Note: A Clearing House – is an association of banks established to

facilitate the clearing of checks and other items (i.e., drafts,
notes, etc.) among the members.

Importance of a Clearing House

Without a clearing house, it would be necessary for each bank to
go to so many banks daily to cash or collect checks deposited with
them by clients.
 Notes Issuance
 In the 19th Century, notes issuance (currency and
coins) had been one of the most important function
of banks. However, this function was later
transferred to a regulatory authority.
 In the country, it was on May 1, 1852, that the Banco
Espanol-Filipino was authorized to issue Philippine
notes. PNB at a much later date was also granted
similar authority.
 The Exchange Function
 Banks exchange and converts foreign currencies.

Types of Fx Rate:
1. Free rate 5. Sight rate
2. Official rate 6. Time rate
3. Spot rate 7. Market rate
4. Forward rate 8. OTC rate
 Remittance & Collection
 Banks remit amounts due to creditors upon order of
debtors who are bank customers.
 Banks will collect accounts for creditors who are also
bank customers
 Service fees, determined by contracts, are charged the
clients for above bank services.
 Advisory Function
 Banks, because of the technical training and
experience of its personnel, are generally in a position
to give advisory counsel to their customers with
reference to such matters as investments, etc.

Note: Many bank customers make use of this bank

function.
 Banks Activities
 Retail banking – deals directly with individuals and
small businesses
 Business banking – provides services to mid-market
businesses
 Corporate banking – directed at large business
entities.
 Private banking – provides wealth management
services to high net worth individuals and families
 Investment banking – assists corporations and
governments raise capital or acquire funds.
 Typical Services of a Bank
A. Deposit Account Services C. Trusteeship
- Savings account - Guardianship
- Checking account - Custodianship and safekeeping
- Time deposit - Administratorship/
- Special savings account executorship
- Foreign currency deposit - Life insurance trust
- ATM card - Escrow receivership
B. Loan Services - Investment management
- Agricultural loans agreements
- Commercial loans - Common trust funds
- Industrial loans - Mortgage trust indenture
- Salary loans - Management of pension funds
- Housing loans
- Special financing loans
D. Other Services
- Loan syndication and co- - Collection
financing - Custody of Securities
- Investment in securities/CPs
 Sources of Bank Funds
1. Investment of the shareholders.
2. Proceeds of the sale of bonds and other securities.
3. Deposits made by bank customers.
4. Undistributed profits from business operations.
5. Trust funds.
6. Derivative deposits. (Note: Banks give out loans in the form
of credits to the checking accounts of borrowers.)
7. Bank credit created through fractional reserve banking.
8. Loans obtained by the bank from various sources (e.g., bank
loans, CB loans, etc.).
 Uses of Bank Funds
1. Loans
2. Investments
3. Project financing
4. Payments (bank operations)
5. Service withdrawals
6. Debt payments
7. Other payments
 Profitability

A bank is in the business of making money

out of other people's money.
 Power to Receive Deposits
 The business of banking consists principally of
receiving deposits for safekeeping (it is the
distinctive feature of every bank).

“Powers of a Commercial Bank – A commercial bank

shall have x x x all such powers as may be necessary to
carry on the business of commercial banking, such as x
x x accepting or creating demand deposits; receiving
other types of deposits and deposit subsitutes x x x.”
Sec. 29, RA No. 8791 - General Banking Law.
 What is a Deposit?
 Deposit – is money placed in a bank for safekeeping
or to earn interest and to be used according to
banking practice. Deposits are the lifeblood of a bank.
A deposit is a contract between savers (creditors)
and the bank (debtor), thus giving rise to a debtor-
creditor relationship.

Note: Bank deposits constitute one of the most

influential factors in the whole financial system. They
are not only the largest element of money stock, but at
the same time form an important source of investment
funds.
 What is a Deposit?
 Although deposits serve as “assets” to banks, they
are “liabilities” since they must be paid upon
withdrawal request.
Deposits are “balances due to customers”.

Note: Bank deposits do not signify something that

is actually or physically present (but may refer only
to an entry in the books of banks recording its
obligation to customers).
 Forms of Deposits
1. Cash (or cash items)
2. Checks issued by the bank or its branches (outright credit)
3. Checks issued by other banks, local or regional (“clearing
items”).
4. Checks issued by other banks but cannot be credited right
away (“items for collection”).
5. Proceeds of loans and discounts
6. Traveler’s checks
7. Drafts
8. Promissory Notes
9. Money orders
 Bank Deposits

 Savings Deposits – have no maturity dates and may be

withdrawn from the bank at (almost) any time.
 Time Deposits – have specific maturity dates and carry
significant interest forfeitures for early withdrawal.

Note: Negotiable Certificate of Deposits – have fixed

maturities and interest rates, but they are payable to
“bearer” (holders can exchange them for money any
time) and do not even require endorsements.
 Other Types of Bank Deposits
 Credit – cash or transfer items (such as checks) which
are placed to a customer’s account in the
bookkeeping department.
 Cash letter – is a deposit received by mail from other
banks.
 Telegraphic Transfers – credits received by
telegraph; also known as wire transfers.
 Deposit Substitutes – alternative form of obtaining
funds from the public; represent all types of money
market borrowings by banks like PNs, repos, CPs,
etc.; sometimes referred to as derivative or secondary
deposit.
 Why Banks Accept Deposits?
1. Banks are businesses – they must be operated like
any other businesses (strive to make their business
profitable).
2. A major portion of the bank’s income comes from
lending, and to be able to do so, they must accept
deposits.
3. Since profits is a pre-requisite to survival, banks
must engage in the generation of income.

Note: Deposits constitute the bulk of the liabilities

of a bank.
 Deposit Insurance
 Deposit insurance – is an insurance coverage to
protect/cover depositors’ deposits to banks.
Depositors, if they heard of the slightest hint of
trouble, “ran” to the bank to withdraw all of their
money. Rumors make people uneasy about the security
of their money in the bank.
“Bank runs” have often than not, lead to failures of
many banks and huge losses of savings for many people.
Other banking insurance – were especially designed
to cover deposits in cases of burglaries, robberies,
vandalism, etc.
 Deposit Reserves
 Reserves – the supply of cash and quick assets of banks.
 Required reserve – banks are required to set aside ready
cash or near-cash items for ordinary or unusual
withdrawals or demands for money by clients.
 Myths about the required reserve:
The required reserve do not exist to protect against “runs”.
Required reserves are to give the monetary authority
control over the amount of lending and deposits that
banks can create.
 Deposit Reserves
 A bank’s solvency, in the long run, depends upon the
quality of its assets.
 Two main classes of reserves:
1. Primary reserve – cash, deposits with other
banks/central bank, readily marketable securities
2. Secondary reserve – securities for investment
purposes.
 Excess and Prudential Reserve
 An Excess Reserve – are reserves that a bank (or
depository institution) or the whole banking system holds
above required reserves.
Ex. If the required reserve of Bank X is P5 million but
its actual reserve is P8 million the excess reserve is P3
million (P8,000,000 – P5,000,000).

 A Prudential Reserve – are reserves that a bank (or

depository institution) voluntarily hold above required
reserves in order to remain liquid to prepare for troubled-
times.
 Reserves Theories
1. Liquidity Theory – a conservative bank prefers to
keep highly liquid reserves (cash over stocks, bonds,
or real estate).
2. Shiftability Theory – a conservative bank allocates
reserves where they can easily be shifted (from
money market instruments, to loans or capital
market instruments and vice versa).
3. Diversity Theory – a conservative bank allocates
reserves in adequately diversified investments.
Note: In case of unavoidable loss in one, the profits
in others may offset the losses.
 What is a Bank Loan?
 A Bank Loan – is a loan made by a bank to be repaid
with interest on or before a fixed date; a major
function of commercial banks.
The major portion of a bank’s income is generated
through lending.

“Productive” Loans
In the early days, bank loans were only short-term
used for productive purposes (ex. carrying a crop
through harvest or carrying an inventory) and
considered as self-liquidating. As soon as the crop, for
example, was sold, the loan could be repaid.
 Accounting for Bank Accounts
 Bank statements are accounting records produced
by banks under various accounting standards.
 Under GAAP there are two kinds of accounts:
debit and credit.
 Credit accounts are Revenue, Equity and Liabilities.
Debit Accounts are Assets and Expenses. This means
you credit credit accounts to increase their balances
and you debit debit accounts to increase their
balances.
 Bank’s Responsibility to Depositors and
Stockholders
 See to it that funds are protected from loss, by being
cautious in their loans and investments, to such an
extent as to assure profits.
 See to it that depositors’ claims for withdrawals are
met upon demand, for ready repayment assures
depositors of the use of their money in transactions
worth many times the values of their deposits.
 See to it that bank funds are put to such productive
uses as to yield satisfactory dividends to shareholders,
and to increase the bank surplus account as to cushion
the bank against loss during lean years.
 Bank Crisis
Banks are susceptible to different types of risks:
 Liquidity risk – withdrawals beyond available funds
 Credit risk – those who owe money to the bank will not repay.
 Operational risk – improper operation of processing or
management system resulting to loss, ex. Inexperienced
personnel, unauthorized trading, easily accessed computer
system, etc.
 Legal risk – arises from the possibility that an entity may not
be able to enforce a contract (an illegality of the contract or the
other party entered into the contract w/o proper authority or
ultra vires).
 Interest rate risk – bank will be unprofitable in the rise of
interest rate.
 General Causes of Bank Failures
 Severe business depressions
 Poor management.
 Large loans to officers and directors of the bank.
 Large loans to business concerns (in which the bank’s
officers/directors are financially interested).
 Unexpected depreciation or decrease in the value of
the securities held by the bank.
 Heavy withdrawals by depositors (bank run) as a
result of loss of confidence in the bank or in its
management.