An Overview of Banks

and the Financial-

Services Sector
 Introduction
• Banks are the principal source of credit (loanable
funds) for millions of individuals and families and for
many units of government (school districts, cities,
counties, etc.).
• Worldwide, banks grant more installment loans to
consumers (individuals and families) than any other
financial-service provider. In most years, they are
among the leading buyers of bonds and notes
governments issue to finance public facilities
• Banks are among the most important sources of short-
term working capital for businesses and have become
increasingly active in recent years in making long-
term business loans to fund the purchase of new plant
and equipment.
 Powerful Forces that are Reshaping
Banking and Financial Services Today
• The industry is consolidating rapidly with
substantially fewer, but much larger, banks and other
financial firms.
• Moreover, banking and the financial-services industry
are rapidly globalizing and experiencing intense
competition in marketplace after marketplace around
the planet, not just between banks, but also involving
security dealers, insurance companies, credit unions,
finance companies, and thousands of other financial-
service competitors. These financial heavyweights are
all converging toward each other
• Banking and its financial-service neighbors are also
undergoing a technological revolution as the
management of information and the production and
distribution of financial services become increasingly
electronic.
• There are virtual banks around the world that offer
their services exclusively through the Internet.
 What is a Bank?
• A bank can be defined in terms of (1) the economic
functions it serves, (2) the services it offers its
customers, or (3) the legal basis for its existence.
• Certainly banks can be identified by the functions
they perform in the economy. They are involved in
transferring funds from savers to borrowers (financial
intermediation) and in paying for goods and services.
• Bank service menus are expanding rapidly today to
include investment banking (security underwriting),
insurance protection, financial planning, advice for
merging companies, the sale of risk-management
services to businesses and consumers, and numerous
other innovative services.
 Bank as financial intermediary
Flow of loanable funds (savings)

Surplus Deficit unit

unit (demanders
(suppliers Banks of funds)
of funds) Mainly
Mainly business
households firms and
government
Flow of financial services, incomes
and financial claims
Nature of banking business

• Financial Institution
• Commercial in Nature
• Legal Entity
• Intermediary
• Solvency
• Receiving Deposits
• Deposits are withdrawable
• Issuing Loan
• Keeping Secrecy
• Safety
• Agency Services/Representation
• Utility Services
The Different Kinds of Financial-Service Firms
Calling Themselves Banks
• Commercial banks: Sell deposits and make loans to
businesses and individuals
• Money center banks: Are large commercial banks
based in leading financial centers
• Community banks: Are smaller, locally focused
commercial and savings banks
• Savings banks: Attract savings deposits and make
loans to individuals and families
• Cooperative banks: Help farmers, ranchers, and
consumers acquire goods and services
• Mortgage banks: Provide mortgage loans on new
homes but do not sell deposits
• Investment banks: Underwrite issues of new
securities by their corporate customers
• Merchant banks: Supply both debt and equity capital
to businesses
• Industrial banks: State-chartered loan companies
owned by financial or nonfinancial corporations
• International banks: Are commercial banks present in
more than one nation
• Wholesale banks: Are larger commercial banks
serving corporations and governments
• Retail banks: Are smaller banks serving primarily
households and small businesses
• Limited-purpose banks: Offer a narrow menu of
services, such as credit card companies and subprime
lenders
• Bankers’ banks: Supply services (e.g., check clearing
and security trading) to banks
• Minority banks: Focus primarily on customers
belonging to minority groups
• National banks: Function under a federal charter
through the Comptroller of the Currency
• State banks: Function under charters issued by
banking commissions in the various states
• Insured banks: Maintain deposits backed by federal
deposit insurance plans (e.g., the FDIC)
• Member banks: Belong to the Federal Reserve
System
• Affiliated banks: Are wholly or partially owned by a
holding company
• Virtual banks: Offer their services only over the
Internet.
• Fringe banks: Offer payday and title loans, cash
checks, or operate as pawn shops and rent-to-own
firms
• Universal banks: Offer virtually all financial services
available in today’s marketplace.
 The Financial System and Competing
Financial-Service Institutions
Roles of the Financial System
• To encourage individuals and institutions to
save and to transfer those savings to those
individuals and institutions planning to invest
in new projects.
• It also provides a variety of supporting services:
 payment services that make commerce and markets
possible (such as checks, credit cards, and interactive
Web sites),
 risk protection services for those who save and
venture to invest (including insurance policies and
derivative contracts),
 liquidity services (making it possible to convert
property into immediately available spending power),
and
 credit services for those who need loans to
supplement their income.
The Competitive Challenge for Banks
• loss of market share
• largest customers find ways around banks to obtain
the funds they need
• Some argued that banking’s market share is falling
due to excessive government regulation, restricting
the industry’s ability to compete.
Leading Competitors with Banks
• Savings associations: Specialize in selling savings
deposits and granting home mortgage loans and other
forms of credit to individuals and families
• Credit unions: Collect deposits from and make loans
to their members as nonprofit associations of
individuals sharing a common bond
• Money market funds: Collect short-term, liquid funds
from individuals and institutions and invest these
monies in quality securities of short duration
• Mutual funds (investment companies): Sell shares to
the public representing an interest in a professionally
managed pool of stocks, bonds, and other securities,
• Hedge funds: Sell shares mainly to upscale investors
in a broad group of different kinds of assets
(including nontraditional investments in commodities,
real estate, loans to new and ailing companies, and
other risky assets)
• Security brokers and dealers: Buy and sell securities
on behalf of their customers and for their own
accounts,
• Investment banks: Provide professional advice to
corporations and governments raising funds in the
financial marketplace or seeking to make business
acquisitions
• Finance companies: Offer loans to commercial
enterprises (such as auto and appliance dealers) and
to individuals and families using funds borrowed in
the open market or from other financial institutions
• Financial holding companies: (FHCs) Often include
credit card companies, insurance and finance
companies, and security broker/dealer firms under
one corporate umbrella
• Insurance companies: Protect against risks to persons
or property and manage the pension plans of
businesses and the retirement funds of individuals
Different Roles Banks and their Closest
Competitors Play in the Economy
• The intermediation role: Transforming savings
received primarily from households into credit (loans)
for business firms and others in order to make
investments in new buildings, equipment, and other
goods.
• The payments role: Carrying out payments for goods
and services on behalf of customers (such as by
issuing and clearing checks and providing a conduit
for electronic payments).
• The guarantor role: Standing behind their customers
to pay off customer debts when those customers are
unable to pay (such as by issuing letters of credit).
• The risk management role: Assisting customers in
preparing financially for the risk of loss to property,
persons, and financial assets.
• The investment banking role: Assisting corporations
and governments in marketing securities and raising
new funds
• The savings/investment role: Aiding customers in
fulfilling their long-range goals for a better life by
advisor role building and investing savings.
• The safekeeping/certification of value role:
Safeguarding a customer’s valuables and certifying
their true value.
• The agency role: Acting on behalf of customers to
manage and protect their property.
• The policy role: Serving as a conduit for government
policy in attempting to regulate the growth of the
economy and pursue social goals.
 Services Banks Have Offered
throughout History
• Carrying Out Currency Exchanges
• Discounting Commercial Notes and Making Business
Loans
• Offering Savings Deposits
• Safekeeping of Valuables and Certification of Value
• Supporting Government Activities with Credit
• Offering Checking Accounts (Demand Deposits)
• Offering Trust Services
 Services Banks and Financial-Service
Competitors Have Offered More Recently
• Granting Consumer Loans
• Financial Advising
• Managing Cash
• Offering Equipment Leasing
• Making Venture Capital Loans
• Selling Insurance Policies and Retirement Plans
• Offering Security Brokerage and Investment Banking
Services
• Offering Mutual Funds and Annuities
• Offering Merchant Banking Services
• Offering Risk Management and Hedging Services
 Key Trends Affecting All Financial-
Service Firms
• Service Proliferation
• Rising Competition
• Government Deregulation
• An Increasingly Interest-Sensitive Mix of Funds
• Technological Change and Automation
• Consolidation and Geographic Expansion
• Convergence
• Globalization
Banking regulation in Bangladesh
Banking system in Bangladesh is operated and
regulated under the supervision and control of
Bangladesh Bank. At present, banks in
Bangladesh are in business according to the bank
company act 1991.

a)Operating Banking Business: "Banking

Company" means any company transacting the
business of banking in Bangladesh, and includes
all new banks and special banks [section 5(o)].
b) Performing banking activities: According to
the section 7 of bank company act 1991 besides
banking business, banks may engage in
businesses namely, borrowing, raising or taking
up of money; the sending, or advancing of
money; transferring, issuing various valuable
document, providing suggestion and information
etc.
c) Minimum Capital Standards: Minimum capital
requirement as required under Article 13 of
Banking Companies Act, 1991 for all banks is
Tk.400 crore.

d) Reserve Fund: Commercial banks are supposed

to main a certain percentage of their deposit
liability as cash and marketable securities with the
Bangladesh Bank as reserve
e) Credit control: In order to control credit all
banks in Bangladesh are ought to obey the rules
and regulations formulated by Bangladesh bank.

f) Supervising banking activities: To develop a

strong, effective and modern banking system in
Bangladesh, overall activities of banks have been
automated under the “Central Bank Strengthening
Project”. Bangladesh bank audits the overall
activities of banks regularly. Inspection Wing –1
and 2 of Bangladesh bank conducts such audits.
Basel II
Basel II is the second of the Basel Accords, which
are recommendations on banking laws and
regulations issued by the Basel Committee on
Banking Supervision.

Basel II, initially published in June 2004, was

intended to create an international standard for
banking regulators to control how much capital
banks need to put aside to guard against the types
of financial and operational risks banks face.
One focus was to maintain sufficient consistency
of regulations so that this does not become a
source of competitive inequality amongst
internationally active banks.

In theory, Basel II attempted to accomplish this by

setting up risk and capital management
requirements designed to ensure that a bank has
adequate capital for the risk the bank exposes
itself to through its lending and investment
practices
Basel II uses a "three pillars" concept –
The First Pillar (Minimum Capital Requirements)
The first pillar deals with maintenance of regulatory
capital calculated for three major components of
risk that a bank faces: Credit risk, operational risk,
and market risk.
The Second Pillar (Supervisory Review)
This is a regulatory response to the first pillar,
giving regulators better 'tools' over those previously
available.
The Third Pillar (Market Discipline)

This pillar aims to complement the minimum capital

requirements and supervisory review process by
developing a set of disclosure requirements which
will allow the market participants to gauge the
capital adequacy of an institution.