Bank Management

Dr. Mohammad Samir Mahmoud

:Learning Outcomes

By the end of this lecture, students will be able to:

• Understand how the commercial banks integrate into the overall financial system..

• Analyze the role of depository fanatical institutions as a sub-system of the whole financial sector.

• Understand the common underlying finance and financial intermediation theory underpinning conventional understanding of all of

depository financial institutions.

• Exploring the specific nature of retail, wholesale, investment, and corporate banks as independent banks and as constituent

elements of a larger universal bank, and a range of other financial firms.

Lecture 1
The Elephant and the Blind Men
? What is a Bank
A Bank is a Financial
Institution ..
What a Financial
Institution is ?
(1/1) Economy Overview:

Labor / Capital / Land

Resources

(Inputs)

Self-sufficiency

Households
Goods & Services

(Outputs)
(1/1) Economy Overview:

Labor / Capital / Land

Resources

(Inputs)

Households
Goods & Services

(Outputs)
 Resources

(Inputs)
Wages / Interest / Rent

Income
Costs

Fund Deficit Fund Surplus

If Revenues < Costs If Income > Expenditure

Business Households
Entrepreneurship / Partnership

Expenditures
Revenues

(Specialization & Division of Work)

Price

Goods & Services

(Outputs)
 Resources

(Inputs)
Wages / Interest / Rent

Income
Costs

Saving Funds

Direct Finance

Primary Securities (Stocks / Bonds)

Business Households

Corporations

Expenditures
Revenues

(Ownership-Management Segregation)

Price

Goods & Services

(Outputs)
(1/2) Direct Finance:

US$ 100 Million

Equity Debt

Primary Securities

Initial Public Offer

Stock Bonds
Investment Bank

US$ 70 Million US$ 30 Million

(Ownership-Management Segregation)

Stockholders Board of Directors

(General Assembly)
(1/2) Direct Finance:

Note

Equity Debt

Stock Bonds

Has No Maturity Date Has a Maturity Date

WHY ?
(1/2) Direct Finance:

What is Difference Between Real Profit

&

Accounting Profit ?
 Resources

(Inputs)
Wages / Interest / Rent

Income
Costs

Saving Funds

Direct Finance

Primary Securities (Stocks / Bonds)

Business Households

Corporations

Expenditures
Revenues

(Ownership-Management Segregation)

Price

Goods & Services

(Outputs)
(1/3) Cost of Direct Finance:

Direct Finance flows from household sector to business sector are likely to be quite
?low. Why

(1) Monitoring Costs:

Households need to monitor the actions of the firm to make sure that the firm management not waste the funds on any projects with low or negative

net present value (return). Such monitoring actions are extremely costly, require time, efforts and a minimum technical knowledge.

(2) Liquidity Costs:

Long-term nature of corporate equity and debt, and the lack of secondary market where households can sell these securities discourage them not to

buy the primary securities directly from business sector, and prefer to keep their savings liquid maybe to finance their consumption in the near

future.
 Resources

(Inputs)
Wages / Interest / Rent

Income
Costs

Funds Funds

Direct Finance Indirect Finance

Primary Securities Secondary Securities

Business Interest e.g. %15 Interest e.g. %10 Households

Financial

Expenditures
Revenues

Institutions

Price

Goods & Services

(Outputs)
(1/4) Indirect Finance:

Funds Funds

Direct Finance Indirect Finance

Borrowers Savers
Primary Securities Secondary Securities

Interest e.g. %15 Interest e.g. %10

High Return Financial Low Return

High Risk Low Risk

Institutions

FIs issues financial claims (Secondary Securities) that are more attractive to household savers than the claims directly issued by

corporations (Primary Securities).

(1/2) Direct Finance:

Secondary Market Transactions and the

Corporate Finance

What is the Relation ?

? What are Financial Institutions )1/5(

Financial Institutions (FIs):

FIs involved in transferring funds from savers to borrowers (Financial Intermediation).

Financial intermediation activity will take place, if there is a positive spread between loan-interest gained from borrowers, and

deposits-interest paid for savers.

Spread = Gained interest (Revenue) - Paid interest (Cost)

:Types of Financial Institutions )1/6(
Depository Institutions

• Commercial Banks.

• Credit Unions.

Depository • Saving Institutions.

Non-depository Non-depository

Institutions

• Insurance Companies.

• Securities Firms.

• Investment Banks.

• Finance Companies.

• Mutual Funds.
? What is a Bank )1/7(

Commercial Bank :

A financial institution accepting deposits from Surplus-spending individuals or institutions and making

loans for deficit-spending individuals or institutions.

Questions
 Thank You

Dr. Mohammad Samir Mohammad.Mahmoud@fue.edu.eg + (2)