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CHAP - 01 - An Overview of Banking Sector-For Student
CHAP - 01 - An Overview of Banking Sector-For Student
BANKING SECTOR
Chapter 1
1
William Chittenden edited and updated the PowerPoint slides for this edition.
Key topics
1. Bank definitions
2. Bank regulation
Goals of regulation
Regulators
Rationality of regulation
3. Bank functions
4. Bank services
5. Bank organization
6. Fundamental sources of changes
2
What is a bank?
Definition by functions it serves
Institutions
involves in transferring funds from
savers to borrowers (financial intermediation)
& in paying for goods and services
Definition by services it offers to
customers
Accept deposits, make commercial loans,
offer trust services, manage cash, etc.
3
What is a bank?
Necessity of a legal definition:
Regulation purpose
Banking service menu is expanding
Other financial-service institution provide
similar services
4
What is a bank?
Definition by legal basis for regulation
US:any institution that could qualify for
deposit insurance administered by the
FDIC
5
What is a bank?
Definition by legal basis for regulation
VN: "Non-bank credit institution" is a credit
institution permitted to engage in some
banking activities as its regular business, but
not permitted to receive individual deposits
and to provide payment services.
VN: "Banking activities" are monetary
business activities and banking services, the
regular operation of which is the receipt of
deposits and use of that to extend credits,
provide payment services;
6
Financial service competitors of banks
Savings associations
Credit unions
Money market funds
Mutual funds (investment companies)
Hedge funds
Security brokers and dealers
Investment banks
Finance companies
Financial holding companies
Life and property-casualty insurance companies
7
Rationale of regulations on financial firms
8
Goals of bank regulation
10
Banking principal regulatory
agencies (VN)
11
Why banks are closely regulated?
Banks are among leading repositories of public’s
savings
Bank’s power of creating money in form of readily
spendable deposits
Banks provide individuals and businesses with loans for
consumption and investment, which should be equally
and adequately supplied.
Government rely upon banks in conducting economic
policies, collecting taxes and dispensing government
payment.
12
Shortcomings of restrictive bank regulation
13
The Federal Reserve System
14
State Bank of Vietnam
15
The Federal Reserve System
Monetary Policy Tools
Open Market Operations
Open market purchases (sales) increase
(decrease) reserves & the money supply
Discount Rate
Decreasing (Increasing) the discount rate makes
bank borrowing less (more) expensive, which
leads to an increase (decrease) in the money
supply
Reserve Requirements
Decreasing (Increasing) reserve requirements
increases (decreases) the money supply
16
Commercial banks and the economy
17
Traditional services offered by banks
19
Discounting commercial notes and
making business loans
Discounting commercial notes/making loans to
merchants based on accounts receivable
Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)
Be provided by banks and many other financial-
service competitors
Be the core and main revenue-earning service
of many banks
20
Offering savings deposits
Why?
22
Supporting government with credit
25
More recent services offered by banks
29
Offering equipment leasing
30
Making venture capital loans
31
Selling insurance policies
33
Dealing in securities
Bank provides security brokerage service and security
underwriting/investment banking services
Bank offer mutual funds, annuities and other investment
products with clear consultation to customers regarding
higher expected yields and risk
Bank temporarily buy stocks of large corporation aiding new
business launching or company expansion by offering
merchant banking services
Bank acts as risk intermediation providing customer with
risk hedging tools (e.g. swap, option, future contract) offered
by themselves or from third party
Services are provided through affiliated securities firms or
insurance companies.
34
Organizational form of the banking industry
35
Organizational form of the banking industry
Branch banking
Offer full range of services from several
locations
Senior management at the home office
Each branch has its own management team with
limited decision making ability
Some functions are highly centralized, while
others are decentralized
36
3-37
Of which:
C: the real value of the charter capital of commercial bank till the
time of request (VND billion).
N1: quantity of branches which have been established and
requested for establishment at Hanoi and Ho Chi Minh urban area.
N2: quantity of branches which have been established and
requested for establishment at Hanoi suburban, Ho Chi Minh
suburban; and other provinces and centrally-run cities.
38
Question for discussion
39
Quality of branching
c) To comply with limitations to ensure safety in
operation of credit institutions specified in Articles
126, 127, 128, 129; Clause 1 Article 130 and
Article 135 of Law on Credit Institutions in 2010
and guides of State Bank of Vietnam for this
provision uninterruptedly during 12 months before
the request month;
40
Organizational form of the banking industry
Parent
Subsidiaries
42
Bank holding companies vs financial
hoding companies
BHC: A corporation chartered for the purpose of
holding the stock (equity shares) of at least one
bank, often along with other businesses.
OBHC (One-bank holding company): control
one or more non-bank businesses.
MBHC (Multibank holding company): a minority
of bank holding company organizations. (eg.
Exhibit 3.8 + ad/dis on MBHC – p80)
43
Bank holding companies vs financial
hoding companies
Affiliated banks: banks acquired by holding
companies.
Independent bank: Not owned by holding
companies
FHC: special type of holding company that may
offer the broadest range of financial services,
including dealing in and underwriting securities,
and selling and underwriting insurances.
E.g. of FHC: p 83 – Exhibit 3.9
44
Exhibit 1.10
Organizational structure of the BHC
Single Ba nk Holding Com pa ny
Pa re nt Com pa ny
E a ch s ubs idia ry ha s a
Ba nk S ubs idiary Nonba nk Subsidia rie s
pre s ide nt a nd line offic e rs
Ba nk Bra nc hes
The bottom four le ve ls ha ve the sa m e orga niza tiona l form a s the indepe ndent ba nk.
Pa re nt Com pa ny
48
Exhibit 1.11
Organizational structure of a financial holding company
Financial Holding
Company
Subsidiaries
Banking Nonbank Thrift Company and Service
Company Subsidiaries Companies
49
Quick quiz
50
Organizational form of the banking industry
Bank subsidiaries
Bank controls one or more subsidiaries
Subsidiaries offer other services such as
insurance and security brokerage services
Profits and losses of each subsidiary impact
parent Bank
Parentcompany’s net income is typically
derived from dividends, interest,
management fees from equity in subsidiaries,
and interest paid on holding company debt.
51
Banking Business Models
Global Banks
International presence
Nationwide Banks
Coast-to-coast presence
Super-Regional Banks
Extensive
operations in a limited
geographic area of the U.S.
Regional Banks
Specialty Banks
52
Exhibit 1.17 DISTRIBUTION OF THE NUMBER OF
BANKS AND TOTAL ASSETS BY TOTAL ASSETS:
1995 - 2004
Number of Assets Size
Banks < $100 M $100M - $1B $1B - $10B > $10B
10,242 7,123 2,741 331 63
1995
(69.55%) (26.76%) (3.23%) (0.62%)
9,451 6,147 2,900 331 73
1997
(65.04%) (30.68%) (3.50%) (0.77%)
8,580 5,157 3,029 318 76
1999
(60.10%) (35.30%) (3.71%) (0.89%)
8,080 4,486 3,194 320 80
2001
(55.52%) (39.53%) (3.96%) (0.99%)
7,769 3,911 3,434 341 83
2003
50.34% 44.20% 4.39% 1.07%
7,630 3,655 3,530 360 85
2004
(47.90%) (46.26%) (4.72%) (1.11%)
54
Exhibit 1.18
Organizational structure of an independent bank
55
Organizational structure – Vietcombank
Operation Center
INTERNAL AUDIT DEPT
ADMINISTRATION DEPT
DIRECTOR
LOAN WORKOUT UNIT
Nguyen My Hao
PROJECT INVESTMENT DEPT
TRANSACTION
TRANSACTION OFFICES
OFFICES SME
SME CREDIT
CREDIT DEPT
DEPT FOREX
FOREX AND
AND TREASURY
TREASURY DEPT
DEPT
GUARANTEE VIP
VIP DEPT
GUARANTEE DEPT
DEPT INTERNATIONAL
INTERNATIONAL PAYMENT
PAYMENT DEPT
DEPT DEPT
DEBT FOREX
FOREX AND
AND TREASURY
TREASURY DEPT
DEPT
DEBT HANDLING
HANDLING DEPT
DEPT
AID
AID AND
AND LOANS
LOANS SETTELEMENT
SETTELEMENT DEPT
DEPT
BUDGET
BUDGET DEPT
DEPT
PERSONAL
PERSONAL BANKING
BANKING DEPT
DEPT
CARDS INFORMATION
INFORMATION TECHNOLOGY
TECHNOLOGY DEPT
DEPT
CARDS DEPT
DEPT
SERVICE
SERVICE BUSINESS
BUSINESS DEPT
DEPT
FINANCIAL
FINANCIAL ACCOUNTING
ACCOUNTING DEPT
DEPT
TRANSACTION
TRANSACTION ACCOUNTING
ACCOUNTING DEPT
DEPT 56
Banking business models
Specialty banks
Personnel
Senior Credit Officer
Cashier/Chief Financial Officer
Senior Operations Officer
Senior Investment Officer
Branch Area Executive
57
Fundamental forces of change
Service Proliferation
Rising competition
Deregulation/reregulation
Crisis, reform and change in banking and financial
services
Increasingly interest-sensitive mix of funds
Tech change and automation
Consolidation & geographic expansion
Convergence
Globalization
58
Fundamental forces of change:
Role of Regulation
Regulatory Dialectic
Process of regulation, market response,
and reregulation
Financial Innovation
59
Fundamental forces of change:
Increased Competition
For Deposits
Interest rate ceilings and inflation
For Loans
Commercial paper
Junk bonds
Credit scoring
Credit derivatives
60
Fundamental forces of change:
Off-Balance Sheet Activities
Loan commitments
Loan guarantees
Standby letters of credit
Interest rate swaps
Futures, forwards & options
Leases
61
Fundamental forces of change:
Impact of Nonbank Competition
Captive Finance Companies
A subsidiary whose purpose is to provide
financing to customers buying the parent
company's product (e.g. General Motors
Acceptance Corporation (GMAC))
General Finance Companies
Fundtheir loans by issuing commercial
paper and long-term bonds. Their cost of
funds is higher than a bank’s, but they
charge higher rates.
62
Fundamental forces of change:
Competition for Payments Services
Credit Cards
Debit Cards
Prepaid Cards
CHIPS
ACH
63
Fundamental forces of change:
Competition for Other Bank Services
Trust services
Brokerage services
Data processing
Real estate appraisal
Credit life insurance
Personal financial consulting
64
Fundamental forces of change:
Change Investment Banking
65
Fundamental forces of change:
Deregulation and Re-regulation
Deregulation
Reregulation
66
Fundamental forces of change:
Financial Innovation
Innovation may be caused by a bank
wanting to:
Enter into a new geographic market
Enter into a new product market
Deliver services less expensively
etc.
67
Fundamental forces of change:
Securitization
Securitization
The process of converting assets into
marketable securities
Mortgages
68
Fundamental forces of change:
Globalization
Globalization
Is the evolution of markets and institutions
where geographic boundaries do not restrict
financial transactions or competition.
69
Fundamental forces of change:
Technology
Advances in Technology
Advances in technology increase the scope of the
global market place and competition
Advances in technology also reduce the need for
an intermediary by providing easy access to
information
Increasing competition by reducing the cost of
being an information intermediary
70
Problems
You recently graduated from university with a business degree
and accepted a position at a major corporation earning
more than you could have ever dreamed. You want to
1. Open a checking account for transaction purposes
2. Open a saving account for emergencies
3. Invest in an equity mutual fund for that far-off future called
retirement
4. See if you can find more affordable auto insurance, and
5. Borrow fund to buy a condo given you uncle said he was so
proud of your grades and he wanted to give $20,000 for a down
payment.
Make five lists of financial service firms that could provide you
with each of these services
71
Problems - Answers
(1) Financial service firms that provide checking account
services include banks, credit unions and savings and loan
associations. Even securities brokers allow you to open
checking accounts. Recently brokers such as Schwab
have become more aggressive in offering interest-bearing
online checkable accounts that often post higher interest
rates than many banks are willing to pay.
75
Rep office of foreign banks
1. Operate as liaison office
2. Conduct market research
3. Develop investment projects of foreign credit
institutions in Vietnam ;
4. Promote and monitor the implementation of
contracts, agreements signed between foreign
credit institutions and Vietnamese credit
institutions and enterprises, projects funded by
foreign credit institutions in Vietnam
No direct profitable activities
76
AN OVERVIEW OF
BANKING SECTOR
Chapter 1
77
William Chittenden edited and updated the PowerPoint slides for this edition.