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Legal Definition of A Commercial Bank: Credit Risk
Legal Definition of A Commercial Bank: Credit Risk
Legal Definition of A Commercial Bank: Credit Risk
Any institution that qualifies for deposit insurance administered by central bank
---------------------------------------------------------------------------------------------------------------------Types of Banks
Commercial Bank
[Sell deposits and make loans to businesses and individuals]
Savings Bank
[ Attract savings deposits and make loans to individuals and families]
Community Bank
[ Is smaller, locally focused commercial and savings bank]
Money Center Bank
[ Is large commercial bank based in leading financial centers]
Investment Bank
[ Underwrite issues of new securities by their corporate customers]
Merchant Bank
[ Supply both debt and equity capital to businesses]
Central Bank
International Bank
[ Is commercial bank present in more than one nation]
Mortgage Bank
[ Provide mortgage loans on new homes but do not sell deposits]
Virtual Bank
[ Offer its services over the internet]
-------------------------------------------------------------------------------------------------------------------------Discuss traditional functions & new functions of banks??
Traditional Functions
Accepts Deposits for Transactions and Saving
Makes Loans to Consumers, Business, and Government
Invests in Securities
Makes Payments for Customers (Checking)
Provides Currency and Coin for Customers
Provides Safekeeping of Valuables
Exchanges Currencies
Trust Services
Service Proliferation
Rising competition
Government Deregulation
An Increasingly Interest-Sensitive Mix of Funds
Technological Change
Consolidation and Geographic Expansion
Convergence
Globalization
Increased Risk of Poor Performance and Failure
Credit Risk
The Probability that Some of the Financial Firms Assets Will Decline in Value and Perhaps Become Worthless
Liquidity Risk
Probability the Financial Firm Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit
Withdrawals and Other Cash Needs
Market Risk
Probability of the Market Value of the Financial Firms Investment Portfolio Declining in Value Due to a Change
in Interest Rates
Operational Risk
Uncertainty Regarding a Financial Firms Earnings Due to Failures in Computer Systems, Errors, Misconduct by
Employees, Floods, Lightening Strikes and Similar Events or Risk of Loss Due to Unexpected Operating
Expenses
Reputation Risk
This is Risk Due to Negative Publicity that can Dissuade Customers from Using the Services of the Financial
Firm. It is the Risk Associated with Public Opinion.
Capital Risk
Probability of the Value of the Banks Assets Declining Below the Level of its Total Liabilities.
-----------------------------------------------------------------------------------------------------------------------Reasons for Bank Regulation
1. To protect the public's savings
2. To control the money supply
3. To ensure adequate supply of loans and to ensure fairness
4. To maintain confidence in the system
5. To avoid monopoly powers
6. To provide support for government activities
7. To support special sectors of the economy
Governments around the world have created policy for banks and other financial service firms in an
effort to safeguard the publics savings, bring stability to the financial system, and prevent abuse of
financial service customers.
From the technical perspective, the following policies of a government can impact business directly or
indirectly: (a) taxation, (b) subsidies, (c) interest rates, (d) exchange rates, and (e) public-private
partnerships.
The government policy in a politically stable country will also be different from an unstable country. In
a stable political system, a government can take sustained business-friendly decisions to strengthen local
business.