Course Plan for FM 11-2 Banking and Financial Institution

GBS for Weeks 11 to 15 ( Nov.23- Dec. 27, 2019)

Topic: Banking Activities and Current Issues in Banking

Objectives:
 To understand what modern banks do
 To describe the main services offered by banks
 To understand the importance of payment system
 To understand the main forces of change in the banking industry
 To identify the current trends and issues in banking sector

Highlights
Note : For better appreciation of the topics read the details on the listed references below.

I. What do banks do?

For banks, the main source of funding is customer deposits. This funding is then invested in
loans, other investments and fixed assets and it is reported on the asset side of the balance
sheet. Banks make profits by charging an interest rate on their loans that is higher than they
pay to depositors.

As with other companies, banks can raise funds by issuing bonds and equity (shares) and
savings from past profits (retained earnings). However, the bulk of their money comes from
deposits. It is this ability to collect deposits from the public that distinguishes banks from other
financial institutions.

II. Banks and Other Financial Institutions

Banks are deposit- taking institutions and are also known as Monetary Financial Institutions
(MFI). They play a major role in country’s economy as their deposit liabilities form a major part
of country’s money supply and are therefore, very relevant to government and Central bank
for transmission of money supply.

Bank deposits function as money, as a consequence an expansion of bank deposit results in an

increase in the stock of money circulating in an economy. All other things being equal, the
money supply , that is the total amount of money in the economy will increase.

The monetary function of bank deposits is often seen as one of the main reasons why deposit
taking institutions are subject to heavier regulation and supervision than non-deposit taking
institution counterparts such as insurance companies, pension funds, investment companies
and finance houses.
 One further feature that distinguish monetary financial institutions from other financial
corporation lies in the nature of financial contract deposit holdings are said to be discretionary
in the sense that savers can make discretionary decisions concerning how much money to hold
and for how long. Depositors are free to decide the frequency and amount of their
transactions.

On the other hand, holding assets from other financial institutions requires a contract which
specifies the amount and frequency of flow of funds. For example, the monthly contribution to a
pension fund or to an insurance provider are normally fixed and pre – determined therefore,
the flow of funds in and out of the financial intermediaries is described as contractual.

It is important to keep in mind that there is no unique, universally accepted classification of

financial intermediaries. Regulations, financial conglomeration, advances in information
technology, financial innovation, increased competition and globalization have All contributed
to change the industry in recent years.

All countries have regulations that define what banking business is which include the
following range of services/activities:

 Accepting deposits
 Issuing e-money
 Implementing and carrying out contracts of insurance
 Dealing in investment
 Managing investment
 Advising on investment
 Safeguarding and administering investment
 Arranging deals in investment
 Advising on regulated mortgage contract
 Entering into and administering a regulated mortgage contract
 Establishing and managing collective investment scheme
 Establishing and managing pension schemes.

III. Bank Services

Modern banks offer a wide range of financial services:

A. Payment Services . Banks offer facilities that enable customers to make payment. It is
defined as any organized arrangement fro transferring value between its participants.
Hefferman(2005) defines payment system as a by-product of intermediation process, as it
facilitates the transfer of ownership of claims in the financial sector. Payment services
can be either paper-based or electronic and an efficient payment system forms the basis
of well functioning financial sector.

The different types of cashless payments include:

 Cheque
  Cash transfer
 Standing order
 Direct debit
 Plastic cards e.g. credit cards; debit cards ,’Cheque guarantee cards, charge cards and
chip cards.

B. Deposit and Lending Services.

1. Current and checking accounts. Banks offer a broad range of current accounts
tailored to various market segment and with various other services attached.
2. Time and savings deposit
3. Consumer loans and mortgage

In addition to deposit and lending service, many banks have diversified into a broader range
of areas offering a “one stop” facility to meet all retail customer’s financial needs that
include an extensive array of investment products, pension, insurance and other services.

C. Investment pension and insurance services

1. Investment products - offered to retail customers that include various securities

related products.
2. Pension and insurance services. Pension services provide retirement income to those
contributing to pension plans.

D. E- Banking

1. E – Money – Include reloadable electronic money instruments in the form of stored

value cards and electric tokens stored in computer memory.
2. Remote payments - are payment instruments that allow access to customer account.

IV. Current Issues in Banking

This part outlines the trends that have characterized banking sector in most advanced
economies and for some emerging and developing countries :

1. Structure and conduct deregulation.

Financial deregulation essentially consists of removing controls and rules that in the past have
protected financial institutions.

Structural deregulation refers to the opening up or liberalization of the financial markets to allow
institution to compete more freely.

2. Supervisory re-regulation . It is defines as the process of implementing new rules, restriction and
control in response to market participants ‘ efforts to circumvent.

3. Competition. Competitive pressure on banks have increased as a result of structural deregulation

and liberalization.
4. Financial Innovation and the adoption of new technologies. Financial innovation is an on going
process whereby private parties experiment. It is defines as an act of creating and then popularizing
new financial instruments as well as new financial technologies, institution and market.

•Financial system/institutional . This is relating to business structure or to change s in the legal systems
•Process innovation. Introduction of new business process.
•Product innovation. Introduction of new credit, deposit insurance and leasing.

5.Mergers and Acquisition.

Mergers is when two banks agree to go forward as a new single bank.

Acquisition is when a bank takes over another one and clearly becomes new owner.
The most common motives for mergers and acquisition are discussed in the chapter.

6.Conglomeration. It is defined as a group of enterprises formed by different types of financial

institutions operating in different sectors of financial institutions.

7.Other responses to the forces of change:

•Disintermediation . It is the process whereby economic units are by passed
•Off Balance Sheet (OBS) activities
•Securities .Refers to the process whereby loans and other financial resources
are being purchased.
8.Globalization. It is defined as the evolution of markets and institutions such that geographic
boundaries are considered boundless.
Note: For clearer understanding of the topics it is recommended that you read the details of the
Chapter.

Answer the following Exercises for Evaluation:

On Banking Activities and Current Issues in Banking:

1. Recent trends indicate mergers and acquisition are becoming increasingly common. What do you
think are the most common motives attributed to this “trend” in the global banking sector.

2.Despite the growing trend towards more banking and financial services being offered on line, some
researchers have cast doubts on the overall profitability of internet banking. Is internet banking
profitable? Give four (4) most common factors that affect its profitability and make suggestions on how
to mitigate their impact on internet banking profitability.

3.Compare and contrast the distinguishing features of Deposit Taking Institutions (DTI) from Non
Deposit Taking Institutions(NDTI).

4. Discuss the main characteristics/features of the different types of plastic cards as a form of cash less
payment service.
5. The widespread use of technology is not without risk, discuss four(4) possible problems/risks arising
from the use of technology and the corresponding ways to prevent if not lessen their impact.

References:
1. Casu, Barbara, Claudia Girardone & Philip Molyneux.2006. Introduction to Banking. Pearson
Educ. Ltd. Essex , England
2. Leuterio, Mercedes and Consuelo Estepa.2009. Banking – Theory & Practice. Anvil Pub. Inc.
Manila.
3. Humpel, George and Donald Simonson. 1998. Bank Management. Pearson Prentice Hall.
New York.
4. Keown, Arthur , John Martin and David Scott.2005. Financial Management – Principles and
Application. Pearson Prentice Hall. New York
5. Mejorada, Nenita .2001. Investment Management and Personal Finance. 1st ed., JMC Press,
Quezon City , Phils.
6. Any books on Central banking & financial institutions
7. Internet

Important : Kindly submit your answers to exercises preferably on or before December 15,
2019 to have ample time to submit your grades. In lieu of Final examination, all
exercises/assignments will serve as bases of evaluation for your Final term
grade.

Thank you.

JULIO R. ESMADE
Professor
(july_esmade@yahoo.com/jresmade@neu.edu.ph)