1

THE BUSINESS
OF BANKING

1.1
1.2
1.3
1.4

Slide 1

Introduction to Banking
Role of Banks in the Economy
How the Banking System Works
Other Financial Institutions

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Lesson 1.1

INTRODUCTION
TO BANKING

GOALS

Define the business of banking

Identify trends in modern banking

Slide 2

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WHAT
WHAT IS
IS A
A BANK?
BANK?
A bank is a business.
Banks sell their services to earn money.
Banks must earn a profit to survive.

Slide 3

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A
A UNIQUE
UNIQUE BUSINESS
BUSINESS
The services banks offer to customers have to do
almost entirely with handling money for other people.
Money is a medium of exchangean agreed upon system
for measuring values of goods and services.
Money shows how much something is worth.

A bank is a financial intermediary for the safeguarding,

transferring, exchanging, or lending of money.
An intermediary is a facilitator acting between parties.
Banks facilitate the flow of money throughout our economy.
Slide 4

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TYPES
TYPES OF
OF BANKS
BANKS
Commercial banks
Retail banks
Central banks

Slide 5

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BANKING
BANKING TODAY
TODAY
Traditionally, banking was viewed as a solid and
slow-moving industry.
Banking today is an exciting, fast-moving,
around-the-clock, around-the-world activity.

Slide 6

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MERGERS
MERGERS
A merger occurs when one or more banks join
or acquire another bank or banks.
Mergers increase the size of banks, giving them
more resources.
Mergers decrease the number of banks.
Mergers have created an opening for a new
wave of small local banks.

Slide 7

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TOP TEN LARGEST

BANKS WORLDWIDE

(Ranked by size of assets)

Bank
Mizuho Financial Group
Citigroup
Deutsche Bank
JP Morgan Chase Co.
Bank of Tokyo-Mitsubishi
HSBC Holdings
Hypo Vereinsbank
UBS
BNP Paribas
Bank of America Corp.
Slide 8

Country
Japan
United States
Germany
United States
Japan
United Kingdom
Germany
Switzerland
France
United States
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TECHNOLOGY
TECHNOLOGY
Impact on bankers
Accounting, auditing, and examining functions have
been taken over by fast and efficient technology.
Funds transfer, record keeping, and financial
analyses have become instantaneous.

Impact on consumers
Automated teller machines (ATMs)
Smart cards
Online banking
Slide 9

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COMPETITION
COMPETITION
As government regulations have changed,
competition between banks has become fiercer.
Banks compete with each other and with other
businesses that sell financial services.

Slide 10

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Lesson 1.2

ROLE OF BANKS IN
THE ECONOMY

GOALS

List banking activities that contribute to

economic stability
Explain how banking expands the
economy

Slide 11

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BANKS
BANKS AND
AND ECONOMICS
ECONOMICS
Money is a medium of exchange and the basis
of the modern economy.
Banks and other institutions play a critical role in
performing services that are essential to the
functioning of an economy.

Slide 12

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KEEPING
KEEPING YOUR
YOUR MONEY
MONEY SAFE
SAFE
Record keeping
Identification
Enforcement
Transfer security
Sound business practices

Slide 13

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SPREADING
SPREADING THE
THE WEALTH
WEALTH
Banks play a key role in transferring money to
provide growth and stabilizing the monetary
supply.
Bank lending makes money available to
consumers and businesses to make purchases
they might not otherwise be able to make.

Slide 14

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TRANSFERRING
TRANSFERRING
Between banks
Between banks and individual customers
Between banks and industry
Between banks and governments
Between governments

Slide 15

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LENDING
LENDING
Loans to businesses
Loans to governments
Loans to individuals
Credit cards
Home loans
Automobile loans

Slide 16

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CREDITWORTHINESS
CREDITWORTHINESS
Evaluating the creditworthiness of customers
is a banking function that affects the economy
at large.
Banking policies and regulations regarding
creditworthiness and the ratio of loans to
deposits help guarantee a secure financial
environment.

Slide 17

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GUARANTEEING
GUARANTEEING THE
THE MONEY
MONEY
In the United States, banks and the government work together
to form the banking system and to make sure the money
supply is adequate, appropriate, and trustworthy.
Much of this guarantee is backed through the central banking
function of the Federal Reserve.
Individual banks work with the government to implement
monetary policy, perform exchange functions, and defeat
counterfeiters of currency.
Banks guarantee their own policies.
Slide 18

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THE
THE SUBSTANCE
SUBSTANCE OF
OF SOCIETY
SOCIETY
A great part of the economic system is
psychological.
Banks are at the heart of our financial system,
and their effect on your life cannot be calculated.

Slide 19

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Lesson 1.3

HOW THE BANKING

SYSTEM WORKS

GOALS

Explain how banks acquire money to do

business
Identify new services that banks offer to
stay competitive

Slide 20

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MONEY
MONEY AT
AT WORK
WORK
Banks earn money in various ways.
Most of their income comes from the interest
that people or businesses pay as they repay a
loan.
When banks lend money, they put it to work.

Slide 21

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THE
THE SPREAD
SPREAD
The difference between what a bank pays in
interest and what it receives in interest is called
the spread, or net interest income.
The spread is not pure profit. The spread is
income, or revenue.
Profit is what is left of revenue after costs are
deducted.

Slide 22

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OTHER
OTHER FUNDS
FUNDS
In addition to interest income, banks have other
sources of income.
They charge for various services such as rental of
safe-deposit boxes, account maintenance fees for
checking accounts, fees for online bill payments,
and ATM transaction fees.
Banks make money on investments.
Banks may have funds at their disposal from
stockholder investments.
Slide 23

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ASSETS
ASSETS AND
AND LIABILITIES
LIABILITIES
An asset is anything of value. In financial terms,
that usually means money.
A liquid asset is anything that can readily be
exchanged, like cash.
A liability, in financial terms, is a cash obligation.

Slide 24

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TWO
TWO PRINCIPLES
PRINCIPLES OF
OF BANKING
BANKING
A banks liabilities exceed its reserves.
A banks liabilities are more liquid than its
assets.

Slide 25

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BANKS
BANKS WORKING
WORKING FOR
FOR YOU
YOU
Banking has changed radically in the last 20
years.
Large regional banks have huge resources.
Smaller banks use the flexibility that sometimes
comes with smaller size to their advantage.

Slide 26

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CHANGES
CHANGES IN
IN TRADITIONAL
TRADITIONAL SERVICES
SERVICES
Branch locations
Extended hours
Drive-up windows
Variety of checking accounts
Savings options
Personal service

Slide 27

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NEW
NEW SERVICES
SERVICES
Credit cards
Innovative lending
Automated teller machines (ATMs)
Smart cards
Online banking

Slide 28

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Lesson 1.4

OTHER FINANCIAL
INSTITUTIONS

GOALS

Explain depository financial institutions

Explain nondepository financial institutions

Slide 29

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TYPES
TYPES OF
OF FINANCIAL
FINANCIAL INSTITUTIONS
INSTITUTIONS
Depository intermediaries
Obtain funds from the public
Use the funds to finance their business

Nondepository intermediaries
Do not take or hold deposits
Earn their money by selling specific services or
policies

Slide 30

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DEPOSITORY
DEPOSITORY INTERMEDIARIES
INTERMEDIARIES
Commercial banks
Savings and loan associations
Mutual savings banks
Credit unions

Slide 31

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NONDEPOSITORY
NONDEPOSITORY INTERMEDIARIES
INTERMEDIARIES
Insurance companies
Trusts companies/pension funds
Brokerage houses
Loan companies
Currency exchanges

Slide 32

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