Accounting for

Financial Institutions

Banks Accounting
Banks Accounting

Chapter (1)
Definition & Types
Bank
 Institution that deals in money and its
substitutes and provides other financial
services.
 Banks accept deposits and make loans
to customers,
 and derive a profit from the difference
in the interest paid to lenders
(depositors) and charged to borrowers,
respectively. Definitions & types Dr Makram 3
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Illustration

Loans Make Banks Accept Deposits

+ -
charged Paid

Interest Interest
Earned
Profit = IE - IP
Paid

Definitions & types Dr Makram 4

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Bank
 They also profit from fees charged
for services.
 The three major classes of banks
are:
- commercial banks,
- investment banks,
- and central banks.
Definitions & types Dr Makram 5
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Bank
 Banking depends entirely on
public confidence in the system's
soundness;
 No bank could pay all its
depositors should they
simultaneously demand cash, as
may happen in a panic.
Definitions & types Dr Makram 6
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(1) SAVING BANK:
 Financial institution that gathers savings
and pays interest or dividends to savers.
 It channels the savings of individuals who
wish to consume less than their incomes
to borrowers who wish to spend more.
 This function is performed by mutual
savings banks,
savings and loan associations,
credit unions, postal savings systems, and
municipal savings banks.
Definitions & types Dr Makram 7
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SAVING BANK:
 Unlike a commercial bank, a savings
bank does not accept demand deposits.
 Many savings banks originated as part
of a philanthropic effort to encourage
saving among people of modest means.
 The earliest municipal savings banks
developed from the municipal
pawnshops of Italy
Definitions & types Dr Makram 8
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SAVING BANK:

 Other early savings banks were

founded in Germany in 1778 and The
Netherlands in 1817.
 The first U.S. savings banks were
nonprofit institutions established in the
early 1800s for charitable purposes.

Definitions & types Dr Makram 9

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(2) Commercial bank
 Bank that makes loans to businesses,
consumers, and nonbusiness
institutions.

 Early commercial banks were limited to

accepting deposits of money or
valuables for safekeeping and verifying
coinage or exchanging one
jurisdiction's coins for another's.
Definitions & types Dr Makram 10
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Commercial bank
 By the 17th century most of the
essentials of modern banking, including
foreign exchange, the payment of interest
, and the granting of loans, were in place.
 It became common for individuals and
firms to exchange funds through bankers
with a written draft, the precursor to the
modern check.

Definitions & types Dr Makram 11

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Commercial bank
 Because a commercial bank is required to
hold only a fraction of its deposits as cash
reserves,
 it can use some of the money deposited
by its customers to extend loans.
 Commercial banks also offer a range of
other services, including savings accounts,
safe-deposit boxes, and trust services.

Definitions & types Dr Makram 12

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(3) Investment bank
 Firm that originates, underwrites, and
distributes new security issues of corporations
and government agencies.
 The Banking Act of 1933 required the
separation of investment banking and
commercial banking functions.
 Investment banks operate by purchasing all
the new securities issued by a corporation at
one price, and selling fractions of the new
issue to the investing public at prices high
enough to yield a profit.
Definitions & types Dr Makram 13
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Investment bank

Investment
Selling Securities Securities Purchasing
bank
Fraction + - All New
of New

At High At One
Profit = HP - LP
Price Price

Definitions & types Dr Makram 14

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Investment bank
 The investment bank is responsible for setting
the public offering price, which it bases on
probable demand and assessments of the
economic climate.
 A syndicate of investment banking firms
underwrites and distributes most security
issues in order to divide the risk of the new
issue.
 An initial public offering (IPO) refers to the
issuance of the first public shares of a formerly
nonpublic company.
Definitions & types Dr Makram 15
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(4) CENTRAL BANK
 Institution, such as the U.S.
Federal Reserve System, charged with regulating
the size of a nation's money supply,
 the availability and cost of credit, and the foreign
exchange value of its currency 
 Central banks act as the fiscal agent of the
government,
 issuing notes to be used as legal tender,
supervising the operations of the commercial
banking system, and implementing
monetary policy. it’s called bank of banks.
Definitions & types Dr Makram 16
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Central bank
 By increasing or decreasing the supply of
money and credit, they affect interest rates,
thereby influencing the economy.
 Modern central banks regulate the money
supply by buying and selling assets (e.g.,
through the purchase or sale of
government securities).
 They may also raise or lower the
discount rate to discourage or encourage
borrowing by commercial banks.
Definitions & types Dr Makram 17
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Central bank
 By adjusting the reserve requirement
(the minimum cash reserves that
banks must hold against their deposit
liabilities),
 central banks contract or expand the
money supply.
 Their aim is to maintain conditions that
support a high level of employment
and production and stable domestic
prices.
Definitions & types Dr Makram 18
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 Central bank
 Central banks also take part in cooperative
international currency arrangements designed
to help stabilize or regulate the foreign
exchange rates of participating countries.
 Central banks have become varied in
authority, autonomy, functions, and instruments
of action,
 but there has been consistent increased
emphasis on the interdependence of monetary
and other national economic policies, especially
fiscal policies and debt management policies.
Definitions & types Dr Makram 19
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(5) Discount rate or Bank rate
 Interest rate charged by a central bank for
loans of reserve funds to commercial bank,
and other financial intermediaries.
 The discount rate is one important indicator of
the condition of monetary policy in an
economy.
 Because raising or lowering the discount rate
alters the rates that commercial banks charge
on loans,
 Adjustment of the discount rate is used as a
tool to combat recession and inflation.
Definitions & types Dr Makram 20
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(6) Check
 Bill of exchange drawn on a bank and payable
on demand.
 Checks have become the chief form of money in
the domestic commerce of developed countries.
 As a written order to pay money,
 a check may be transferred from one person to
another by endorsement.
 Most checks are not paid in currency, but by the
debiting and crediting of bank deposits.
Definitions & types Dr Makram 21
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Check
 There are several special forms of checks.
 A cashier's check is issued by a bank and has
unquestioned acceptability, as does a certified
check,
 which is a depositor's check that has been
guaranteed by a bank.
 Traveler's checks are cashier's checks sold to
travelers,
 which must be signed twice by the payee (‫لمستفيد‬FF‫)ا‬,
once when the check is issued, and once when it
is cashed;
 Reimbursement is guaranteed if they are lost or
stolen.
Definitions & types Dr Makram 22
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 (7) National bank
 In the U.S., any commercial bank
 chartered and supervised by the
federal government and operated by
private individuals.
 National banks were created during the
Civil War under the National Bank Act of
1863 to combat financial instability
caused by state banks, and to help
finance the war effort.
Definitions & types Dr Makram
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National bank
 When these banks purchased federal bond
s and deposited them with the comptroller
of the currency,
they were permitted to circulate national
bank notes, thereby creating a stable,
uniform national currency.
 After the Civil War, the government began
to retire the bonds issued during the war,
which reduced the number of national bank
notes that could be issued.
Definitions & types Dr Makram 24
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National bank
 Concern over the inflexibility of national
bank notes led to the formation of the
Federal Reserve System in 1913, which
all national banks were required to join.

 The U.S. Treasury assumed the

obligation of issuing national bank notes
in 1935, effectively ending the issue of
money by private commercial banks.
Definitions & types Dr Makram 25
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(8) Development bank
 National or regional financial institution
designed to provide medium- and long-term
capital for productive investment.
 Such investment is usually accompanied by
technical assistance.
 Some development banks are government-
owned and -operated, while others are private.
 Many have been established under the auspices
(‫ )ت&&&حترعاية‬of the World Bank.
 Among the largest are the Inter-American
Development Bank, the Asian Development
Bank, and the African Development Bank.
Definitions & types Dr Makram 26
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 (9) World Bank
 Specialized agency of the United Nations system,
established at the Bretton Woods Conference for
postwar reconstruction.
 It is the principal international development
institution. Its five divisions are the International B
ank for Reconstruction and Development (IBRD; its
main component),
 the International Development Association
(IDA),
 the International Finance Corporation (IFC),
 the Multilateral Investment Guarantee Agency
(MIGA),
 and the International Center for Settlement of
Investment Disputes (ICSID).
Definitions & types Dr Makram 27
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 World Bank
 The IDA (founded 1960) makes interest-free
loans to the bank's poorest member
countries.
 The IFC (founded 1956) lends to private
businesses in developing countries.
 The MIGA (founded 1985) supports national
and private agencies that encourage foreign
direct investment by offering insurance
against noncommercial risks.
 The ICSID (founded 1966) was developed to
relieve the IBRD of the burden of settling
investment disputes.
Definitions & types Dr Makram 28
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