slike bài giảng quản trị ngân hàng chương 1 an overview of banking sector

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 busin

William Chittenden edited and updated the PowerPoint slides for this edition.

AN OVERVIEW OF BANKING SECTOR

Chapter 1

1 What is a bank?

 Definition by functions it serves

savers to borrowers (financial intermediation)

& in paying for goods and services (payment

intermediation)

 Definition by services it offers to

customers

offer trust services, manage cash, etc

What is a bank?

 Necessity of a legal definition:

 Regulation purpose

 Banking service menu is expanding

 Other financial-service institution provide similar services

What is a bank?

 Definition by legal basis for regulation

 US: any institution that could qualify for

deposit insurance administered by the FDIC

 VN (Law of credit institution 2004): a credit institution permitted to conduct all banking activities and other related business

operations.

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 demand 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

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

2 Goals of bank regulation

 Ensure safety and soundness of banks protecting

public’s savings and confidence

 Provide an efficient and competitive financial system

 Provide monetary stability to achieve national broad

economic goals

 Maintain the integrity of the payments system

 Ensure equal opportunity and fairness in the public’s access to financial services

 Provide government with credit, tax revenues and other services

 Help sectors that have special credit needs

Banking principal regulatory agencies (US)

 Federal Reserve System (FED)

 Comptroller of the Currency (OCC)

 Federal Deposit Insurance Corporation (FDIC)

 Department of Justice

 Securities and Exchange Commission (SEC)

 State Boards of Commissions

Banking principal regulatory agencies (VN)

 State Bank of Vietnam (SBV)

 Deposit Insurance of Vietnam (DIV)

 Ministry of Finance (MOF)

 State Securities Commission of Vietnam (SSC)

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

Shortcomings of restrictive bank regulation

make good decisions, but create a struggle

between regulators and banks going on definitively

more-regulated banks

The Federal Reserve System

 The Federal Reserve System

 Fundamental Functions

 Conduct monetary policy

 Provide and maintain the payments system

 Supervise and regulate banking operations

 Organization

 Board of Governors

 12 Federal Reserve District Banks

State Bank of Vietnam

The Federal Reserve System

 Monetary Policy Tools

 Open Market Operations

 Open market purchases (sales) increase (decrease) reserves & the money supply

3 Commercial banks and the economy -Bank functions

small businesses and many individuals

system

4 Traditional services offered by banks – Bank services

1. Carrying out currency exchange

2. Discounting commercial notes and making

business loans

3. Offering savings deposits

4. Safekeeping of valuables

5. Supporting government activities with credit

6. Offering checking accounts

7. Offering trust services

More recent services offered by banks – Bank services

8. Granting consumer loans

9. Providing financial advice

10. Managing cash

11. Offering equipment leasing

12. Making venture capital loans

13. Selling insurance policies

14. Selling retirement plans

15. Dealing in securities: brokerage and

investment banking services

Carrying out currency exchange

 Bank trade one form of currency to another in

return for fee

 Start from early days of banks

 Become more complicated in the global financial market

 Be provided by large and well-experienced banks

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

Offering savings deposits

 Be the earliest and major source of fund for

making loan

 Compose of many types different in maturity, form

of currency, interest, etc.

 Be the most stable funding source

 Deposit is subject to reserve requirement and

insurance

Supporting government with credit

 Banks in Europe during the Industrial Revolution and in America during the Revolutionary War

had to purchase government bonds with a

portion of deposits

 The custom continues in the modern world

 Banks use government bond as a shelter of

liquidity risk and a source of revenue

Offering checking accounts

 Demand deposits permit depositors to write draft/ cheque for payment of goods and services

 Be one of the most important offerings of the

industry

 Service is provided by not only banks but also

credit unions, savings associations, etc.

 Today the service is extended to the internet with the use of smart cards

 Provide banks with cheap source of fund.

Offering trust services

 Banks manage financial affairs and property of

individuals and firms in return for fee

 In property management, banks acts as a trustee for wills, managing the deceased customer’s

estate,…

 In commercial trust department, bank manages pension plan for businesses and acts as an agent issuing stocks and bonds.

Granting consumer loans

 By early 20th century, banks started lending

consumers given the heavy competition for

business deposits and loans

 The trend has increased rapidly after the World

Providing financial advice

 Banks gains good reputation for understanding and experience in the financial market

 Customers ask for advice, particularly in credit

utilization, saving or investing funds

 Services provided are plentiful including financial plan preparation, marketing opportunity

consultation, fund seeking, investment options, etc

Managing cash

 Bank handle cash collection and disbursement for firms, invest temporary cash surpluses

 Service is expanded to individuals and firms

 Bank earns not only fee, but also low-cost fund

in demand deposit accounts

Offering equipment leasing

Making venture capital loans

 Finance the start-up cost of new companies

 Implement through a venture capital firm because added risk

 The venture capital firm raise fund from investors looking for high profit

Selling insurance policies

 Bank sell insurance policies through acquiring control

Selling retirement plans

 Bank actively involves in managing retirement plan of businesses make available to employees

 Incoming fund is invested to wisely selected

securities ensuring acceptable risk and return

 Bank also is in charge of dispensing payment to retired or disabled employees

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

5 Organizational form of banking industry

 Unit banking

grow and attract more resources

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

What trend in branch banking has been

prominent in the U.S in recent years?

Year # of Bank

Main Offices

# of Branch Offices

Total of U.S Bank Offices

Ave # of Branches/

Organizational form of the banking industry

 Bank holding companies

 Parent

 Subsidiaries

 One-Bank holding companies

 Mutli-Bank holding companies

Organizational form of the banking industry

 Bank holding companies

holding the stock of one or more banks

of the stock is owned

control a bank

holding companies

Exhibit 1.10

Organizational structure of the BHC

Board of Directors Parent Company

Bank Subsidiary Nonbank Subsidiaries

Bank Branches

Each subsidiary has a president and line offi cers The bottom four levels have the same organizational form as the independent bank.

Single Bank Holding Company

Multibank Holding Company Board of Directors Parent Company Bank Subsidiary Nonbank Subsidiaries Bank Subsidiary Bank Branches Bank Branches

Organizational Form of the Banking Industry

 Financial holding companies

 Special type of holding company

 Offers the broadest range of services

 List of activities offered may expand as

regulators decide what services are

‘compatible’ with banking

 Each affiliated financial firm has its own capital and management and its own profit or loss.

Organizational Form of the Banking

Industry

 Financial Holding Companies

 Can engage in financial activities not permitted in

a bank or bank holding company

 Federal Reserve may not permit a company to form

a financial holding company or a bank holding

company to convert to a financial holding

Thrift Holding Company

Real Estate Subsidiary

Financial Holding Company

Subsidiaries and Service Companies

Thrift Company Nonbank

Subsidiaries Banking

Company

Organizational form of the banking industry

 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

 Parent company’s net income is typically derived from dividends, interest, management fees from equity in subsidiaries, and interest paid on holding company debt.

Banking Business Models

Exhibit 1.17 DISTRIBUTION OF THE NUMBER OF BANKS AND TOTAL ASSETS BY TOTAL ASSETS:

1995 - 2004

Assets Size Number of

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

Banking Business Models

Exhibit 1.18

Organizational structure of an independent bank

Banking business models

 Specialty banks

 Personnel

6 Fundamental forces of change

Fundamental forces of change:

Fundamental forces of change:

Fundamental forces of change:

Off-Balance Sheet Activities

 Loan commitments

 Loan guarantees

 Standby letters of credit

 Interest rate swaps

 Futures, forwards & options

 Leases

Fundamental forces of change:

Impact of Nonbank Competition

 Captive Finance Companies

financing to customers buying the parent

company's product (e.g General Motors

Acceptance Corporation (GMAC))

 General Finance Companies

and long-term bonds Their cost of funds is higher than a bank’s, but they charge higher rates

Fundamental forces of change:

Competition for Payments Services

Fundamental forces of change:

Competition for Other Bank Services

 Trust services

 Brokerage services

 Data processing

 Real estate appraisal

 Credit life insurance

 Personal financial consulting

Fundamental forces of change:

Change Investment Banking

 National full-line firms

 Investment banking firms

 Underwriter

 Broker versus Dealer

Fundamental forces of change:

Deregulation and Re-regulation

Fundamental forces of change:

Financial Innovation

 Innovation may be caused by a bank wanting to:

 etc

Fundamental forces of change:

Fundamental forces of change:

Fundamental forces of change:

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with each of these services

William Chittenden edited and updated the PowerPoint slides for this edition.

AN OVERVIEW OF BANKING SECTOR

Chapter 1