Banking Systems, 2e© Cengage/South-Western Slide 1

THE BUSINESSOF BANKINGTHE BUSINESSOF BANKING

1.1 Introduction to Banking1.2 Role of Banks in the Economy1.3 How the Banking System Works1.4 Other Financial Institutions

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Banking Systems, 2e© Cengage/South-Western Slide 2

1.1

INTRODUCTIONTO BANKING

1.1

INTRODUCTIONTO BANKING

Define the business of banking.Identify trends in modern banking.

GOALS

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Medium of exchange Financial intermediary Commercial bankRetail bankCentral banks

TERMS

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What is a Bank?What is a Bank?

• A bank is a business • Banks sell their services to earn money, and they

market and manage those services in a competitive field

• In many ways, banks are like other businesses that must earn a profit to survive

Banking Systems, 2e© Cengage Learning/South-Western

4 Functions of a Bank4 Functions of a Bank

Safeguarding fundsTransferring fundsExchanging moneyLending money

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Banking Systems, 2e© Cengage Learning/South-Western

Money is a Medium of ExchangeMoney is a Medium of Exchange

Medium of exchangeAn agreed upon system for measuring the value of goods

and servicesFinancial intermediary

An institution, firm or individual who mediates between two or more parties in a financial context.

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Banking Systems, 2e© Cengage Learning/South-Western

Making of Money VideosMaking of Money Videos

History of Money VideoHow money is made

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Banking Systems, 2e© Cengage Learning/South-Western

Banks are Financial IntermediariesBanks are Financial Intermediaries

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a bank can act as your agent for using or protecting that money, which makes it a financial intermediary for: the safeguardingTransferringExchanging or lending of money.

Banking Systems, 2e© Cengage Learning/South-Western

Closely RegulatedClosely Regulated

Because banks and money are essential to maintaining not only economies but entire societies, they are closely regulated and must operate by strict principles and procedures

In the United States, banks may be chartered by federal or state governments.

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Banking Systems, 2e© Cengage Learning/South-Western

Bank OrganizationBank Organization

• Banks are usually corporations and may be owned by groups of individuals, corporations, or both

• In the US, all federally chartered banks have been required to be corporations since 1863

• Around the world banks are supervised by governments to guarantee the safety and stability of the money supply and of the country

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Types of BanksTypes of Banks

• Commercial Banks• Retail Banks• Central Banks

Banking Systems, 2e© Cengage Learning/South-Western

Commercial BanksCommercial Banks

Generally what we think of as a bankConduct about 60% of the deposit and loan

business in the U.S.Provide familiar services

Checking and savings accountsCredit cardsInvestment services

Offer their services to both businesses & people

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Banking Systems, 2e© Cengage Learning/South-Western

Retail BanksRetail Banks

Institutions that help individuals not served by commercial banks

Mutual savings banksSavings and loansCredit unions

Help customers save money, acquire loans, and invest

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Banking Systems, 2e© Cengage Learning/South-Western

Central BanksCentral Banks

Government banks that manage, regulate, and protect the money supply & the banks themselvesIssue currencyConduct monetary policy

The Federal Reserve System performs the central banking function in the U.S.

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Banking Systems, 2e© Cengage Learning/South-Western

The Federal ReserveThe Federal Reserve

Owned by the banksBoard of Governors appointed by the President

& SenateThe President of U.S. selects the chair of the

Federal Reserve

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List four functions that define a bank.

checkpoint

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Banking TodayBanking Today

3 Factors that have changed the banking industry:1. Mergers2. Technology3. Competition

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MergersMergers

MergerWhen one or more banks join or acquire another

bank or banks

Mergers increase the size of banks, giving them more resources

Decreases the number of banks

Banking Systems, 2e© Cengage Learning/South-Western

Bank MergersBank Mergers

Banks are larger & ownership is concentratedFewer banks control more & more of the

nation’s moneyAbout 25 large banks control 45% of U.S.

assetsThe largest banks control about 75% of

domestic assets

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After a merger…After a merger…

Some consumers face higher fees Banks have less community involvement Banks offer less lending in local areas

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Banking Systems, 2e© Cengage Learning/South-Western

Banking is InternationalBanking is International

Technology has allowed banking to become more international

Instant communication & transfer of funds so geographic boundaries do not matter

U.S. banks put together huge investment transactions overseas & engage in investment banking prohibited in the U.S.

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TECHNOLOGYTECHNOLOGY

Operations have been automatedAccountingAuditingExamining functions

Instantaneous transactionsFunds transferRecord keepingFinancial analyses

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CompetitionCompetition

Competition is an ongoing challengeMore services are available to consumers as

banks compete to earn customers’ financial business

Banks are more sales oriented with an emphasis on service, innovation, and marketing

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Book WorkPg. 9 #1-4Turn in within 15 minutesThen we will go to the computer lab.

Banking Systems, 2e© Cengage Learning/South-Western

Create Your Own Currency Create Your Own Currency

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