Lecturer: Chu Mai Linh, M.Sc. LECTURE 1 BANKING AND YOU

Learning Objectives Bank history Describe a bank’s organizational structure Bank products and services The role of the banks in their communities Explain the reasons for merging or acquisitions with another bank Identify trends in banking

Banking history - In the ancient world – religious temples  Demand of finding a safe place for gold (deposit, loans, payment) - In the 13 th, 14 th and 15 th centuries – the Italian merchants - Benches (banco)  Bills of exchange, letters of credit, book entry for money and double entry bookkeeping.  Investment banking (financing trade, bills of exchange and raising money for governments by selling bonds) - In the 18 th to early 19 th, industrialization and urbanization in Europe  different types of banking: “merchant” and “commercial”.

Banking in the 20 th century The Great Depression lasted 12 years in US, during which unemployment reach 25 percent. By 1933 over 8300 commercial banks (half the banks in the nation) has failed.  deposits/life saving  Faith in the banking system. - 5 factors as main contributors to the crisis: 1. Paying interest on demand deposits 2. Underwriting securities 3. No margin requirements 4. No depositor Protection 5. Illiquid Banks

The New Laws Banking Act of 1933 (Glass-Steagall Act)  Prohibited banks from paying interest on demand deposit  Raised minimum capital requirements of national banks  Prohibited banks as members of FED from underwriting securities and affiliating with organizations dealing in securities.  Allowed FED to forbid member banks to use reserved credit for speculative purposes  Created FDIC to protect depositors at FDIC-insured banks In effect, Glass-Steagall Act seperated the activities of commercial banks from those in the sercurities industry.

Types of banks Commercial banks Taking deposits and lending money Retail or wholesale Investment banks Saving banks and cooperative banks Mortgage banks – UK building societies Credit unions

Typical Bank Organization

Bank Structure A bank needs a charter which is a document issued by a federal or state supervisory agency granting a bank the right to do business. A publicly owned company, a corporation, sells stock to the public; buyers become shareholders. The shareholders elect the directors, who serves as the governing body managing the corporation’s affairs. The directors appoint the bank’s executive officers. The board of directors usually functions through committees, such as audit, compliance, risk, credit, trusts, corporate governance and compensation committees.

Bank Structure 2 The chairman of the board, often the bank’s chief executive officer, is responsible for the policies that guide the bank. The bank’s president, typically the chief operating officer, is responsible for applying those policies and supervising operations.

Bank Structure 3 Depending on size and scope of the bank, various departments or divisions may created and specific individuals made responsible for certain functional areas. Accounting and Finance: organizes, record and reports all transactions that present the financial condition of the bank. Audit and Loan Review: make sure the bank is safe from risk such as internal and external fraud and under performing-loans. Commercial and Business Banking: delivers loan, deposit and payment services to businesses. Compliance: Ensures that all bank staff and department are in compliance with banking laws and the accosiated regulations. Consumer Banking: delivers loan, deposit and payment services to individuals. Funds Management: Balances the bank’s needs for liquidity, safety and income. Human Reources: recruits, trains and compensates bank staff.

Bank structure 3 Information Systems Operations Insurance International Internet Banking Marketing and Sales Trust: administers trusts and trust-related activities for individuals and businesses. Wealth Management: provides personalized service to valued high net-worth customers.

Bank and Financial Holding Companies

Bank holding company BHC is company that has control over one or more banks or other BHCs. BHCs may engage in financial activities through nonbank subsidiaries that banks themselves are not allowed to engage in, such as securities brokerage and underwriting stocks and bonds. The Gramm-Leach-Bliley Act (1999) authorized financial holding companies (FHCs) so that banks and other businesses could engage in a broad array of finance-related activities (banks, insurance companies, brokerage firms and securities dealers)

Bank products and services Traditional products and services - Traditional banking involves accepting money from depositors and loaning it to borrowers Question: - Why do depositors choose to save their money in a bank rather to keep it at home? Banks complement basic deposit and loan services with related products and services the benefit individuals and businesses. (eg. Trusts, online bill payment and safe keeping)

Bank products and services 2 Nontraditional products and services - Securities underwriting, insurance products… - Provide management consulting services - Provide services associated with mortgage banking, finance companies. - Provide trust services - Issue credit cards - Provide management consulting services - Provide financial advice to institutions and high net-worth individuals. - Offer combined investment advisory and securities brokerage services.

Electronic Services Most bank offer online banking. Customer can verify account balances, pay bills, and apply for loans online. Banks offer customers online loan closings,

Marketing and Cross-selling services Cross-selling: a marketing and sales practice whereby additional products and services are offered to a current customer. For example, if a customer wants a mortage, a banker may cross-sell such products as: Question: Why does bank offer the cross-selling services?

Future trends Deregulation Expansion of financial services Intensity of Competition Margin squeeze Technological Advances Geographic Expansion