guy hargreaves acf-104. recap of yesterday the fundamental principles of financial intermediation...
TRANSCRIPT
Banking and Financial Institutions
Guy HargreavesACF-104
2
Recap of yesterdayThe fundamental principles of financial
intermediation“Financial claims” - marketable and non-marketableIdentify various financial markets, and banking and
non-banking financial intermediaries Deposit-taking and non-deposit-taking financial
intermediariesBanking versus shadow banking markets The function and characteristics of money and
monetary basesThe importance of market liquidity to the operation of
the global economy
Banking Systems and commercial banks within developed economies
4
Today’s goalsUnderstand banking systems within
developed economiesAppreciate the structure of a typical
commercial banking system Review payment systems and how they
operateDescribe the main products and services
offered by commercial banks Understand the commercial banking
customer base
5
Definition for this courseThis course focuses on Commercial BankingCommercial banking can be thought of as any
regulated banking activity operated as a businessFor this course we will define commercial
banking as: Retail banking (including Private banking) Wholesale (or Corporate) banking
We will also look at investment banking Important to note investment banking activity is not
usually regulated by a Central Bank It is regulated when conducted by a regulated bank
6
Two basic economic sectorsPrivate sector – not controlled by the State
Individuals Private / public companies Non-profits / charities
Public sector – controlled by the State Federal government State governments Local governments State owned enterprises
7
Where does commercial banking fit?Private sector
Individuals – banking licenses not generally available
Private / public companies – most commercial banks Non-profits / charities – some banks eg
Microfinance
Public sector Federal government – Central Banks State governments - no Local governments - no State owned enterprises – few SOE commercial
banks remain
8
Who are the savers / borrowers?Private sector
Individuals – both savers and borrowers Private / public companies – both savers and
borrowers Non-profits / charities – goal usually to be neither
Public sector Federal government – mostly borrowers State governments – mostly borrowers Local governments – mostly borrowers State owned enterprises – mostly borrowers
9
Are commercial banks savers?Like any for-profit entity, commercial banks
can be savers and borrowers themselves Lending out profits not paid to shareholders Borrowing for capital expenditure
If a commercial bank is a saver / borrower, it will conduct this activity with its own capital
This activity is considered “proprietary” ie not performed in the course of its financial intermediation activity
10
The financial systemRetail / WholesaleCommercial Banks
Investment Banks
11
What is a banking system?The Banking System is that part of a financial
system in which regulated banks operate Does not include Capital Markets which are part of
the Financial Markets Includes payments, Central Bank operations, bank
loans, deposits – any activity which involves a regulated bank
Whether the activity is regulated is an important distinction
Unregulated activity is conducted outside of the security and support provided by Central Bank regulated commercial banks
12
What is a banking system?Banking systems are usually made up of:
Central Banks Regulated commercial banks
Retail (including Private) banks Wholesale banks
Payments systems
Regulated banks deal in financial markets but markets are not usually considered as part of the banking system
Investment banks deal in financial and capital markets but if unregulated they are not considered part of the banking system
13
What else do commercial banks do?Conduct operations in financial markets, eg
Hedging risks for customers Risk management for their own balance sheet
Operate payments systemsFacilitate trade flowsHelp with the conduct of monetary policySupport economic growthAssist in executing development policies
14
Recall: payment systemsA Payment System is any organised system
established to allow participants to transfer financial assets between themselves
Payments take place for many reasons: In exchange for goods and services Creation or repayment of a financial liability/asset
Commercial banks have historically played a key role in payments systems
15
Payment systems - RTGS“Interbank” payment systems use Real Time
Gross Settlement (RTGS) to transfer money between bank participants
Retail participants must hold some form of account with a commercial bank in the payments system
To effect payment a participant will instruct its bank to transfer money from that participant’s account to the proper account of another participant at its own bank
The two banks “settle” the transaction through adjustment of their own accounts held with the relevant Central Bank
Central Banks usually manage RTGS systems
16
Payment systems - SWIFTInternational payment systems use Society
for Worldwide Interbank Financial Telecommunication (SWIFT) to transfer money between participants
SWIFT is does not alter the underlying mechanics of individual domestic payment systems
SWIFT is simply a system that arranges domestic payments between international participants
Unless the banks handling a SWIFT transaction are primary deposit-taking institutions in the currency of the transaction, instructions will be handled through a correspondent banking arrangement
17
Commercial bank payment productsCommercial banks offer many ways for their
clients to instruct a payment: Cheques Online transfers Standing orders Credit cards Debit cards ATMs Smartphones SMS
18
Correspondent bankingCommercial banks often hold accounts with
other domestic or international commercial banks
Nostro account: “our money held by you” Vostro account: “your money held by us”
When a bank holds an account with another bank it is said to have a Correspondent Banking Relationship
If a bank does not maintain an account with its Central Bank it needs to have a correspondent banking relationship with one that does
19
Commercial banking productsRetail and wholesale commercial banks offer a
wide range of products and services – including:
Current and chequing accounts Term deposits Consumer loans and mortgages Credit and Debit Cards Cash management services Corporate and SME loans Trade Finance Financial market products and services Online banking
20
Investment banking productsInvestment banks offer a wide range of
products and services – including: Capital market product arranging and underwriting Financial market products and services Securitised or asset backed arranging Merger and acquisition advisory
21
Mortgage productsOne of the most fundamental banking products
A bank lends money to a borrower to purchase a house, apartment or other property
Only a portion of the property purchase price is lent (eg 50%) – the balance is funded from savings of the borrower
The borrower repays loan principal and interest over an agreed time frame (eg 30 years)
The bank takes a “mortgage” over the property which entitles it to seize and sell the property to repay the loan if the borrower defaults
Banks are at the heart of retail property financing across the globe
22
Credit and debit cardsA group of banks were responsible for the
development of widely used credit cards such as Visa and Mastercard
Card products offer the great convenience of being cash-like and widely accepted
Credit cards offer the holder an unsecured line of credit that can be drawn to pay for goods and services
Debit cards are accounts that must have positive fund balances before they can be used to pay for goods and services
23
Cash management servicesCorporate customers have complex daily cash
management requirements including: Multi currency cash accounts Account sweeping and reconciliation Lockbox facilities Subsidiary account management Foreign exchange
Sophisticated online cash management solutions are now offered by many banks to help corporate customers manage their business flows
24
Trade financeCommercial banks are central to the
financing of trade flows across the globe: Guaranteeing payments for exporters and importers
through correspondent banking relationships Financing shipments of commodities around the
globe Working capital finance for trading companies Inventory financing
25
Financial market productsCommercial banks offer a range of financial
market products and services including: Foreign exchange and forwards Money market products Syndicated loans Derivative risk management products Repo products
26
Corporate banking productsCorporate banking customers range from
SME to mid market to large listed multinational companies (MNCs)
These customers have a range of commercial banking needs including:
Lease and hire purchase financing Invoice and receivable discounting Corporate loans and commercial paper (CP) Project finance
27
Commercial banking customersTraditional commercial banking customers
broadly fall into categories of: Household savers, or borrowers for purchases of
property or smaller ticket personal goods (eg cars) Corporate borrowers entering into bilateral or club
loans for capital expenditure (capex), working capital or M&A
Governments funding infrastructure or deficits
28
Modern banking customersPost deregulation in the 1980s, the number
and type of bank customer has grown strongly
Retail customers now also include: Financial market traders and speculators Margin loan borrowers Advisory customers (Private Banking, estate
planning etc) “Sub-prime” customers Traditional deposit and consumer loan customers Etc..
29
Modern banking customersWholesale commercial banking customers
now also include: Private Equity funds Pension and Mutual funds Hedge Funds Mortgage and other originators NBFIs Traditional corporate borrowers Corporate risk managers Syndicated loan borrowers Etc…