1 THE BUSINESS

OF BANKING
1.1 Introduction to Banking
1.2 Role of Banks in the Economy
1.3 How the Banking System Works
1.4 Other Financial Institutions

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 Lesson 1.1
INTRODUCTION
TO BANKING
GOALS
Define the business of banking
Identify trends in modern banking

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WHAT IS A BANK?

A bank is a business.
Banks sell their services to earn money.
Banks must earn a profit to survive.

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A UNIQUE BUSINESS

The services banks offer to customers have to do

almost entirely with handling money for other people.
Money is a medium of exchange—an agreed upon system
for measuring values of goods and services.
Money shows how much something is worth.
A bank is a financial intermediary for the safeguarding,
transferring, exchanging, or lending of money.
An intermediary is a facilitator acting between parties.
Banks facilitate the flow of money throughout our economy.
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TYPES OF BANKS

Commercial banks
Retail banks
Central banks

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BANKING TODAY

Traditionally, banking was viewed as a solid and

slow-moving industry.
Banking today is an exciting, fast-moving,
around-the-clock, around-the-world activity.

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MERGERS

A merger occurs when one or more banks join or

acquire another bank or banks.
Mergers increase the size of banks, giving them
more resources.
Mergers decrease the number of banks.
Mergers have created an opening for a new
wave of small local banks.

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TOP TEN LARGEST
BANKS WORLDWIDE (Ranked by size of assets)

Bank Country
Mizuho Financial Group Japan
Citigroup United States
Deutsche Bank Germany
JP Morgan Chase Co. United States
Bank of Tokyo-Mitsubishi Japan
HSBC Holdings United Kingdom
Hypo Vereinsbank Germany
UBS Switzerland
BNP Paribas France
Bank of America Corp. United States
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TECHNOLOGY

Impact on bankers
Accounting, auditing, and examining functions have
been taken over by fast and efficient technology.
Funds transfer, record keeping, and financial
analyses have become instantaneous.
Impact on consumers
Automated teller machines (ATMs)
“Smart” cards
Online banking
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COMPETITION

As government regulations have changed,

competition between banks has become fiercer.
Banks compete with each other and with other
businesses that sell financial services.

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 Lesson 1.2
ROLE OF BANKS IN
THE ECONOMY
GOALS
List banking activities that contribute to
economic stability
Explain how banking expands the
economy

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BANKS AND ECONOMICS

Money is a medium of exchange and the basis

of the modern economy.
Banks and other institutions play a critical role in
performing services that are essential to the
functioning of an economy.

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KEEPING YOUR MONEY SAFE

Record keeping
Identification
Enforcement
Transfer security
Sound business practices

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SPREADING THE WEALTH

Banks play a key role in transferring money to

provide growth and stabilizing the monetary
supply.
Bank lending makes money available to
consumers and businesses to make purchases
they might not otherwise be able to make.

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TRANSFERRING

Between banks
Between banks and individual customers
Between banks and industry
Between banks and governments
Between governments

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LENDING

Loans to businesses
Loans to governments
Loans to individuals
Credit cards
Home loans
Automobile loans

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CREDITWORTHINESS

Evaluating the creditworthiness of customers

is a banking function that affects the economy
at large.
Banking policies and regulations regarding
creditworthiness and the ratio of loans to
deposits help guarantee a secure financial
environment.

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GUARANTEEING THE MONEY

 In the United States, banks and the government work together

to form the banking system and to make sure the money
supply is adequate, appropriate, and trustworthy.
 Much of this guarantee is backed through the central banking
function of the Federal Reserve.
 Individual banks work with the government to implement
monetary policy, perform exchange functions, and defeat
counterfeiters of currency.
 Banks guarantee their own policies.

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THE SUBSTANCE OF SOCIETY

A great part of the economic system is

psychological.
Banks are at the heart of our financial system,
and their effect on your life cannot be calculated.

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 Lesson 1.3
HOW THE BANKING
SYSTEM WORKS
GOALS
Explain how banks acquire money to do
business
Identify new services that banks offer to
stay competitive

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MONEY AT WORK

Banks earn money in various ways.

Most of their income comes from the interest that
people or businesses pay as they repay a loan.
When banks lend money, they put it to work.

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THE SPREAD

The difference between what a bank pays in

interest and what it receives in interest is called
the spread, or net interest income.
The spread is not pure profit. The spread is
income, or revenue.
Profit is what is left of revenue after costs are
deducted.

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OTHER FUNDS

In addition to interest income, banks have other

sources of income.
They charge for various services such as rental
of safe-deposit boxes, account maintenance
fees for checking accounts, fees for online bill
payments, and ATM transaction fees.
Banks make money on investments.
Banks may have funds at their disposal from
stockholder investments.
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ASSETS AND LIABILITIES

An asset is anything of value. In financial terms,

that usually means money.
A liquid asset is anything that can readily be
exchanged, like cash.
A liability, in financial terms, is a cash obligation.

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TWO PRINCIPLES OF BANKING

A bank’s liabilities exceed its reserves.

A bank’s liabilities are more liquid than its assets.

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BANKS WORKING FOR YOU

Banking has changed radically in the last 20 years.

Large regional banks have huge resources.
Smaller banks use the flexibility that sometimes
comes with smaller size to their advantage.

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CHANGES IN TRADITIONAL SERVICES

Branch locations
Extended hours
Drive-up windows
Variety of checking accounts
Savings options
Personal service

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NEW SERVICES

Credit cards
Innovative lending
Automated teller machines (ATMs)
Smart cards
Online banking

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 Lesson 1.4
OTHER FINANCIAL
INSTITUTIONS
GOALS
Explain depository financial institutions
Explain nondepository financial institutions

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TYPES OF FINANCIAL INSTITUTIONS

Depository intermediaries
Obtain funds from the public
Use the funds to finance their business
Nondepository intermediaries
Do not take or hold deposits
Earn their money by selling specific services or
policies

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DEPOSITORY INTERMEDIARIES

Commercial banks
Savings and loan associations
Mutual savings banks
Credit unions

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NONDEPOSITORY INTERMEDIARIES

Insurance companies
Trusts companies/pension funds
Brokerage houses
Loan companies
Currency exchanges

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