T.1 Banking PDF

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BANKING AND FINANCIAL INSTITUTIONS T-1. WHAT IS A BANK? Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). Primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds (in ...

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BANKING AND FINANCIAL INSTITUTIONS T-1. WHAT IS A BANK? Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). Primary role is to take in funds —called deposits—from those with money, pool them, and lend them to those who need funds (in general, through loans). The amount banks pay for deposits and the income they receive on their loans are both called interest, and derive a profit from the difference in the interest rates charged and paid. Depositors/Borrowers can be individuals and households, financial and nonfinancial firms, or national and local governments. A bank is a financial intermediary and money creator that creates money by lending money to a borrower, thereby creating a corresponding deposit on the bank's balance sheet. Lending activities can be performed directly by loaning or indirectly through capital markets. A bank is an institution that deals in money and its substitutes and provides other financial services. Concretely, some of the bank’s operations are:            

Attract deposits from individuals and legal entities (demand and time deposits) Placement of funds in its own name and for its own account on the terms of repayment, maturity and payment (credit) Opening and maintaining bank accounts of clients Settlements on behalf of individuals and entities, including correspondent banks, through their bank accounts Collection of cash, bills, payment and settlement documents and settlement services for individuals and legal entities Purchase and sale of foreign currency in cash and non-cash The issuance of bank guarantees Issuance of guarantees for third parties providing for the fulfillment of obligations in cash Acquisition of the right to claim from a third party execution of monetary obligations (factoring) Trust funds and other property under the contract with individuals and entities (trust operations) Leasing operations Consulting and information services

The legal transactions executed by a bank in its daily business, such as providing loans, mortgages and investments, depends on the focus and size of the bank. Usually, retail banks are those which provide loans and maintain deposits, whether investment banks are more focused on big deals and consulting services. In those transactions, we consider two kinds depending on where are placed in the balance sheet of the bank:

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Passive operations: such as deposits from customers, with no credit risk, and paying an interest to them. Active operations: such as loans to customers, with credit risk, and charging an interest rate. Banking Services: banks charge fees (no interests) as a price for these services, which are in the P&L.

Passive Operations Are those operations (liabilities) that consist on getting resources from customers’ money to finance active operations. For example:   

Current and Savings accounts Term deposits Specific products

Active Operations Are those operations (assets) that represent a payment to customers, which have some credit risk. For example:      

Advance of receivables Loans Credit facilities Lease Guarantees Out of the balance but with credit risk Letters of Credit

Banking Services Banks provide services, and can work as a broker or intermediate agent. For example:     

Receivables management Stock Market transactions Financial advisory Reports Foreign operations

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