1
1.1
1.2
1.3
1.4
Slide 1
THE BUSINESS
OF BANKING
Introduction to Banking
Role of Banks in the Economy
How the Banking System Works
Other Financial Institutions
Copyright South-Western, a division of Thomson, Inc.
Lesson 1.1
INTRODUCTION
TO BANKING
GOALS
Define the business of banking
Identify trends in modern banking
Slide 2
Copyright South-Western, a division of Thomson, Inc.
WHAT IS A BANK?
A bank is a business.
Banks sell their services to earn money.
Banks must earn a profit to survive.
Slide 3
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 4
Copyright South-Western, a division of Thomson, Inc.
TYPES OF BANKS
Commercial banks
Retail banks
Central banks
Slide 5
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 6
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 7
Copyright South-Western, a division of Thomson, Inc.
TOP TEN LARGEST
BANKS WORLDWIDE
(Ranked by size of assets)
Bank
Country
Citigroup
United States
Mizuho Financial Group Japan
UBS
Switzerland
Sumitomo Mitsui Fin. Grp. Japan
Deutsche Bank Group
Germany
Mitsubishi Tokyo Fin. Grp. Japan
HSBC Group
United Kingdom
JP Morgan Chase & Co. United States
BNP Paribas
France
Bayer HypoVereinsbank Germany
Slide 8
Copyright South-Western, a division of Thomson, Inc.
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
Slide 9
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 10
Copyright South-Western, a division of Thomson, Inc.
Lesson 1.2
ROLE OF BANKS IN
THE ECONOMY
GOALS
List banking activities that contribute to
economic stability
Explain how banking expands the
economy
Slide 11
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 12
Copyright South-Western, a division of Thomson, Inc.
KEEPING YOUR MONEY SAFE
Record keeping
Identification
Enforcement
Transfer security
Sound business practices
Slide 13
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 14
Copyright South-Western, a division of Thomson, Inc.
TRANSFERRING
Between banks
Between banks and individual customers
Between banks and industry
Between banks and governments
Between governments
Slide 15
Copyright South-Western, a division of Thomson, Inc.
LENDING
Loans to businesses
Loans to governments
Loans to individuals
Credit cards
Home loans
Automobile loans
Slide 16
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 17
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 18
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 19
Copyright South-Western, a division of Thomson, Inc.
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
Slide 20
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 21
Copyright South-Western, a division of Thomson, Inc.
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 (or net income) is what is left of revenue
after expenses are deducted.
Slide 22
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 23
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 24
Copyright South-Western, a division of Thomson, Inc.
TWO PRINCIPLES OF BANKING
A bank’s liabilities exceed its reserves.
A bank’s liabilities are more liquid than its
assets.
Slide 25
Copyright South-Western, a division of Thomson, Inc.
TEST OF BANK PROFITABILITY
Return on assets (ROA)
Net income  Total assets  Return on assets
Return on equity (ROE)
Net income  Total equity  Return on equity
Slide 26
Copyright South-Western, a division of Thomson, Inc.
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.
Slide 27
Copyright South-Western, a division of Thomson, Inc.
CHANGES IN TRADITIONAL SERVICES
Branch locations
Extended hours
Drive-up windows
Variety of checking accounts
Savings options
Personal service
Slide 28
Copyright South-Western, a division of Thomson, Inc.
NEW SERVICES
Credit cards
Innovative lending
Automated teller machines (ATMs)
Smart cards
Online banking
Slide 29
Copyright South-Western, a division of Thomson, Inc.
Lesson 1.4
OTHER FINANCIAL
INSTITUTIONS
GOALS
Explain depository financial institutions
Explain nondepository financial institutions
Slide 30
Copyright South-Western, a division of Thomson, Inc.
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
Slide 31
Copyright South-Western, a division of Thomson, Inc.
DEPOSITORY INTERMEDIARIES
Commercial banks
Savings and loan associations
Mutual savings banks
Credit unions
Slide 32
Copyright South-Western, a division of Thomson, Inc.
NONDEPOSITORY INTERMEDIARIES
Insurance companies
Trusts companies/pension funds
Brokerage houses
Loan companies
Currency exchanges
Slide 33
Copyright South-Western, a division of Thomson, Inc.