Lecture 5. Types of banking - · PDF file1.Traditional versus modern banking ... financial...

Part B. Banking products and services

Lecture 5. Types of banking

Outline

1.Traditional versus modern banking

2. Retail or personal banking

3. Private banking

4. Corporate banking

5. Investment banking

6. Islamic banking

2


3


4


!!! Universal banking trend: banking business is broadly defined to

include all aspects of financial service activity (including securities

operations, insurance, pensions, leasing and so on).

!!! Bancassurance trend: the distribution of insurance products through a

bank’s distribution channels (a package of financial services that can fulfill

both banking and insurance needs at the same time).

Advantages:

Cross-selling opportunities for banks (scope economies);

Non-interest income boosted at a time of decreasing interest margins;

Risk diversification;

Banks converting into full service financial firms (deregulation).

5


6


relates to financial services provided to consumers

it is usually small-scale in nature (all large banks

offer a broad range of personal banking services

including payments services, savings, loans,

mortgages, insurance, pensions and other services)

7


Commercial banks: are the major financial intermediaries in any

economy. They are the main providers of credit to the household and

corporate sector and operate the payments mechanism. Commercial banks

are typically joint stock companies and may be either publicly listed on the

stock exchange or privately owned.

Savings banks: savings banks have traditionally had mutual ownership,

being owned by their ‘members’ or ‘shareholders’ who are the depositors

or borrowers => they may pursue strategic objectives other than

maximising shareholder wealth or profits (they are very similar with

commercial banks, typically their business focuses on retail customers and

small businesses);

8


Co-operative banks: very similar with saving banks (originally had mutual

ownership and typically offered retail and small business banking services);

Building societies: very similar to savings and cooperative banks as they have

mutual ownership and focus primarily on retail deposit-taking and mortgage

lending; most people, who have a savings account, or a mortgage, are members and

have certain rights to vote and receive information, as well as to attend and speak

at meetings;

Credit unions: non-profit institutions owned by their members. Member deposits

are used to offer loans to the members; they are usually regulated differently from

banks;

Finance houses: provide finance to individuals/companies by making consumer,

commercial and other types of loans. They differ from banks because they typically

do not take deposits and raise funds by issuing money market (such as commercial

paper) and capital market instruments (stocks and bonds).

9

3. Private banking

10

3. Private banking

concerns the high-quality provision of a range of financial

services to wealthy clients (individuals/their families): retail

banking products such as payment and account facilities plus

a wide range of up-market investment-related services.

tailoring services to individual client requirements;

anticipation of client needs;

long-term relationship orientation;

personal contact;

discretion.

11

3. Private banking

In terms of AUM (Assets Under Management), the world's 20 largest private banks (or private banking

divisions/subsidiaries of large bank holding companies), as of end-2015.

12

https://en.wikipedia.org/wiki/Bank_holding_companies


13


The corporate banking segment of banks typically serves a

diverse range of clients, ranging from small to mid-sized local

businesses with a few millions in revenues to

large conglomerates with billions in sales and offices across

the country.

Corporate banking is typically offered by commercial banks,

and entails all the services that can be extended on a financial

level to corporate entities to ease day-to-day operations.

14


Banking services used by small firms

Payment services;

Debt finance;

Equity finance;

Special financing.

Banking services for mid-market and large (multinational) corporate

clients

Cash management and transaction services.

Credit and other debt financing facilities – loans, overdrafts, syndicated loans;

Commercial paper, bonds and other facilities;

Commitments and guarantees;

Foreign exchange and interest rate-related transactions;

Securities underwriting and fund management services.

15


16


Investment banks were essentially created in the U.S. by the

passage of the Glass-Steagall Act. Prior to this, investment

banking activities were part of large, money-center

commercial banks.

The lines between investment banks and commercial banks

again begins to blur as legal separation between investment

banks and commercial banks is no longer required.

They mainly deal with companies and other large institutions

and they typically do not deal with retail customers.

17


Financial advisory (M&A advice);

Underwriting of securities issues (guaranteeing a price that the new

equity or bond issue will sell for);

Trading and investing in securities on behalf of the bank or for clients.

This activity can include trading and investments in a wide range of

financial instruments including bonds, equities and derivatives products;

Asset management – managing wholesale investments (such as pension

funds for corporate clients) as well as providing investment advisory

services to wealthy individuals (private banking) and institutions;

Other securities services – brokerage, financing services and securities

lending.

18

Financial advisory (M&A advice)

Investment bankers may assist both acquiring firms

and potential targets (although not both in the same

deal).

Deal may be a hostile takeover, where the target

does not wish to be acquired.

Investment bankers will assist in all areas, including

deal specifics, lining up financing, legal issues, etc.

Underwriting of securities issues

The process of underwriting a stock or a bond issue requires that the investment banker purchase the entire offering at a predetermined price and then resell the offering (securities) in the market. The services provided during this process include:

Giving Advice

Filing Documents

Underwriting, Best Efforts, or Private Placement


Giving advice

Explaining current market conditions in to help

determine why type of security (equity, debt, etc.) to

offer

Assisting in determining when to issue, how many, at

what price (more important with IPOs than SEOs)


Filing Documents

A portion of the registration statement known as the prospectus is made available to the public.

Debt issues require several additional steps, including acquiring a credit rating, hire a bond counsel, etc.

For equity issues, the investment banker may also arrange for the securities to appear on one of the exchanges.


Underwriting (firm commitment)

The investment banker purchases the entire offering at a fixed price and then resells the offering to the market.

An underwriter may form an underwriting syndicate to diffuse part of the underwriting risk.

Placement of a tombstone in, for instance, the Wall Street Journal (example on next slide).

Underwriting of

securities issues


The goal of underwriting is for all of the shares in an offering to be spoken for. However, this may not occur.

Fully subscribed: all shares are spoken for

Undersubscribed: underwriting syndicate unable to generate interest in all of the available shares

Oversubscribed: interest in more shares than are available (may lead to rationing).


Figure 23.1 Using Investment Bankers to Distribute Securities to the Public


Equity Sales: when a firm sells an entire division (or maybe the entire company), enlisting the aid of an investment banker.

Assists in determining the value of the division or firm and find potential buyers

Develop confidential financial statements for the division for prospective buyer (confidential memorandum)

Prepare a letter of intent to continue, assist with due diligence, and help reach a definitive agreement

Trading and investing in securities

Securities firms with brokerage services offer

several types of services:

Brokerage Service

Other services

Full-Service Brokers versus

Discount Brokers


Securities Orders: when you call a brokerage house

to buy or sell a security, you essentially have three

options:

Market Order: buy or sell security at current price

Limit Order: you specify the most you are willing to pay

(buy) or the least you are willing to accept (sell) for

a security

Short Sales: sell a security you don’t own with the intent of

buying it back at a later date (hopefully at a lower price)


Other Services

Insurance against loss of actual security documents

Margin credit for purchasing equity with borrowed

funds

Other services driven by market demand (e.g., the cash

management account)


Full Service Brokers: offer clients research and

investment advice, but usually charge a higher

commission on trades.

Discount Broker: provides facilities to buy/sell

securities but offers no advice. Many on-line

discount brokerage firms do have significant

research available


Securities Dealers

Hold inventories of securities on their

own account

Provide liquidity to the market by standing by ready to

buy or sell securities (market maker)

Especially important for thinly traded securities


33


34

6. Islamic banking

35

6. Islamic banking

Islamic Shariah law prohibits the payment of riba or interest

but does encourage entrepreneurial activity.

As such, banks that wish to offer Islamic banking services

have to develop products and services that do not charge or

pay interest.

Their solution is to offer various profit-sharing-related

products whereby depositors share in the risk of the bank’s

lending.

Depositors earn a return (instead of interest)

Borrowers repay loans based on the profits generated from the

project on which the loan is lent.

36

6. Islamic banking

37

6. Islamic banking

38

6. Islamic banking

39

6. Islamic banking

40

6. Islamic banking

41

6. Islamic banking

Total Islamic finance

assets of commercial

banks rose 17% between

2009 and 2013, hitting

$778 billion.

Of that, Gulf Cooperation

Council (GCC)

countries account for

around $517 billion,

ASEAN countries for

$160 billion and South

Asia for $23 billion; with

the rest of the world

(especially Turkey)

making up the remaining

$78 billion.

42

6. Islamic banking

43

6. Islamic banking

44

6. Islamic banking

45

Lecture 5. Types of banking - · PDF file1.Traditional versus modern banking ... financial...

Documents

Transcript of Lecture 5. Types of banking - · PDF file1.Traditional versus modern banking ... financial...