Role of Banks

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Lecture # 15Role of Commercial Banks


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Bank

A bank is a commercial or stateinstitution that provides financial

services , including issuing money

in various forms, receiving deposits

of money, lending money and

processing transactions and thecreating of credit.


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A commercial bank accepts

deposits from customers and in turn

makes loans, even in excess of thedeposits; a process known as

fractional-reserve banking. Some

banks called Banks of issue! issuebanknotes as legal tender.

"ommercial Bank


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A commercial bank is usually

defined as an institution that bothaccepts deposits and makes loans;

there are also financial institutions

that provide selected banking

services without meeting the legal

definition of a bank.


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#any banks offer ancillary financialservices to make additional profit;

for example, most banks also rent

safe deposit boxes in theirbranches.


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"urrently in most $urisdictionscommercial banks are regulated% re&uire permission to operate.'perational authority is granted bybank regulatory authorities whichprovides rights to conduct the mostfundamental banking services suchas accepting deposits and makingloans.


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Purpose of a bank


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Banks have influenced economies %

politics for centuries. (istorically, the

primary purpose of a bank was to

provide loans to trading companies.

Banks provided funds to allowbusinesses to purchase inventory, and

collected those funds back with

interest when the goods were sold.


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Commercial

Lending


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)or centuries, the banking industry

only dealt with businesses, notconsumers. "ommercial lendingtoday is a very intense activity, with

banks carefully analy*ing thefinancial condition of their businessclients to determine the level of riskin each loan transaction.


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Banking Services


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Banking services have expanded

to include services directed atindividuals, and risk in these much

smaller transactions are pooled.


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A Banks Profit


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+his difference is referred to as the

spread between the cost of fundsand the loan interest rate.

(istorically, profitability from lending

activities has been cyclic anddependent on the needs and

strengths of loan customers.


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n recent history, investors have

demanded a more stable revenue

stream and banks have therefore

placed more emphasis on

transaction fees, primarily loan feesbut also including service charges

on array of deposit activities and


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ancillary services international

banking, foreign exchange,insurance, investments, wire

transfers, etc.!. (owever, lending

activities still provide the bulk of acommercial banks income.


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(owever, there are traces of

banking activity even in theBabylonian times, and indeed a

book about the history of banking is

named 1 Banking, from Babylon toWall Street.


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Services !ypically"ffered by Banks


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Although the basic type of services

offered by a bank depends uponthe type of bank and the country,

services provided usually include1


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1 !aking deposits from their

customers and issuing current2ak! or checking 3S! accounts

and savings accounts to individuals

and businesses.


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7. )acilitating money transactionssuch as wire transfers and

cashiers checks


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8. ssuing credit cards, A+# cards,

and debit cards9. Storing valuables, particularly in a

safe deposit box


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:. "onsumer % commercial financial

advisory services

. 2ension % retirement planning


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)inancial transactions can

be performed throughmany different channels1


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4. A!% is a computeri*ed

telecommunications device that

provides a financial institutions

customers a method of financialtransactions in a public space

without the need for a human clerk

or bank teller


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8. "nline bankingis a term used for

performing transactions, paymentsetc. over the nternet through a

bank, credit union or building

societys secure website


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!ypes of banks


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Banks activities can be divided intoretail banking, dealing directly with

individuals and small businesses;business banking, providingservices to mid-market business;

corporate banking, directed at largebusiness entities; and investmentbanking, relating to activities on the

financial markets.


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#ost banks are profit-making,

private enterprises. (owever, some

are owned by government, or are

non-profits.


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"entral banks are non-commercial

bodies or government agenciesoften charged with controllinginterest rates and money supplyacross the whole economy. +heygenerally provide li&uidity to thebanking system and act as =enderof last resort in event of a crisis.


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Commercial bank1 the term used

for a normal bank to distinguish it

from an investment bank. After the

>reat ?epression, the 3.S.

"ongress re&uired that banks onlyengage in banking activities,

whereas investment banks were


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limited to capital market activities.

Since the two no longer have to beunder separate ownership, some

use the term commercial bank to

refer to a bank or a division of abank that mostly deals with

deposits and loans from

corporations or large businesses.


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Community Banks& locally

operated financial institutions thatempower employees to make local

decisions to serve their customers

and the partners


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Community development banks&

regulated banks that providefinancial services and credit to

underserved markets or

populations.


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Postal savings banks& savings

banks associated with nationalpostal systems.

Private banks&manage the assets

of high net worth individuals.


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"ffs$ore banks& banks located in

$urisdictions with low taxation andregulation. #any offshore banks are

essentially private banks.


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were created on public initiative, while in

others socially committed individuals

created foundations to put in place thenecessary infrastructure. owadays,

5uropean savings banks have kept their

focus on retail banking1 payments,savings products, credits and

insurances for individuals or small and

medium-si*ed enterprises.


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Apart from this retail focus, they

also differ from commercial banks

by their broadly decentrali*ed

distribution network, providing local

and regional outreach and by theirsocially responsible approach to

business and society.


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Building societies and

Landesbanks& conduct retail

banking.

't$ical banks&banks that prioriti*e

the transparency of all operationsand make only what they consider

to be socially-responsible

investments.

Role of Banks

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