Banking and Financial Institutions Unit 1

Introduction to Banking

• Banking is defined as a financial institution involved in lending funds obtained from deposits.
• Liquidity refers to the ease and cost of converting one asset into another, crucial for financial operations.
• Liquidity mismatch occurs when cash inflows and outflows do not align in terms of amounts and timing.

Role of Banks

• Banks provide liquidity to depositors while authoring long-term loans, balancing the needs of savers and borrowers.
• They reduce transaction costs associated with finding parties for financial transactions, minimizing search and contractual costs.

Major Functions of Banks

• Deposit Function: Facilitates fund transfer and safekeeping for individuals and businesses.
• Loan Function: Offers loans funded by deposits, subject to credit evaluations.
• Exchange Function: Manages local and international transactions to facilitate commerce.
• Trust Function: Acts as an agent to administer funds and properties under their custody.

Lending Practices

• Involves aggregating small savings to lend to larger borrowers, improving access to credit.
• Banks promote diversification, helping savers mitigate risks by spreading investments across various assets.

Types of Banks

• Universal Banks:

  • Can function as investment houses, investing in a range of enterprises.
  • Require the highest capitalization, allowing them to offer diversified financial services.
  • Prominent examples in the Philippines include BDO, Metrobank, Landbank, BPI, ChinaBank, RCBC, PNB, Security Bank, UnionBank, and DBP.

• Commercial Banks:

  • Focus primarily on accepting deposits and granting consumer and business loans.