Banking: Definition and Functions

Banks: Definition

• A bank is a financial entity accepting public deposits and creating credit.
• Lending happens directly or indirectly through capital markets.
• Banks are heavily regulated due to their importance in a country's financial stability.
• Fractional reserve banking: banks hold liquid assets equal to a portion of their liabilities.
• Banks must adhere to minimum capital requirements, per the "Basel Accords".
• Banks act as payment agents by managing checking or current accounts and enabling payments through ACH, telegraphic transfer and ATMs.
• Banks borrow by accepting deposits in current accounts or term deposits, and by issuing debt securities.
• Banks provide payment services, which makes bank accounts indispensable.
• Banks create new money when issuing loans, increasing the money supply; repayments decrease it.
• Banks undertake activities like personal, corporate, investment, private insurance, consumer finance, foreign exchange, commodity, equities, futures, and money market trading.

Banking Channels

• Branch: In-person banking at a retail location.
• ATM: Banking via automated teller machines.
• Bank by mail: Accepting deposits and communicating with customers.
• Online banking: Performing transactions over the Internet.
• Mobile banking: Using a mobile phone for banking transactions.
• Telephone banking: Conducting transactions via telephone with an operator or automated system.
• Video banking: Banking transactions or consultations via remote video connection.
• Relationship manager: Private or business banking representative visiting clients.
• Direct Selling Agent: Increasing the bank's customer base on a contract basis.

Retail Banking Products

• Savings account.
• Fixed deposit account.
• Certificate of Deposit (CD): Has a fixed term and fixed interest rate.
• Individual Retirement Account (IRA).
• Credit card.
• Debit card.
• Mortgage.
• Mutual fund.
• Personal loan.
• Time deposits.
• ATM card.
• Current accounts.
• Cheque books.
• Automated Teller Machine (ATM).

Business Banking Products

• Business loan.
• Capital raising (equity / debt / hybrids).
• Revolving credit.
• Risk management (FX, interest rates, commodities, derivatives).
• Term loan.
• Cash management services (lock box, remote deposit capture, merchant processing).
• Credit services.

Types of Banking

• Retail banking: Direct interaction with individuals and small businesses.
• Business banking: Services for mid-market businesses.
• Corporate banking: Services for large entities.
• Private banking: Wealth management for high-net-worth individuals and families.
• Investment banking: Activities related to the financial markets.

Types of Banks

• Commercial banks: Handle deposits and loans from corporations or large businesses.
• Investment banks: Underwrite stock and bond issues, trade, manage investments, and advise on capital market activities.
• Central banks: Government-owned, supervise banks, control interest rates, provide liquidity, and act as lender of last resort.
• Islamic banks: Adhere to Islamic law, avoiding interest and earning profit through markups and fees.
• Specialized banks: Help disadvantaged groups with low-interest loans for specific sectors or categories.

Types of Credit

• Credits include credit cards, loans, service credit, installment credit, and revolving credit.
• Loans: Enable obtaining cash, varying by amount, term and conditions with secured and unsecured types.
• Credit Cards: Used for buying on credit without interest if paid within the period.
  • Departmental store cards.
  • Travel & Entertainment Cards (T&E).
    • Bank Credit Cards.
• Installment Credit: Repaid through installments with the item bought utilized as security.
  • Home construction loan, Land loan, Home mortgage, Automobile loan, Home improvement loan, Student loan, Recreational vehicle loans or boats loans, Vacation loan, and Personal Loans are examples of installment credit.
• Service Credit: Monthly payments for utilities like gas, telephone, water, and electricity, which may incur late fees.
• Revolving Credit: Not repaid by installments.
  • HELOC: Borrower uses home equity, often for major expenses.
  • Line of Credit: Establishes a maximum loan balance accessed by the borrower.

Collateral

• Collateral is an asset offered to secure a loan.
• Lenders can seize collateral to recoup losses if payments are missed.
• Houses, cars, stocks, bonds, salary domiciliation, and cash are forms of collateral readily convertible to cash.

Banking Secrecy Law

• September 3rd 1956 law: requires all banks in Lebanon to maintain professional secrecy.
• Bank employees can't reveal client information, assets or holdings without authorization, except in cases of inheritance, bankruptcy, or litigation.
• Law allows communication among banks regarding debtor accounts and judiciary requests for illicit wealth cases.

Monetary Policy

• Monetary authority controls money supply, targeting inflation or interest rates for price stability and trust.
• Central banks influence interest rates by acting on the money supply.
• Actions include modifying rates, buying/selling bonds, and altering bank reserve requirements.
• The Federal Reserve, for example, manages it for the United States.
  • Expansionary monetary policy increases money supply to lower unemployment and stimulate growth.
  • Contractionary monetary policy slows money supply growth or decreases it to control inflation, potentially slowing economic growth.
    • 1980's Federal Reserve intervention raised interest rates to 20% to curb inflation, causing a recession but keeping inflation in check.