Banking Systems and Functions

Banking

• Types of Banks:
  • Commercial banks: provide basic banking services to individuals and businesses
  • Investment banks: specialize in helping companies raise capital and advise on mergers and acquisitions
  • Central banks: regulate the money supply and oversee the banking system
• Banking Functions:
  • Accepting deposits
  • Making loans
  • Providing credit
  • Facilitating payments
  • Offering investment products
• Banking Systems:
  • Fractional reserve banking: banks hold a fraction of deposits as reserves and lend out the rest
  • Full-reserve banking: banks hold 100% of deposits as reserves and do not lend

Financial Markets

• Types of Markets:
  • Money market: short-term debt securities with maturities less than a year
  • Bond market: long-term debt securities with maturities over a year
  • Stock market: equity securities representing ownership in companies
• Financial Instruments:
  • Stocks: equity securities representing ownership in companies
  • Bonds: debt securities with fixed interest rates and maturities
  • Derivatives: contracts deriving their value from underlying assets
• Financial Intermediaries:
  • Brokerages: facilitate buying and selling of securities
  • Mutual funds: pools of money invested in a diversified portfolio of securities
  • Hedge funds: investment vehicles for high-net-worth individuals and institutions

Financial Regulations

• Regulatory Bodies:
  • Central banks: regulate monetary policy and oversee banking systems
  • Securities and Exchange Commission (SEC): regulates securities markets and protects investors
  • Federal Deposit Insurance Corporation (FDIC): insures deposits and regulates banking practices
• Regulatory Frameworks:
  • Basel Accords: international standards for banking regulation and supervision
  • Dodd-Frank Act: regulates banking and financial institutions in the United States
  • Sarbanes-Oxley Act: regulates corporate governance and accounting practices

Banking

• Commercial banks provide basic banking services to individuals and businesses, including accepting deposits, making loans, and facilitating payments.
• Investment banks specialize in helping companies raise capital and advise on mergers and acquisitions.
• Central banks regulate the money supply, oversee the banking system, and set monetary policy.

Banking Functions

• Accepting deposits involves taking in funds from customers and providing safekeeping services.
• Making loans involves providing credit to customers and charging interest rates.
• Providing credit involves offering credit cards, personal loans, and mortgages to customers.
• Facilitating payments involves enabling customers to make transactions through debit cards, checks, and online banking.
• Offering investment products involves selling securities, mutual funds, and other investment vehicles to customers.

Banking Systems

• Fractional reserve banking allows banks to lend out a portion of their deposits to other customers, while holding a fraction as reserves.
• Full-reserve banking requires banks to hold 100% of deposits as reserves and does not allow lending.

Financial Markets

• The money market involves trading short-term debt securities with maturities less than a year, such as commercial paper and treasury bills.
• The bond market involves trading long-term debt securities with maturities over a year, such as corporate and government bonds.
• The stock market involves trading equity securities representing ownership in companies.

Financial Instruments

• Stocks represent ownership in companies and give shareholders a claim on a portion of the company's assets and profits.
• Bonds are debt securities with fixed interest rates and maturities, providing a regular income stream to investors.
• Derivatives are contracts deriving their value from underlying assets, such as options and futures.

Financial Intermediaries

• Brokerages facilitate buying and selling of securities, earning commissions on transactions.
• Mutual funds pool money from many investors to invest in a diversified portfolio of securities, providing economies of scale and diversification benefits.
• Hedge funds are investment vehicles for high-net-worth individuals and institutions, using complex strategies to generate returns.

Financial Regulations

• Central banks regulate monetary policy, oversee the banking system, and maintain financial stability.
• The Securities and Exchange Commission (SEC) regulates securities markets, protects investors, and enforces securities laws.
• The Federal Deposit Insurance Corporation (FDIC) insures deposits, regulates banking practices, and resolves bank failures.

Regulatory Frameworks

• The Basel Accords set international standards for banking regulation and supervision, focusing on capital adequacy and risk management.
• The Dodd-Frank Act regulates banking and financial institutions in the United States, introducing stricter capital and liquidity requirements.
• The Sarbanes-Oxley Act regulates corporate governance and accounting practices, aiming to protect investors and maintain market integrity.