Banking Systems and Functions

Study Notes

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.