Commercial Banks and Their Role

Commercial Banks and Their Role

• Commercial banks function as intermediaries in the financial system.
• They offer a range of services, including lending, deposit taking, and asset management.
• They also participate in trade finance, providing guarantees and letters of credit to facilitate business transactions.

Types of Commercial Banks

• Universal banks: Offer a wide array of financial services.
• Corporate banks: Specialize in services for corporations.
• Retail banks: Focus on individual customers.
• Construction savings banks: Often cater to mortgages and savings for housing.
• Regional banks: Operate within specific geographic areas.
• Credit unions: Membership-based financial institutions.

Roles of a Commercial Bank

• Financial intermediary: Act as a link between depositors and borrowers.
• Lender: Provides loans to clients
• Deposit taker: Collects deposits from clients.
• Asset manager: Manages client assets.
• Trade finance: Assists clients in international trade activities.

Products Offered by Commercial Banks

• Lending: Includes corporate and retail lending.
• Financial markets: Provides hedging and foreign exchange (FX) services.
• Treasury: Handles cash management.
• Trade finance: Supports international trade.

Central Bank Role (Short Video)

• Jerome Powell was featured in a 60-minute segment on the central bank role, in February 2024.

Economic Activity & US Data

• US inflation decreased to 2.4% in September 2024.
• US GDP growth was 2.8% in Q3 2024.
• US unemployment rate stood at 4.1% in October 2024.

Assets and liabilities of a commercial bank

• Assets: Include cash, securities, and loans.
• Liabilities: Include deposits, borrowings, and other obligations.
• Capital/Net worth: Represents the bank's equity.

Profit and Loss of a Commercial Bank

• Revenues: Comprised of net interest income, net fees, net trading income etc.
• Costs: Include administrative expenses, provisions for bad debt, and other operational costs.

Key Risks of a Commercial Bank

• Liquidity risk: The risk that a bank may not be able to meet its short-term obligations. This often relates to managing cash flow to meet client demands.
• Mitigation strategies include diversifying deposits and borrowing from other banks/ central banks. Another popular strategy is decreasing loans or selling securities
• Credit risk: The risk that a borrower will default on a loan. Credit risk analysis is key to loan management and minimizing loss. Mitigation strategies include diversification of assets and credit risk analysis.
• Strategies for mitigation include credit risk analysis and diversification of clients and asset types

My Role in a Corporate Bank (Lending Department)

• Part of the lending department and key profit generating area.
• Responsible for loan management and loan origination including credit risk analysis and management.
• Deal with Short-term (overdraft) and long-term (amortisation) lending activities.

Comparing Two Banks

• Students are asked to assess two banks, comparing them as investors and managers.
• Reasoning for the preferred bank should include comprehensive information.

Key Roles of Bankers

• Reliability: A cornerstone of trust with banks and clients.
• Trust: Essential for maintaining relationships between a bank and their customers.
• Client focus: Demonstrates an understanding and responsiveness to client financial needs.
• Delivering on promises: Bankers need to keep commitments.
• Pro-active approach: Ensuring success for bank and customer.