Introduction to Banking (MGMT1022)

• This course is Introduction to Banking (MGMT1022)

Course Description

• This course introduces the student to the basic concepts, theories and issues involved in the field.
• The first part describes services provided by banks, the organizational structure of financial institutions, and the regulatory framework.
• The second part focuses on managerial issues like assessing the performance of banking institutions.

Course Rationale

• This course introduces students to the role of banking and finance in an open economy.
• The course also covers the unique managerial issues that confront financial institutions.

Learning Outcomes

• Students will gain an understanding of the role of banking and finance in an open economy.
• Students will learn about managerial issues that confront financial institutions.

Course Information

• There are no pre-requisites for this course.
• This course has 3 credits.

Course Material

• The required textbook is "Bank Management & Financial Services" (8th ed., 2010) by Peter S. Rose & Sylvia C. Hudgins.
• A reference textbook is "Financial Institutions Management" (6th ed., 2008) by Anthony Saunders and Marcia Millon Cornett.

Lecture Topics

• Week 1 (Jan 21): Overview of banks & the financial services sector.
• Week 2 (Jan 28): Banking and the expansion of the money supply.
• Week 3 (Feb 4): Organization and Structure of Banking Industry.
• Week 4 & 5 (Feb 11 & 18): Financial Statements of banks.
• Week 6 (Feb 25): Midterm exam.
• Week 7 (Mar 11): Asset Liability management.
• Week 8 (Mar 18): Managing Liquidity; investments and deposits.
• Week 9 (Mar 25): Basics of Credit.
• Week 10 (Apr 1): Capital Management.
• Week 11 (Apr 8): Review.

Student Assessment

• Coursework mid-term exam is is 40% of grade.
• The final Examination grade weighting is 60%

Grading System

• A+ grade corresponds to 90-100% exceptional quality work.
• A grade corresponds to 80-89% outstanding quality work.
• A- grade corresponds to 75-79% excellent quality work.
• B+ grade corresponds to 70-74% very good quality work.
• B grade corresponds to 65-69% good quality work.
• B- grade corresponds to 60-64% satisfactory quality work.
• C+ grade corresponds to 55-59% fair quality work.
• C grade corresponds to 50-54% acceptable quality work.
• F1 grade corresponds to 45-49% unsatisfactory quality work.
• F2 grade corresponds to 40-44% unsatisfactory quality work.
• F3 grade corresponds to 0-39% poor quality work.

Code of Conduct

• Cellular phones should be switched off before the start of each class session.
• Students should be civil at all times.
• It is acceptable to disagree without being disagreeable.
• Students should read all assigned materials and attempt all assigned problems before each class.
• Students should participate in class discussions and questions are welcome.
• Assignment Deadlines are firm.

Banking Defined

• A bank is an entity that accepts deposits and grants credit to its customers.
• To operate as a bank in Trinidad and Tobago, an entity must be incorporated in TT and licensed by the central bank.
• "Banking business" means soliciting and receiving money, which may be withdrawn on demand.
• It also includes granting credit exposures, payment card business, and commercial banking activities.
• Only a company incorporated/continued in Trinidad & Tobago under the Companies Act and licensed by the Central Bank.
• Foreign financial institutions licensed by the Central Bank can carry on banking business in the country.

Regulated Commercial Banks in Trinidad and Tobago

• Republic Bank
• First Citizens Bank
• Scotiabank
• RBC Royal Bank
• JMMB Bank
• ANSA Bank
• First Caribbean International Bank
• Citibank

Banking Industry Trends

• The banking industry is consolidating and diversifying at the same time.
• Products and services have expanded due to new products and mergers.
• A commercial bank was traditionally,defined as a firm that accepted demand deposits and made commercial loans.
• However, these services are now offered by commercial banks, savings banks, credit unions, and other financial companies.
• Geographic markets have become more important for competing financial services companies.
• Consolidation has led to a larger proportion of banking assets being controlled by the biggest banks.
• The same trends are seen globally.
• There are significant operations of the largest foreign banks in the U.S. and the rest of the world.
• Individuals can now open checking account at brokerage firms, and nonbank firms.
• Money can be deposited electronically, and funds transferred between accounts.
• Stocks, bonds, and mutual funds can be purchased and loans can be requested from these firms.
• This business is conducted by phone, mail, or over the Internet.

Financial Services Market

• Deregulation/re-regulation, financial innovation, securitization, globalization, and advances in technology have an impact.
• Historically, commercial banks were heavily regulated in the United States.
• Regulations included maximum interest rates, minimum capital-to-asset ratios, and legal reserve requirements.
• They also limited geographic markets, investment types, and the range of products/services.
• Banks have consistently changed their operations to avoid regulation.
• Banks wanted to meet customer needs.
• Regulators and lawmakers would impose new restrictions and market participants circumvented those.
• Regulation and market response forms regulatory dialect.

Competition

• The fundamental forces of change increased competition for deposits, loans, and payments.

Competition for Deposits

• High inflation ended the guaranteed spread between asset yields and liability costs in the late 1970s.
• In 1973, investment banks created money market mutual funds (MMMFs).
• Money market mutual funds (MMMFs) increased from $10.4 billion in 1978 to almost $189 billion in 1981.
• Congress enabled banks and thrifts to offer similar accounts like money market deposit accounts (MMDAs) and Super NOWs.

Competition for Loans

• Loan yields fell relative to borrowing costs, and lending institutions competed for a decreasing pool of quality credits.
• High loan growth raises bank capital requirements.
• Junk bonds, commercial paper, auto finance companies, credit unions, and insurance companies compete for the same good quality customers.
• Bank funding costs rose and competition for loans put downward pressure on loan yields and interest spreads.
• Prime corporate borrowers issue commercial paper or long-term bonds rather than borrow.

Competition for Other Bank Services

• Banks and their affiliates offer many products and services, including trust services, brokerage and data processing.
• Banks offer securities underwriting, real estate appraisal, credit life insurance and personal financial consulting.

Investment Banking

• Investment banking encompasses three broad functions underwriting public offerings of new securities.
• It includes trading existing securities.
• It includes advising and financing mergers and acquisitions.

Deregulation

• Deregulation eliminates regulations, such as regulation on interest rate ceilings.
• Deregulation is often confused with re-regulation, which implements new restrictions or modifies existing controls.

Financial Innovation

• Innovations take the form of new securities and financial markets, new products and services, new organizational forms, and new delivery systems.
• Regulation caused financial innovation as depository institutions tried to slow disintermediation.
• Banks developed new vehicles to compete with Treasury bills, money market mutual funds, and cash management accounts.
• Regulators responded by imposing marginal reserve requirements, raising interest rate ceilings, and authorizing new deposit instruments.
• Recent innovations take the form of new futures, options, options-on-futures.

Globalization

• The evolution of markets and institutions occurred so that geographic boundaries do not restrict financial transactions.
• Financial markets and institutions are becoming increasingly global.
• Businesses must recognize businesses in other countries are competitors and international events affect domestic operations.
• Most of the legal and regulatory differences that separated types of depository institutions are gone.
• Banks now compete with brokerage firms, and nonbank firms.

Commercial Banks vs Non-banking financial institutions (NFIs)

• Non-banking financial institutions (NFIs) are companies that provide financial services like lending, etc but are not regulated as banks.
• NFIs includes Insurance companies, investment banks, pension funds, mutual funds, hedge funds, private equity firms and venture capital firms.
• Each of these non-banking financial institutions serves a different purpose, but works toward funding for businesses.

Globalization - Examples

• Brokerage firms in Trinidad include Bourse Brokers Limited, Caribbean Stockbrokers Limited, Bourse Investment and The Sheppard Group.
• Nonbank firms in Trinidad include Development Finance Limited, Caribbean Finance Company Limited and Massy Finance.
• All of these firms compete for business, pay/charge fair market rates.
• All of these firms are not restricted.

Recent Trends

• Customers are increasingly relying on mobile banking apps for financial needs.
• Banks are enhancing their mobile app capabilities, like mobile check deposits, peer-to-peer payments, and management tools.
• New accounts are now opening and onboarding online with e-signatures and digital identity verification.
• 24/7 Availability is now expected with AI powered chatbots, virtual assistants, and extended support hours.
• Customer security is being focused on with Fingerprint scanning, facial recognition, and other technologies being used.
• Artificial Intelligence (AI) is being applied in areas like fraud detection, risk management, and customer service.