Understanding Banks: Definition, Function, and Impact

Definition of a Bank

• A bank is a financial institution accepting deposits from the public and creating credit.
• Banks support financial stability, leading to strict regulation in most countries.
• Fractional reserve banking is a system where banks hold liquid assets equal to a portion of their liabilities.
• Banks must adhere to minimum capital requirements based on international standards like the "Basel Accords."
• Banks provide payment services via checking accounts, Automated Clearing House (ACH), telegraphic transfers, and ATMs.
• Banks borrow by accepting deposits and issuing securities like banknotes and bonds.
• They lend by making advances, installment loans, and investing in debt securities.
• Banks create new money through lending; new loans generate deposits elsewhere, increasing the money supply.
• Lending increases the money supply, while faster loan repayments reduce it.
• Bank activities include personal, corporate, investment, private banking, insurance, consumer finance, and various trading activities.

Banking Channels

• Branch: In-person banking in retail locations.
• Automated Teller Machine (ATM): Banking via ATMs at or away from the bank.
• Bank by Mail: Accepting check deposits and communicating by mail.
• Online Banking: Performing transactions over the Internet.
• Mobile Banking: Using a mobile phone for banking transactions.
• Telephone Banking: Conducting transactions via automated systems or with an operator.
• Video Banking: Banking transactions or consultations via remote video and audio.
• Relationship Manager: Private or business banking through personal visits.
• Direct Selling Agent: Increasing the bank's customer base on a contract basis.

Bank Products

• Retail Banking Products:
• Savings account
• Fixed deposit account
• Certificate of Deposit (CD): Differs by having a fixed term (one month to five years) and a 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 (foreign exchange (FX), interest rates, commodities, derivatives)
• Term loan
• Cash management services (lock box, remote deposit capture, merchant processing)
• Credit services

Types of Banking

• Retail Banking: Dealing directly with individuals and small businesses.
• Business Banking: Providing services to mid-market businesses.
• Corporate Banking: Directed towards large business entities.
• Private Banking: Managing wealth for high-net-worth individuals and families.
• Investment Banking: Activities related to financial markets.

Types of Banks

• Commercial Banks: Deal with 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 commercial banks, control interest rates, provide liquidity, and act as lenders of last resort.
• Islamic Banks: Operate based on Islamic law, avoiding interest and earning profits through markups and fees.
• Specialized Banks: Assist disadvantaged groups with credits, offering long-term, low-interest loans.

Types of Credit and Collateral

• Types of Credit: Credit cards, loans, service credit, installment credit, and revolving credit cater to different needs.
• Loans: Enable obtaining cash, vary in amount, repayment term, and conditions; can be secured or unsecured.
• Credit Cards: Used for buying on credit without interest if paid within a specified period.
  • Types: Departmental store cards, travel and entertainment cards, and bank credit cards.
• Installment Credit: Repaid through a fixed number of installments, using the purchased item as security.
  • Examples: Home construction, land, home mortgage, auto, home improvement, student, recreational vehicle, vacation, and personal loans.
• Service Credit: Monthly payments for utilities like gas, telephone, water, and electricity, requiring a deposit.
• Revolving Credit: Not repaid in fixed installments, unlike installment credit.
  • Examples: Home Equity Loans (HELOC), using home equity as collateral for expenses; Line of Credit, establishing a maximum borrowable balance.
• Collateral: Property or asset offered to secure a loan, which the lender can seize if payments are missed.
• Includes houses, cars, stocks, salary domiciliation, and cash.

Banking Secrecy Law

• The banking secrecy law was passed on September 3, 1956.
• Banks in Lebanon and foreign branches are bound by the "secret of the profession."
• Bank employees cannot reveal client information unless authorized, in cases of bankruptcy, or litigation.
• The law allows communication among banks regarding debtor accounts and permits judiciary authorities to access information in cases of illicit wealth accumulation.

Monetary Policy

• Monetary policy controls the money supply to manage inflation, interest rates, price stability, and currency trust.
• It involves actions by central banks to adjust the money supply, affecting interest rates through various means.
• Modifying interest rates
• Buying or selling government bonds
• Changing bank reserve requirements
• The Federal Reserve manages monetary policy in the United States.
• Two Types of Monetary Policy:
• Expansionary: Increases the money supply to lower unemployment and stimulate economic growth, often used during economic crises with low interest rates.
• Contractionary: Decreases the money supply to control inflation, potentially slowing economic growth and increasing unemployment.
  • Example: The Federal Reserve raised interest rates to 20% in the early 1980s to curb inflation, causing a recession but controlling inflation.