Banks and Its Classifications PDF

College of Business Administration Silliman University Dumaguete City, Negros Oriental Banks and Its Classifications BA-FM 31P - A Monetary Policy and Central Banking Submitted by: GROUP 4 Anadon, Ryan June Bilangdal, July An...

College of Business Administration Silliman University Dumaguete City, Negros Oriental Banks and Its Classifications BA-FM 31P - A Monetary Policy and Central Banking Submitted by: GROUP 4 Anadon, Ryan June Bilangdal, July An Garingo, Sweetzeal Gordoncillo, Joepett Dale Olberos, Jorlwen Angel September 2024  NOTES: CLASSIFICATIONS OF A BANK BANK Definition: An institution authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions from savers to borrowers and provide other financial services to its customers. Role and Function: 1. Accepting Deposits The banks accept deposits from their customers, who can withdraw their funds at will. Customers can deposit money and leave their funds with the bank in any type of bank accounts. These deposits can be in the form of savings account, current account or fixed deposit account. 2. Granting Loans & Advances The bank lends people money on a time-interest basis. Each loan amount is passed by the bank after due consideration and securing the bank’s profit. Banks provide loans and advances to individuals, businesses, and governments for various purposes such as expansion, construction, or meeting day-to-day expenses. This includes personal loans, mortgage loans and business loans. 3. Payment and Settlement Systems A bank’s most important role may be matching up creditors and borrowers, but banks are also essential to the domestic and international payments system—and they create money. The payments system is a complex network of local, national, and international banks and often involves government central banks and private clearing facilities that match up what banks owe each other. Banks facilitate the transfer of money through various payment methods, including checks, demand drafts, and electronic funds transfer. This helps in the smooth functioning of financial transactions. 4. Providing Financial Services and Advice Banks offer financial services and advice such as wealth management, insurance, and investment opportunities to help customers manage their finances effectively. Bank as an Intermediary: An intermediary is one who stands between two other parties. Banks are a financial intermediary, it operates between a saver who deposits money in a bank and a borrower who receives a loan from the bank. All the funds deposited are mingled in one big pool, which is then loaned out. Figure 1: Banks as financial intermediaries, with deposits flowing into a bank and loans flowing out. Depositors can be individuals and households, financial and nonfinancial firms, or national and local governments. Borrowers are, well, the same. Deposits can be available on demand (a checking account, for example) or with some restrictions (such as savings and time deposits). Philippine Deposit Insurance Corporation (PDIC) A government agency task to protect depositors through the insurance on deposit which will be paid in the event of a bank closure. It also helps in the promotion of a sound and stable banking system and foster public confidence in the banking system. Deposit insurance is the government guarantee of up to the maximum deposit insurance coverage of Php500,000 for each depositor per bank in case of bank closure. To pay claims on insured deposits, PDIC builds up the Deposit Insurance Fund (DIF) primarily through assessments of banks at an annual flat rate of 1/5 of 1% of their total deposit liabilities. Co-Regulator of Banks. Types of banks covered by deposit insurance: - Universal Banks - Commercial Banks - Thrift Bank - Rural Banks - Cooperative Banks - Islamic Banks - Specialized Government Banks Bank products that are covered by deposit insurance: - Savings Account - Current Account - Special Savings Account - Time Deposit Interest Rates in Banks Interest rates for bank loans are primarily influenced by two key factors: 1. Bangko Sentral ng Pilipinas (BSP) Monetary Policy BSP sets the overnight borrowing rate, also known as the Reverse Repurchase Rate (RRP). This rate serves as a benchmark for other interest rates in the economy. BSP aims to maintain price stability by adjusting the RRP. If inflation is high, BSP raises the RRP to curb borrowing and spending, thus reducing demand pressure. Inversely, when inflation is low, the BSP lowers the RRP to encourage borrowing and spending, stimulating economic growth. 2. Market Forces The interaction between the supply and demand of funds determines market interest rates. When demand for loans exceeds the supply of funds, interest rates tend to rise. Conversely, when the supply of funds exceeds demand, interest rates tend to fall. Banks incur costs in processing loans, such as administrative expenses, operating costs, and reserve requirements. These costs are factored into the interest rates charged to borrowers. Market forces and individual bank assessments decide the specific interest rate and BSP's key policy rate plays a critical role in establishing the direction for interest rates. Difference between Deposits and Investment Deposit Investment Definition Term Deposit are bank Investment Funds are products meant for saving, collective investment where customers place their undertakings made up of the money with a bank for an capital of many investors, indefinite period of time in which a management exchange for the delivery of company invests in various their deposited amount plus financial products. The profit the agreed interest at the end from this investment is shared of that term. between the investors on the basis of their interest in the fund. Return and Risk Customers know exactly the Investment funds do not offer return they will be receiving fixed returns. Instead, the from their capital, since the income from the investment interest rate is agreed between will depend on the the customer and the bank. In performance of the financial the event of insolvency, the assets that the fund’s capital is Philippines Deposit Insurance invested in. Corporation covers up to Php500,000 each customer per bank. Advantages and Disadvantages of a Bank Advantages: - Safety of Public Wealth - Availability of Cheap Loans - Propellant of Economy - Development in Rural Areas - Global Reach Disadvantages: - Chances of Bank Going Bankrupt - Risk of Fraud and Robberies - Risk of Public Debt Bank Run and Bankruptcy Bank Run - Customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank’s solvency. As more people withdraw their funds, the probability of default increases which can cause more people to withdraw their deposits. A bank run is typically the result of panic rather than true insolvency. However, in extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals and can push a bank into bankruptcy. Bankruptcy - is a legal proceeding initiated when a person or business cannot repay outstanding debts or obligations. In the case of a bank, bankruptcy means that the institution's assets are insufficient to cover its liabilities. This can happen due to the following reasons: - Economic Downturns - Poor Management - Fraud or Robberies - Bank Run Classifications of Banks 1. Universal Banks Universal Bank is defined as a commercial bank with the additional authority to exercise the powers of an investment house. Universal banks can also invest in non-allied undertakings and can own up to 100% of the equity in a thrift bank, rural bank, financial allied enterprise or non-financial allied enterprise. In contract, an ordinary commercial bank does not have that authority. Required Capitalization: P4.95B Examples: Bank of the Philippines Islands, Landbank, Bank of China, BDO 2. Commercial Banks Commercial banks are a type of financial institution that operates services related to withdrawals, deposit of money, issuing loans and other business activities for everyday banking needs. They have the power to accept drafts and issue letters of credit, discount and negotiate promissory notes. These banks also accept and create demand deposits and are also responsible for the buy and sell of foreign exchange, acquiring marketable bonds and other debt securities. Required Capitalization: P2.4B Examples: Bank of Commerce, Citibank, Metrobank, Philippine National Bank  3. Thrift Banks Thrift banks, also known as savings and loans associations (S&Ls), or simply thrifts, are financial institutions primarily funded by consumer deposits. Thrift bank has the power to accept savings and time deposits, act as a correspondent with other financial institutions and as a collection agent for government entities, issue mortgages, engage in real estate transactions and extend credit. In addition, thrift banks may also maintain checking accounts, act as a depository for government entities and local government units. A thrift specializes in offering savings accounts and originating home mortgages for consumers. Thrifts also offer many of the same services as commercial banks, including debit and credit cards and savings and checking accounts. Required Capitalization: P325.0M Examples: 1st Valley Bank, Inc., Allbank, Bangko Kabayan, Inc., PSBank 4. Rural and Cooperative Banks These banks are frequent in rural communities, promoting and expanding the rural economy by offering essential financial services such as extending loans to farmers, fishermen and merchants. Rural banks - these are privately owned and managed Required Capitalization: P100M Examples: Rural Bank of Bacong, Rural Bank of Tanjay, Bolinao Bank, The Green Bank Cooperative banks - these are owned by cooperatives or federation Required Capitalization: P10M Examples: First Isabela Cooperative Bank, Planters Development Bank, Cooperative Bank of the Philippines, Rural Bank of the Philippines 5. Islamic Banks An Islamic bank is a financial institution that operates according to Islamic law (Sharia). It provides banking services without engaging in activities prohibited by Islam, such as charging interest (riba) and investing in haram (forbidden) industries. Two fundamental principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors. Islamic banks make a profit through equity participation, which requires a borrower to give the bank a share in their profits rather than paying interest. Examples: Al-Amanah Islamic Investment Bank of the Philippines, Islamic Branch of the Center for Agriculture and Rural Development (CARD) Bank Inc.