Banking Basics PDF

Banking and Finance Banking basics  Where does the money come from and what banks do with it? Banks offer multiple products and services to different customers with different needs. Different clients: Different needs: - Individuals - Cash manage...

Banking and Finance Banking basics  Where does the money come from and what banks do with it? Banks offer multiple products and services to different customers with different needs. Different clients: Different needs: - Individuals - Cash management - Entities: - Supply chain management - Business - Small to big amounts of financing required - Corporates - Etc. - Governments Banking and Finance 2  Where does the money come from and what banks do with it? Banks offer multiple products and services to customers across their balance sheet: Banking and Finance 3  Where does the money come from and what banks do with it? Banks offer multiple products and services to customers across their balance sheet: Banking and Finance 4  Where does the money come from and what banks do with it? Banks offer multiple products and services to customers across their balance sheet: Banking and Finance 5  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Universal banks Retail Banking Business Banking Corporate Banking Private Banking Commercial Investment Banking Banking Specialized banks Banking and Finance 6  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Focus on banking services to all individual consumers Examples of retail banking services: Sight and savings accounts Loans Mortgages Debit and credit cards Banking and Finance 7  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Is a subset of retail banking. Customer service is provided through a dedicated relationship manager. Services include retail banking products, and: Asset management, brokerage, and limited tax advisory. Usually clients are divided between: High-Net-Worth Ultra-High-Net-Worth Banking and Finance 8  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Focus on banking services to banking services provided to small businesses that are owner-operated. Examples of retail banking services: Business sight and savings accounts Working capital management (e.g. financing inventory & receivables) Merchant services (e.g. PoS) Loans and lines of credit Banking and Finance 9  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Commercial banking is larger in scale than business banking and serves clients with more complex needs (+5M Revenue, multiple locations, ~500 employees). Services include all business banking, and: Transactional banking (Cash and treasury management) Trade finance and FX Advisory services Banking and Finance 10  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Needs are even more complex than in commercial banking services are between commercial and investment banking services (+100M revenue, public companies, governments, etc.) Services include: Provide credit expertise Assist with deal execution Structure complex needs around working capital management Debt capital markets Banking and Finance 11  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: The distinction between depository institutions and investment banks originates from the US regulatory framework and in particular the Glass Steagall Act (1933), which was then repealed in 1999 by the Gram-Leach-Bliley Act. After the financial crisis new restrictions (proprietary trading) have been put in place by the Volcker Rule of the Dodd-Frank Act (2010). Investment banks do not transform the securities issued by the net users of funds into claims more attractive to the net suppliers of funds but they rather serve as brokers intermediating between suppliers and users of funds. Banking and Finance 12  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Investment banks do not offer traditional banking products. They offer services associated with large or complex financial transactions in: Originating, structuring and executing (e.g. underwriting, roadshow and book building) public and private placement of debt and equity securities in primary money and capital markets ECM (e.g. IPOs, SEOs, ABB, PP), DCM (IG, HY, ABS, PP) Assisting trading of securities in secondary markets Brokerage, market-making, research Advising on corporate finance activities and shareholder relations M&As, joint ventures, leveraged buyouts, takeover defenses, divestitures, spin-offs, loan syndication and corporate restructurings Investing and lending (proprietary) and asset management (money market Banking and Finance funds, pension funds, hedge funds, private equity funds, etc..) 13  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Shadow banks are nonbank financial service firms performing banking services. Their activity has facilitated the shift from the originate and hold model of commercial banking to the originate and distribute model. For example: hedge funds, money market mutual funds, bond funds, real estate funds, exchange traded funds, private debt funds, financial vehicle corporations engaged in securitization, special purpose entities, security and derivative dealers, financial Corporations engaged in lending (credit companies, leasing companies) EU non-bank financial intermediation risk monitor (ERSB) Global Monitoring Report on Non-Bank Financial Intermediation (FSB) Off the Radar: the Rise of Shadow Banking in Europe (VOX-EU CEPR) Banking and Finance 14  Different business models under the same name Different bank models/types can be generally categorized based on the bundle of products and services offered to clients: Universal Banks PROs CONs High supervisory costs Contagion risk among asset side and liability side More diversified activities and sources of funds operations Economies of scale and synergies Risk of crowding out od other sources of credit Risk of moral hazard and conflicts of interest (e.g., misuse of private info or tying behavior) Specialized Banks PROs CONs Competitive advantage Higher concentration of risk Economies of scope Need for longer term funding Easier supervision More efficient allocation of capital to the economy Banking and Finance 15  The recent evolution of the banking sector in Spain Banking and Finance 16  The recent evolution of the banking sector in Spain Banking and Finance 17  The recent evolution of the banking sector in Spain Banking and Finance 18  The recent evolution of the banking sector in Spain Banking and Finance 19