Introduction to Banking PDF

4 Sep 2024 Banking and Financial Institutions Objectives Know the history of Banking Understand the role of banks as financial intermediaries in the economy Differentiate...

4 Sep 2024 Banking and Financial Institutions Objectives Know the history of Banking Understand the role of banks as financial intermediaries in the economy Differentiate lenders and borrowers and how banks help in bridging such differences Understand how financial intermediaries reduce transaction, information, and research costs. Explain what modern banks do Describe the main services offered by banks 1  4 Sep 2024 Money Economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Commonly referred to as currency. Used in the settlement of transactions Can be – market-determined – officially issued legal tender or fiat moneys – money substitutes and fiduciary media – electronic cryptocurrencies. History of Philippine Money Cobs/Macuquinas & Revolutionary Barter System Pesos Fuertes Banknotes Filipinization of Republic Guerilla Notes & coins and paper money Resistance Currency Philippine Peso 2  4 Sep 2024 Pre-hispanic Era Spanish Era 3  4 Sep 2024 Revolutionary Period American Period 4  4 Sep 2024 Japanese Occupation The Philippine Republic 5  4 Sep 2024 Financial System A set of institutions, such as banks, insurance companies, and stock exchanges, that permit the exchange of funds Components of Financial System Financial Systems Financial System Non-Bank Banks Financial Institutions Private Government Private Government 6  4 Sep 2024 History of Banking Philippines’ First Bank Philippine banking was born on August 1, 1851, with the establishment of the El Banco Español Filipino de Isabel II Renamed to Bank of the Philippine Islands (BPI) in 1912. 7  4 Sep 2024 Banks Financial Institution authorized by the government – Accepts Deposits – Pay Interests – Clear Checks – Offers checking account services – Makes Various Loans – Offer financial products – Act as an intermediary – Offer other financial services 8  4 Sep 2024 The Nature of Financial Intermediation Financial Intermediation 9  4 Sep 2024 Financial Intermediaries Financial Institutions which acts as a link between savers who have excess funds and borrowers who need funds. Helps both parties to meet their financial objectives. Financial Intermediaries 10  4 Sep 2024 Direct and Indirect Finance Financial Claim A claim to the payment of a future sum of money and/or a periodic payment of money Carries an obligation on the issuer to pay interest periodically and to redeem the claim at stated value in one of 3 ways – On Demand – After giving a state period of notice – Definite date or within a range of dates 11  4 Sep 2024 Financial Claims Generated whenever an act of borrowing takes place. Borrowing occurs whenever an economic unit’s total expenditure exceeds its total receipts. Can take the form of any financial asset, such as money, bank deposit accounts, bonds, shares, loans, life insurance policies, etc. The Role of Banks in Financial Intermediation Helps lenders meet borrowers Taking in funds from depositors and lending them out to borrowers. Giving interest payments to depositors and taking interest charges to borrowers. 12  4 Sep 2024 The Role of Banks in Financial Intermediation Banks bridge the gap between the needs of lenders and borrowers by performing a transformation function: – Size Transformation – Maturity Transformation – Risk Transformation Economic unit of Lenders & Borrowers Individuals Households Companies Bank Central Bank Government bodies 13  4 Sep 2024 Lenders In financial intermediation process, they are the savers, creditors, investors, who have excess funds and make it available to the borrowers with the expectation that the funds will be repaid. Repayment will include the payment of any interest or fees. Repayment may occur in increments or as a lump sum. Generally referred to as surplus units Holds the borrower’s financial claim, therefore hold a financial asset. Lenders’ and Borrowers’ requirements Lenders Borrowers Minimization of risk Funds at a particular specified date Minimization of cost Funds for a specific period of Liquidity time. Funds at the lowest possible cost 14  4 Sep 2024 Debtors/Borrowers In the financial intermediation process, they are the debtors who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower, and if the debt is in the form of securities – such as bonds – the debtor is referred to as an issuer. Known as deficit units Have financial liability Why do banks exist? Theories explaining why banking exists: 1. Delegated monitoring 2. Information production 3. Liquidity transformation 4. Consumption smoothing 5. Bank as a commitment mechanism 15  4 Sep 2024 Benefits of Financial Intermediation Reduce Transaction Information Reduce Transaction Costs through Economies of Scale Decrease risks between lenders and borrowers Benefits of Financial Intermediation Lenders (Surplus units) Borrowers (Deficit units) Greater Liquidity Longer time period of Less risk is involved repayment of loans Marketable Securities may be Financial intermediaries are issued as counterpart to prepared to grant loans of deposits larger amounts than lenders. Transaction costs associated Lower transaction costs. with lending process are likely to be reduced Low interest rate Lending decision is simplified Availability of loans 16  4 Sep 2024 Benefits to society as a whole More efficient utilization of funds within an economy Higher level of borrowing and lending to be undertaken Improvement in the availability of funds to higher-risk ventures. 17