Lecture 1
fundamental finance
bank
defined
Its customer services
Its legal position (now the most important)
include
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retail banking, wholesale banking,
private banking, investment banking,
insurance protection, financial planning,
corporate advice, risk-management services
and other financial products
drawbacks of direct finance
high transaction costs
information asymmetries
Costs of obtaining information about them
Costs of negotiating the contract
Costs of monitoring borrower’s performance
Enforcements expenses should borrower not fulfil its commitment
Benefits of financial intermediation
Economies of scale - Reduce transaction costs
Economies of scope
Maturity intermediation
Denomination intermediation
Liquidity intermediation
Information intermediation
Credit risk diversification
Financial systems have five primary functions
Facilitating the flow of funds 促进资金流动
Providing for the settlement of transactions
Generating information for decision making
Assisting in the transfer and management of risk
Addressing the incentive problems that arise in financial contracting 解决财务承包中出现的激励问题
Money-centred vs community US banks
Money-centred banks
Industry leaders
Cover whole regions, nations and continents
Offer the widest possible menu of financial services
Acquire smaller businesses
Face tough global competition
Community banks
Much smaller
Service local communities and towns
Offer a narrower, but often more personalised, menu of financial services
difination
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A bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature
The US Congress then defined a bank as any institution qualified for deposit insurance cover from the Federal Deposit Insurance Corporation (FDIC)
So banks have come to be defined, not so much by their services, but by the government agency insuring its deposits
Business of banking
Traditionally, banks accepted deposits and made loans. Their profit, the net interest margin (NIM) was the difference between what they paid depositors and charged borrowers. Many argue that the wider the margin, the less competitive is the banking system.
More recently, banks have earned increasing revenue from non-interest income such as fees, commissions, and trading profits.
ratios
ROE
CIR
ROA
NPLs
The sum of interest and non-interest income less expenses divided by the bank s total assets gives its return of assets
Because banks are highly leveraged via their deposit taking and other borrowings, the income is often divided by total equity which gives its return on equity
The relationship between the bank's operating costs and its revenue, or cost to income ratio (CIR), provides another insight to bank management and strategy. A high CIR may reflect poor management
The ratio of non-performing loans (NPLs): loans that are not repaying as expected to total loans indicates the bank's risk appetite in this lending and the bank's own riskiness
Competition in financial-services
views
banking is not dying but changing its form by offering new services
The banks’ largest customers can now raise
their funds by borrowing in the open market
traditional banking is dying
Perhaps banking is being “regulated to death”监管致死
competitors
Savings associations/building societies
Credit unions/credit cooperatives
Fringe or shadow banks
Money market funds
Mutual funds
Hedge funds
Security brokers and dealers
Investment banks
Finance companies
Financial holding companies
Life and property/casualty insurance companies人寿及财产保险公司
Key trends in financial‐services
Service proliferation服务增值
These new sources of revenue service fees - are likely to continue to grow faster than more traditional revenue (such as interest on loans)
Growing competition
Government deregulation
Increasingly interest-sensitive funds
Technological change
Consolidation and geographic expansion
Convergence融合
Service proliferation服务增值 and greater competitive rivalry has led toward convergence, particularly for the largest financial institutions
Convergence refers to the movement of businesses across industry lines so that expands into other product lines to broaden its sales base
The larger banks, insurance companies, and security firms have all sought to enter each other‘s markets with parallel service menus and seeking their clients
Globalization
Its economic functions
financial system
function
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Addressing the incentive problems that arise in financial contracting
Assisting in the transfer and management of risk
Generating information for decision making
Providing for the settlement of transactions
Facilitating the flow of funds
purpose
encourage saving, transfer those saving to individuals and institutions planning to invest and needing credit to do so
financial institution
financial instrument
financial market