Banks and their business

1
Banks and their business
Deposit taking e.g. savings deposits
Lending e.g. mortgage loans
Informations, consultations
Services e.g. money transfer
2
Basic functions of banks

• To make and receive payments for customers
• To accept deposits and to keep them safe for
  customers
• To lend money to customers

These functions are carried out through holding
accounts for customers.
3
Accounts

• Current account used for transfer functions
• Deposit account and saving accounts are used for
  deposits
• When a loan is agreed a separate loan account is
  created for the customer

4
Deposits and loans
Bank
Deposit
Deposit
Loan
Deposit
Loan
Deposit
5
Deposits and loans
Banks accept deposits from various customers
(e.g. private individuals, business enterprises,
public corporations). These deposits, the
liabilities of the bank, enable the banks to
grant loans to various borrowers (again
private individuals, business enterprises, public
corporations). The granted loans are assets in
the account of the bank.
6
Banks and their business

• Banks try to find depositors
• Banks transform funds
• Banks try to find customers who are in need of
  money
• Banks take on the risks of default
• Counselling and administration

7
Banks transform funds

• Transformation of size banks transform many
  small deposits into big loans
• Tranformation of term a part of short term
  deposits remains at the disposal of the bank for
  a longer period of time, e.g. savings deposits
  repayable on demand remain at the banks disposal
  for 3 years in average.

8
Banks take on risk and default

• Banks use their know-how to check whether the
  borrower is able to repay the loan and by doing
  this, they minimise the risk of default. It is
  easier for banks than for private individuals to
  take on the risk of default. This is because they
  grant
• A variety of loans (to different customers, e.g.
  private individuals, business enterprises,
  industries), thus they spread the risk.
• Numerous loans of which only a few are not repaid.

9
How banks raise capital for lending
Basically a bank like any other company has two
possibilities of raising capital. Owners funds
or equity and creditors funds or debt funds.
Creditors

• Deposits
• Sight deposits
• Time deposits
• Savings deposits

• Loans from other banks
• Inter bank financing

Issue of their own bonds
10
Sight deposits

• These are acconts with banks, from which all the
  money can be withdrawn on demand, e.g. current
  accounts. These accounts are held by depositors
  who need this liquidity for their payments
  transactions. Sight deposits usually pay very
  little interest.
• As not all the money must be held at the
  customers disposal, banks can use a certain
  part, the so-called deposit base, of the sight
  deposits for loans.