Chapter 1

Peter S. Rose

Importance of Banking• Most important financial institution of the economy.• Principal source of credit (loanable funds).• Mode of payments for purchase of goods and

services.• Advice and counsel for financial information/

planning.• Bank reserves are the principal channel for

government economic policy to stabilize the economy.

What is a bank?• Banks can be identified by the products/ services they offer.• Not only are the banks functions changing but the functions

of their competitors are also changing.

• Deposits should be insured by Federal Deposit Insurance Corporation

• banks are those financial institutions that offer the widest range of financial services-especially credit, savings and payment services-and perform the widest range of financial functions of any business firm in the economy.

Vital functions of a modern Bank

• Cash management function• Investment banking/underwriting function• The brokerage function• The insurance function• The investment planning function• The payments function• The saving function

Services banks have offered in history

• Carrying out currency exchanges• Making business loans• Offering saving deposits• Safekeeping of valuables• Support govt activities with credit• Offering demand deposit

Services banks have developed recently

• Granting consumer loans• Financial advising• Cash management• Offering equipment leasing• Making venture capital loans• Selling insurance services• Selling retirement plans• Offering brokerage investments services• Offering mutual funds • Offering investment banking and merchant banking services

(also offer hedging services)

Services banks have developed recently

• Granting consumer loans• Financial advising• Cash management• Offering equipment leasing• Making venture capital loans• Selling insurance services• Selling retirement plans• Offering brokerage investments services• Offering mutual funds • Offering investment banking • (also offer hedging services)

PE and VC is the Investment in Privately held co’s as compared to publicly held co’s

in stock exchangesPrivate Equity• Giving equity to already

established company

• Proven concepts, growth of the company/idea may not be very rapid

• 2* return over years

• Leverage involved

Venture Capital• Giving equity to a brand new

idea-may just be starting up, hence- more risky

• Looking for Rapid growth

• 10 times of our money in few years with fair amount of risk

• Pure equity

Trends affecting all banks

• Service proliferation• Rising competition• Deregulations• Rising funding costs• Technological revolution• Geographical expansion• Globalization of banking