Finance (Basics)
Petr Malek
Department of Finance
Office 533
malek.petr@seznam.cz
99563@mail.muni.cz

Structure of lectures
n1.Introduction to finance - ok
n2.Financial markets - ok
n3.Banks and bank systems - now
n4.Other financial institutions;
n5.Current value of money;
n6.Private finance;
n7.Investments;
n8.Corporate finance;
n9.International finance;
n10.International financial system;
n11.Macroekonomic and financial indicators and information;
n12.History of financial science;
n13.Latest trends on financial markets.
n
n

Banks (and other financial institutions)
nBanks are financial institutions that accept deposits and make loans.
qIncluded under the term banks are companies such as commercial banks, savings and loan
associations, mutual savings banks and credit unions.
n
nBanks are the financial intermediaries that the average person average with most frequently.
qA person who needs a loan to buy a house or a car usually obtains it from a local bank.

Banks
nBanks are the largest financial intermediaries in our economy, they deserve the most careful
study.
qHowever, banks are not the only important financial institutions.
qIn recent years other financial institutions such as insurance companies, finance companies,
pension funds, mutual funds, and investment banks have been growing at the expense of banks, and so
we need to study them as well.

Banking and the management of financial institutions
nBecause banking play such a major role in channeling funds to borrowers with productive investment
opportunities, this financial activity is important in ensuring that the financial system and the
economy run smoothly and efficiently.
qBanks provide loans to businesses, help with financing college education or the purchase of a new
car or home, and provide us with services such as checking and savings accounts.

The Bank Balance Sheet
nBalance sheet = a list of the bank‘s assets and liabilities.
qTotal assets = total liabilities + capital
qA bank‘s balance sheet lists sources of bank funds (liabilities) and uses to which they are put
(assets)
qBanks obtain funds by borrowing and by issuing other liabilities such as deposits
nThen use this funds to acquire assets such as securities and loans.

The Bank Balance Sheet (liabilities and assets)
nLiabilities
qCheckable deposits…are bank accounts that allow the owner of the account to write checks to third
parties
qNon-transaction deposits…are the primary source of bank funds (60% of bank liabilities)
qBorrowings…bank obtain funds by borrowing from FED (US), other banks, and corporations.
qBank capital…the final category on the liabilities side of the balance sheet, which equals the
difference between total assets and liabilities(10%).
nAssets

The Bank Balance Sheet (liabilities and assets) II.
nLiabilities
nAssets
qReserves (reserve funds)…all banks hold some of the funds they acquire as deposits in an account.
qCash items in Process of collection (suppose that a check written on an account at another bank is
deposited in your bank and the funds for this check have not yet been received from the other bank
qDeposits at Other Banks (many small banks hold deposits in larger banks in exchange for a variety
of services, including check collection, foreign exchange transactions, and help with securities
purchases

The Bank Balance Sheet (liabilities and assets) III.
nLiabilities
nAssets
q…
q…
qSecurities…a bank‘s holdings of securities are an important income-earning assets (25% of bank
assets and they provide commercial banks with about 10% of their revenue)
qLoans…banks make their profits primarily by issuing loans (60% of bank assets are in the form of
loans and produce generally more than half of bank revenues)
qOther assets…the physical capital (buildings, computers, and other equipment) owned by the banks
is included in this category

Capital Adequacy Management
nROA (Return on Assets)
qA basic measure of bank profitability is the return on assets (ROA), the net profit after taxes
per CZK (USD,..) of assets.
nROA=net profit after taxes/assets
nROE (Return on Equity)
qBasic measure of bank profitability, the return on equity (ROE), the net profit after taxes per
CZK of equity (bank) capital.
nROE=net profit after taxes/equity capital
nEM (Equity multiplier)
qThere is direct relationship between ROE and ROA. This relationship is determined by the so-called
equity multiplier, which is the amount of assets per CZK of equity capital.
nEM=assets/equity capital
nROE=ROA x EM
n

Summary
nThe balance sheet of commercial banks can be thought of as a list of the sources and uses of bank
funds. The bank‘s liabilities are its sources of fund, which include checkable deposits, time
deposits, discount loans, borrowings from other banks and corporations, and bank capital. The
bank‘s assets are its uses of funds, which include reserves, cash items in process of collection,
deposits at other banks, securities, loans and other assets.
nBanks make profits through the process of asset transformation: They borrow short (accept
deposits) and lend long (make loans). When a bank takes in additional deposits, it gains an equal
amount of reserves; when it pays out deposits, it loses an equal amount of reserves.
nOff-balance-sheet activities consist of trading financial instruments and generating income from
fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.
Because these off-balance-sheet activities expose banks to increased risk, bank management must pay
particular attention to risk assessment procedures and internal controls to restrict employees from
taking on too much risk.
nQuestion:
qRank the following bank assets from most to least liquid: Commercial loans, securities, reserves,
physical capital

Banking Industry: Structure and Competition
nThe operations of individual banks (how they acquire, use, and manage funds to make a profit) are
roughly similar throughout the world.
n
nIn all countries, banks are financial intermediaries in the business of earning profits.

Historical Development of The Banking system (US)
nThe modern commercial banking industry in the United States began when the bank of North America
was chartered in Philadelphia in 1782.
n
nWith the success of this bank, other banks opened for business, and the American banking industry
was off and running.
n
nFigure

1782
1791
1913
1832
1811
1863
1933
Bank of North America
is chartered
Bank of the United
States is chartered
Bank of the United States
charter is allowed to lapse
Andrew Jackson vetoes rechartering
of Second Bank of the United States;
charter lapses in 1836
National Bank Act of 1863
establishes national banks
and Office of the Comptroller
of the Currency
1816
Second Bank of United
States is chartered
Federal Reserve Act of 1913
creates Federal Reserve System
Banking Act of 1933
creates Federal Deposit
Insurance (FDIC) and
separates banking and
securities industries
Figure: Historical Development

Bank – credit and debit cards
nIn the Czech Republic we have three types of cards- credit, debit, charge
qCharge card
qCredit card
qDebit card
nElectronic banking…lower the cost of bank transactions by having the customer interact with an
electronic banking facility rather than with a human being.
qOne important form of an e-banking facility is the ATM (automated teller machine), an electronic
machine that allows customers to get cash, make deposits, transfer funds from one account to
another, and check balances.
n24 hours a day

Investment Banks
nInvestment banks are best known as intermediaries that help corporations raise funds
nInvestment bank…is not a financial intermediary that takes in deposits and then lends them out
nIn addition to underwriting the initial sale of stocks and bonds, investment banks, also play a
pivotal role as a deal makers in the mergers and acquisition area, as intermediaries in buying and
selling of companies, and as private brokers to the very wealthy.
nWell-known…Morgan Stanley, Merrill Lynch, Goldman Sachs

Investment Banks II.
nOne feature of investment banks that distinguishes them from stockbrokers and dealers is that they
usually earn their income from fees charged to clients rather than from commissions on stock
trades.
n
nThese fees  are often set as a fixed percentage of the dollar size of the deal being worked.

Banking System Classification
nBanks are financial institutions that accept deposits and make loans
nBanking system presents complex of all banks in one country and relationships between them
qYou can differentiate between the one-tier and the two-tier banking system
nA hierarchical, subordinate relationship when the central bank occupies the first tier and the
others (commercial banks, pension funds, building societies) are on the second tier (one-tier or
two-tier?)
nYou can differentiate between universal banking system and specialized banking system
n

Banking System
nBanks are financial institutions that accept deposits and make loans
nDeposit…the liability owed by the bank to its depositor; money given in advance to show intention
to complete the purchase of a property; to put money in a bank, as for safekeeping or to earn
interest
nLoan…an arrangement about lending money when the customer agrees to pay the money back after a
certain period of time, with some interest

Central Bank and its function
Central Bank
Microeconomics
Macroeconomics
Bank of Banks
Bank of State
Regulation and Supervision
Monetary policy representation
Monetary Policy
Issue banknotes and coins
Foreign-exchange activity

Central Bank and its Function
nControl and formulate monetary and fiscal policy
nIssue banknotes and coins (sole right)
nStore reserves
nHandle government borrowing
nAct as the other banks‘ bank (lender of last resort)
nSet and control interest and exchange rates
nDo business with international institutions (e.g. IMF)
nConduct money transfer to other countries

CNB (Czech National Bank)
nThe CNB is the central bank of the Czech Republic and the supervisor of the Czech financial
market.
nIt is established under the Constitution of the Czech Republic.
nUnder Article 98 of the Constitution of the Czech Republic and Act No. 6/1993 Coll., on the Czech
National Bank, as amended, the primary objective of the CNB is to maintain price stability.
n
q

CNB…its mission
nTo maintain low and stable inflation
nTo ensure smooth circulation of money and smooth payments
nTo oversee the stability of the financial system
nTo support the balanced and smooth development of the Czech financial market
qThrough monetary policy CNB seeks to achieve price stability and thereby maintain confidence in
the value of money and the exchange rate of the Czech koruna
qBy supervising the financial market, issuing prudential rules and conducting financial market
operations we care for the stability and development of the financial system and protect its
clients
qBy managing the clearing system and issuing banknotes and coins we ensure smooth payments and cash
flows
qThey administer the foreign exchange reserves of the Czech states

The types of the financial institutions
nCommercial banks (clearing)
nMerchant banks
nBuilding societies (US: Thrifts)
nPension funds
nInsurance companies
nCredit Unions

nCommercial banks accept deposits, make loans and provide services both to the members of the
public and to the corporate clients while
nMerchant banks only cater for the corporate clients with the same services
nBuilding societies take mortgage loans and deposits by offering current accounts to members
nPension funds earn interests and dividends from the accumulated funds and sometimes part of banks
or

nInsurance companies…loan out funds and invest in government securities or shares
nCredit unions…co-operatively owned by members who are given loans, chequebooks, life assurance
etc.

Nonbank finance
nBanking is not the only type of financial intermediation you are likely to experience.
qYou might decide to purchase insurance, take out installment loan from a finance company, or buy a
share of stock.
nInsurance
nPension
nMutual funds

nThank you for your attention