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Chapter no. 3: Banks and banking system

Something concerning the course organization
§The first test will be written on October 27, either at 8.30 am, or at 10.30.
§The second test will be written on December 16 at 8.30 am
§It is still possible to apply for presentations and essays
§There are four final exam dates:
§December 19, at 8.30 am
§January 3, at 8.45 am
§January 13, at 1.00 pm
§January 27, at 12.00 am
§The sample test is already accessible
§Please, check the „notebook“ in the Information System regularly
§
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Content
§Basic terms
§Banking system, functions of banks
§Types of banks
§Monetary policy
§Types of interest rates
§Examples
§Questions (revision)
§Conclusion, comments, discussion

Basic terms
§Loan
§the act of giving money, property or other material goods to another party in exchange for future
repayment of the principal amount along with interest or other finance charges
§Deposit
§A transaction involving a transfer of funds to another party for safekeeping
§Mortgage
§a debt instrument, secured by the collateral of specified real estate property, that the borrower
is obliged to pay back with a predetermined set of payments
§Principal
§The original amount of money (borrowed or provided); without any interest payments
§Collateral
§a property or other asset that a borrower offers as a way for a lender to secure the loan
§
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Banking system
§A banking system is a group or network of institutions that provide financial services for us.
These institutions are responsible for operating a payment system
§Functions of banks:
§Loans provision
§Deposits accepting
§Help and assistance with investments
§(Information provision)
§
§Bank = a financial institution licensed to receive deposits and make loans
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Types of banks
§Central and national banks
§Control monetary policy
§Regulation and supervision over commercial banks
§
§Commercial banks
§(community banks)
§Accept deposits and provide loans
§Provide current and savings accounts
§Other offered products: insurance, investments and retirement services
§
§Dual banking system
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How central bank might influence the monetary policy?
§Central banks use a number of tools to shape monetary policy
§
§Particular tools and their impact:
§Open market operation
§Reserve requirements
§Discount (bank) rate
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Interest rate
§Nominal interest rate
§Interest rate paid/asked by a bank
§Real interest rate
§Interest rate after deduction of the inflation (expresses the real value of debt/income
§
§Real interest rate = nominal interest rate - inflation
§
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Interest rate II – different types of rates
§p.a. (per annum)
§p.q. (per quartale)
§p.m. (per mensem)
§p.d. (per diem)
§
§The frequency might be even more frequent, for example, in question of hours, minutes or even
seconds
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Interest rate III – simple and compound interest
§Simple interest
§Computes interest only from the original principal, not from added interest payment(s)
§= P x I x n
§Compound interest
§Computes interest from principal, as well as from the added interest payment(s)
§= P(1+i)^n - P
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Used abbreviations:
P = principal
I = interest rate
N = number of periods

Example I: Which of the following savings accounts is more profitable if an investor intends to
deposit 20,000 CZK per one year?
§Savings account A: interest rate: 1.5% p.a.; simple interest, interest is added at the end of
every year
§
§Savings account B: compound interest, interest rate: 1.4% p.a., interest is added at the end of
every year
§
§Savings account C: compound interest, interest rate: 1.0% p.m., interest is added at the end of
every month
§
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Example II: Which of the savings accounts is more favourable if you intend to invest 10,000 CZK per
one year?
§Savings account I: 1.2% p.a., with regular annual fee 100 CZK, interest is added at the end of
every year
§
§Savings account II: 0.5% p.m., with one fee (paid in the beginning) in the amount of 3% of
invested sum(principal), interest is added at the end of every month
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§Which of them provides an investor with higher return on investment?
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Revision
§What is the difference between „current account“ and „savings account“?
§What is the main role of commercial banks?
§What types of interest rates do you know?
§How can different types of interests influence the future income of such investment/loan? §What
are the possibilities of a central bank to influence the price of loans?
§What is monetary policy?
§
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Thank you for being able to keep up with me till the end!
Questions and comments?
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References
§MISHKIN, Frederic S. The economics of money, banking and financial markets. 7th ed. Boston:
Addison-Wesley, 2004. ISBN 0-321-12235-6.
§Simple Interest Definition | Investopedia. Investopedia [online]. [cit. 2016-09-06]. Dostupné z:
http://www.investopedia.com/terms/s/simple_interest.asp
§Banking System: Definition & Types - Video & Lesson Transcript | Study.com. Study.com | Take
Online Courses. Earn College Credit. Research Schools, Degrees & Careers [online]. [cit.
2016-09-09]. Dostupné z: http://study.com/academy/lesson/banking-system-definition-types.html
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