Finance (Basic)
Ludek Benada
Department of Finance
Office 533
75970@mail.muni.cz

Bank
Bank is… (Accepts deposits and provides loans… + other financial services.)
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A few history… (Origin Italy, Florence)

How the bank works
… just because of trust! Banks can legally extend considerably more credit than they have cash!
Multiplication of deposits:
ME=D*1/r
ME …. Effect of multiplication
D   …. Deposits
R   …. Minimal reserves (holding by the Central bank)

Balance sheet
•Bank Assets = Bank Liabilities + Bank Capital
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Sources of Funds (Liabilities)
qEquity
qDeposits
qBorrowing (Other CB´s, Central Bank, Usage of Bonds..)

Uses of Funds (Assets)
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qCash
qSecurities (Stocks, Bonds)
qLoans
qReserves at Central Bank
qAccounts at other Commercial Banks
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Off-balance-sheet
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qAsset,
qDebt,
qor Financing Activity.
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… not at company´s balance sheet.

Banks increase the amount of money in the economy
qTwo ways:
qCentral Bank issues new money into the economy (purchasing financial assets or lending money).
qCommercial Banks multiply the introduced money from the Central Bank.

How creates the Commercial Bank money?
Fractional Reserves Banking
Multiplying money
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Bank run, Bank panic
qBank Run – many clients require their money at the same moment – bank does not have enough
liquidity.
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qBank Panic – Financial crisis (many banks suffer runs)

Types of Banks
qCentral Banks – Monetary Authority
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qCommercial Banks
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qSaving Banks/Thrift – offers the possibility for saving (cooperative banks, credit unions)

Central Bank
A Central Bank … has monopoly for issue the currency, regulates the money supply, control interest
rate.
(FED, European Central Bank, Czech National Bank).

Functions of CBs
qKeep a stable price level
qIssue note
qBank for state (for government)
qBanker´s clearing house
qLender to the last resort (in the case of liquidity lack)
qMonetary policy
qCollecting statistic data/analysis

Commercial Banks
How CBs make money?
… Profit = Revenue – Costs (Spread in interest)

Functions of Commercial Banks
qPrimary Function
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qSecondary Functions

The Primary Functions of CB
qAccept deposits and
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qoffer loans.
(The main activities)

The Secondary Functions of CB
qTransfer money,
qStanding guarantee on behalf of its customers,
qFacilities of foreign exchange,
qConsulting, collecting & supplying business information, etc..)

Types of CBs
qRetail Bank (individual, small businesses)
qBusiness Bank (mid-market businesses)
qCorporate Bank (large businesses
qPrivate Bank (high net worth individuals/families)
qInvestment Bank (related with activities on the financial markets, activities like M&A)

Universal versus Separated Banking
qUniversal Banking
qSeparated Banking (Glass Stiagall Act – 1933)

Other Categories of Banks
qPublic Sector Banks
qPrivate Sectors Banks
qForeign Banks

Bank Channels
qATM
qOffice (direct contact with clients)
qCall center
qMobil banking
qOnline banking
qRelationship Managers (private banking)
qTelephone banking

Clearing and Clearing Bank
qClearing is.. Activities connected with the transaction until it is settled. (Reporting,
monitoring, netting of trades, tax handling, failur handling).
(Europe – TARGET2 – major interbank payment)
qClearing Bank is.. (almost the Monetary authority, through this institution go transaction
abroad).

Bank Risks
qCredit
qLiquidity
qMarket
qSystematic
qOther
qOperational
qFraud
qreputation

BASEL II
qBASEL II is… (Regulation for banks – international standard)
qThe aim is..(Protection agains banks collapse)
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Three Pillars of BASEL II
qMinimum capital requirements,
qSupervisory,
qMarket discipline.
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Thank you for your attention