role of banks
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Lecture # 15Role of Commercial Banks
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Bank
A bank is a commercial or stateinstitution that provides financial
services , including issuing money
in various forms, receiving deposits
of money, lending money and
processing transactions and thecreating of credit.
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A commercial bank accepts
deposits from customers and in turn
makes loans, even in excess of thedeposits; a process known as
fractional-reserve banking. Some
banks called Banks of issue! issuebanknotes as legal tender.
"ommercial Bank
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A commercial bank is usually
defined as an institution that bothaccepts deposits and makes loans;
there are also financial institutions
that provide selected banking
services without meeting the legal
definition of a bank.
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#any banks offer ancillary financialservices to make additional profit;
for example, most banks also rent
safe deposit boxes in theirbranches.
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"urrently in most $urisdictionscommercial banks are regulated% re&uire permission to operate.'perational authority is granted bybank regulatory authorities whichprovides rights to conduct the mostfundamental banking services suchas accepting deposits and makingloans.
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Purpose of a bank
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Banks have influenced economies %
politics for centuries. (istorically, the
primary purpose of a bank was to
provide loans to trading companies.
Banks provided funds to allowbusinesses to purchase inventory, and
collected those funds back with
interest when the goods were sold.
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Commercial
Lending
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)or centuries, the banking industry
only dealt with businesses, notconsumers. "ommercial lendingtoday is a very intense activity, with
banks carefully analy*ing thefinancial condition of their businessclients to determine the level of riskin each loan transaction.
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Banking Services
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Banking services have expanded
to include services directed atindividuals, and risk in these much
smaller transactions are pooled.
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A Banks Profit
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+his difference is referred to as the
spread between the cost of fundsand the loan interest rate.
(istorically, profitability from lending
activities has been cyclic anddependent on the needs and
strengths of loan customers.
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n recent history, investors have
demanded a more stable revenue
stream and banks have therefore
placed more emphasis on
transaction fees, primarily loan feesbut also including service charges
on array of deposit activities and
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ancillary services international
banking, foreign exchange,insurance, investments, wire
transfers, etc.!. (owever, lending
activities still provide the bulk of acommercial banks income.
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(owever, there are traces of
banking activity even in theBabylonian times, and indeed a
book about the history of banking is
named 1 Banking, from Babylon toWall Street.
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Services !ypically"ffered by Banks
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Although the basic type of services
offered by a bank depends uponthe type of bank and the country,
services provided usually include1
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1 !aking deposits from their
customers and issuing current2ak! or checking 3S! accounts
and savings accounts to individuals
and businesses.
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7. )acilitating money transactionssuch as wire transfers and
cashiers checks
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8. ssuing credit cards, A+# cards,
and debit cards9. Storing valuables, particularly in a
safe deposit box
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:. "onsumer % commercial financial
advisory services
. 2ension % retirement planning
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)inancial transactions can
be performed throughmany different channels1
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4. A!% is a computeri*ed
telecommunications device that
provides a financial institutions
customers a method of financialtransactions in a public space
without the need for a human clerk
or bank teller
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8. "nline bankingis a term used for
performing transactions, paymentsetc. over the nternet through a
bank, credit union or building
societys secure website
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!ypes of banks
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Banks activities can be divided intoretail banking, dealing directly with
individuals and small businesses;business banking, providingservices to mid-market business;
corporate banking, directed at largebusiness entities; and investmentbanking, relating to activities on the
financial markets.
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#ost banks are profit-making,
private enterprises. (owever, some
are owned by government, or are
non-profits.
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"entral banks are non-commercial
bodies or government agenciesoften charged with controllinginterest rates and money supplyacross the whole economy. +heygenerally provide li&uidity to thebanking system and act as =enderof last resort in event of a crisis.
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Commercial bank1 the term used
for a normal bank to distinguish it
from an investment bank. After the
>reat ?epression, the 3.S.
"ongress re&uired that banks onlyengage in banking activities,
whereas investment banks were
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limited to capital market activities.
Since the two no longer have to beunder separate ownership, some
use the term commercial bank to
refer to a bank or a division of abank that mostly deals with
deposits and loans from
corporations or large businesses.
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Community Banks& locally
operated financial institutions thatempower employees to make local
decisions to serve their customers
and the partners
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Community development banks&
regulated banks that providefinancial services and credit to
underserved markets or
populations.
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Postal savings banks& savings
banks associated with nationalpostal systems.
Private banks&manage the assets
of high net worth individuals.
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"ffs$ore banks& banks located in
$urisdictions with low taxation andregulation. #any offshore banks are
essentially private banks.
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were created on public initiative, while in
others socially committed individuals
created foundations to put in place thenecessary infrastructure. owadays,
5uropean savings banks have kept their
focus on retail banking1 payments,savings products, credits and
insurances for individuals or small and
medium-si*ed enterprises.
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Apart from this retail focus, they
also differ from commercial banks
by their broadly decentrali*ed
distribution network, providing local
and regional outreach and by theirsocially responsible approach to
business and society.
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Building societies and
Landesbanks& conduct retail
banking.
't$ical banks&banks that prioriti*e
the transparency of all operationsand make only what they consider
to be socially-responsible
investments.