Business of Banking

1. Business of Banking Chapter 3

2. Bellringer • Complete the online pretest for Chapter 3 • www.m.g-wlearning.com

3. Income from Loans and Securities • Describe four common ways banks generate revenue • Explain the connection between customer fees and bank profitability.

4. Turn off the lights! • Biz Kid$ Video

5. Income from Traditional Bank Services • Asset: something owned by an individual or other entity • Two largest assets of banks—loans and securities

6. Interest on Loans • Banks make most of income by extending loans to customers • Interest: fee charged for borrowing money (interest income) • Also charge interest on credit card balances

7. Interest on Loans 3 Main Factors How Much Interest a Bank Charges Creditworthiness Poor credit=high risk Risky loans=higher interest rates Good credit=good risk Good risk=lower interest rates The lower the risk, the less a borrower has to pay. • Competition • Market rates • Borrower’s creditworthiness

8. Interest on Securities • Banks invest money in securities (bonds and treasury bills) • Securities: investments that represent ownership or debt (example: bond) • Bonds pay interest • Investor receives the purchase price plus interest back when the bond matures(date the investor can receive the initial deposit) • Bonds are a type of long-term security • Banks invest in treasury bonds issued by US Treasury Department

10. Gains on Securities • Gain: increase in income • Securities are the next most profitable (next to loans) • Banks can sell securities when money runs low

11. Research Activity • What is the Credit Card Act of 2009? • What does it require?

12. Income from Fees • Larger source of income for banks • Banks have raised fees to generate more income • Some are waived with a certain balance • Insufficient funds fee if there isn’t enough money in acct to cover transaction • Overdraft program provides funds to cover a check written on an acct w/insufficient funds • Overdraft = negative balance • ATM fees: surcharge (convenience fee), account inquiry fee • Safe deposit boxes • Money order: payable to a specific party • Inactivity fee (really?)

13. Checkpoint: On Target!! • What is interest? • How do loans earn income for banks? • What are the two ways banks earn income on securities? • List four types of treasury securities. • List three of the fees a bank may charge for checking accounts.

14. Bellringer Fill in the blank _____________ is used to manage exposure to financial risk.

15. Income from Nontraditional Services • Explain how banks earn income from insurance products • Describe types of trust operations and how they provide income • Explain how brokerage services operate and provide bank revenue • Describe how banks manage the financial assets of certain customers • Identify the major investment banking activities

16. Insurance Products • Risk is the chance that something unfavorable could happen to a person or property. • Insurance provides protection from certain risks that can cause financial loss. • Major types: life, health, and property

17. Life Insurancebeneficiary receives the financial protection from the policy. Credit Life Insurance Mortgage Life Insurance Pays off mortgage upon death • Pays off a loan if insured dies • Offered at the time borrower applies for the loan

18. Property and Casualty Insurance and Liability Insurance Property and Casualty Liability Protects against financial losses that may occur if the insured is found responsible for property loss or injuries to others i.e. medical expenses • Covers things • Lost or stolen • Will pay for replacement or repair • i.e. automobile and homeowner’s

19. Types of Health Insurance

20. Checkpoint • Why do people purchase insurance? • How do banks make money from selling insurance? • What are the biggest costs associated with liability cases?

21. Trust Services Individual Clients • Involve handling financial assets for a customer • Bank becomes the trustee (person/institution that controls the financial assets for the customer) • Trusts define the customer’s assets and how those assets should be handled • Generally provided by large banks

22. An estate is the property and possessions of an individual.

23. Checkpoint • List the major services offered by bank trust departments.

24. Trust Services Business Clients • Treasury and cash management services include accounting, capital, collections, credit card, and information services. • Pension funds are plans that provide retirement income for the employees of a business. • Contributions from employees, employers, or both go into the pension fund. • Payment of dividends to stockholders are handled by banks.

25. Trust Services Brokerage Services • A broker may buy and sell securities for a customer (trading). • Common stock • Bonds • Treasury securities

26. Checkpoint • What is the major source of income from brokerage services?

27. Trust Services Asset Management • Grouped into 3 categories • Fixed income—mostly bonds • Equities—mostly stocks • Cash equivalents—cash or investments that can be readily sold for cash, i.e. T-bills or CDs

28. Investment Banking Services Underwriting Securities Mergers and Acquisitions Merger takes place when 2 companies agree to combine Acquisition happens when 1 company buys another company • Occurs when an investment bank buys a new stock directly from the company wanting to generate cash, then selling to the public. • Underwriting spread is the difference between the price paid by the investment bank and the price sold to the public.

29. International Banking • Focus largely on trade • Conduct business beyond the borders • Advantage: access to more customers • Disadvantage: exposure to economic and political conditions of the country its in • Federal Reserve monitors and regulates branches of foreign banks doing business in the US

30. Banking Expenses Interest Expense Operating Expenses Costs that are incurred to keep the bank in business Banks increase profit by increasing income, decreasing expenses, or a combo of both • When the bank pays interest to customers for using their money (largest expense) • Banks pay interest to entice customers Profit = total income – total expenses

31. Activity: List the banking activities in the appropriate column • Investment banking income • Interest paid on deposits • Interest income from loans and securities • Security expenses • Gains on securities • Equipment costs • Employee wages and salaries • Brokerage commissions • Money order fees • Building and utility costs • Inactivity fees • Employee benefits • Credit card fees • ATM fees • Employee training costs • Safe deposit box rental fees • Checking account fees

32. Take-home quiz . . . Write these down! • What is the largest expense for banks? • What type of expense are utilities? • Total income minus what equals profit? • Why do banks pay interest to depositors? • How can banks increase their profits?