Legal Definition of a Commercial Bank

Any institution that qualifies for deposit insurance administered by central bank----------------------------------------------------------------------------------------------------------------------Types of Banks

Commercial Bank [Sell deposits and make loans to businesses and individuals] Savings Bank [ Attract savings deposits and make loans to individuals and families] Community Bank [ Is smaller, locally focused commercial and savings bank] Money Center Bank [ Is large commercial bank based in leading financial centers] Investment Bank [ Underwrite issues of new securities by their corporate customers] Merchant Bank [ Supply both debt and equity capital to businesses] Central Bank International Bank [ Is commercial bank present in more than one nation] Mortgage Bank [ Provide mortgage loans on new homes but do not sell deposits] Virtual Bank [ Offer its services over the internet]

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Discuss traditional functions & new functions of banks??Traditional Functions

Accepts Deposits for Transactions and Saving Makes Loans to Consumers, Business, and Government Invests in Securities Makes Payments for Customers (Checking) Provides Currency and Coin for Customers Provides Safekeeping of Valuables Exchanges Currencies Trust Services

Other Financial Services Provided by Banks Corporate Cash Management Equipment Leasing Insurance Retirement and Pension Plans Security Brokerage, Mutual Funds, Annuities Merchant Banking Financial Advising and Planning Credit, Debit, and Smart Cards ATM’s, Point of Sale Payment, and Internet Banking

--------------------------------------------------------------------------------------------------------------------------Key Trends Affecting Banks and Other Financial-Service Firms

Service Proliferation Rising competition Government Deregulation An Increasingly Interest-Sensitive Mix of Funds Technological Change Consolidation and Geographic Expansion Convergence Globalization Increased Risk of Poor Performance and Failure

----------------------------------------------------------------------------------------------------------------------------Risks faced by banksCredit RiskThe Probability that Some of the Financial Firm’s Assets Will Decline in Value and Perhaps Become Worthless

Liquidity Risk

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Probability the Financial Firm Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs

Market RiskProbability of the Market Value of the Financial Firm’s Investment Portfolio Declining in Value Due to a Change in Interest Rates

Interest Rate RiskThe Danger that Shifting Interest Rates May Adversely Affect a Bank’s Net Income, the Value of its Assets or Equity

Operational RiskUncertainty Regarding a Financial Firm’s Earnings Due to Failures in Computer Systems, Errors, Misconduct by Employees, Floods, Lightening Strikes and Similar Events or Risk of Loss Due to Unexpected Operating Expenses

Legal and Compliance RiskRisk of Earnings Resulting from Actions Taken by the Legal System. This can Include Unenforceable Contracts, Lawsuits or Adverse Judgments. Compliance Risk Includes Violations of Rules and Regulations

Reputation RiskThis is Risk Due to Negative Publicity that can Dissuade Customers from Using the Services of the Financial Firm. It is the Risk Associated with Public Opinion.

Capital RiskProbability of the Value of the Bank’s Assets Declining Below the Level of its Total Liabilities. ------------------------------------------------------------------------------------------------------------------------Reasons for Bank Regulation 1. To protect the public's savings2. To control the money supply3. To ensure adequate supply of loans and to ensure fairness4. To maintain confidence in the system5. To avoid monopoly powers 6. To provide support for government activities7. To support special sectors of the economyfalls because businessmen would not borrow at unavailable rates.

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