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Part B. Banking products and services
Lecture 5. Types of banking
Outline
1.Traditional versus modern banking
2. Retail or personal banking
3. Private banking
4. Corporate banking
5. Investment banking
6. Islamic banking
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1.Traditional versus modern banking
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1.Traditional versus modern banking
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1.Traditional versus modern banking
!!! Universal banking trend: banking business is broadly defined to
include all aspects of financial service activity (including securities
operations, insurance, pensions, leasing and so on).
!!! Bancassurance trend: the distribution of insurance products through a
bank’s distribution channels (a package of financial services that can fulfill
both banking and insurance needs at the same time).
Advantages:
Cross-selling opportunities for banks (scope economies);
Non-interest income boosted at a time of decreasing interest margins;
Risk diversification;
Banks converting into full service financial firms (deregulation).
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2. Retail or personal banking
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2. Retail or personal banking
relates to financial services provided to consumers
it is usually small-scale in nature (all large banks
offer a broad range of personal banking services
including payments services, savings, loans,
mortgages, insurance, pensions and other services)
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2. Retail or personal banking
Commercial banks: are the major financial intermediaries in any
economy. They are the main providers of credit to the household and
corporate sector and operate the payments mechanism. Commercial banks
are typically joint stock companies and may be either publicly listed on the
stock exchange or privately owned.
Savings banks: savings banks have traditionally had mutual ownership,
being owned by their ‘members’ or ‘shareholders’ who are the depositors
or borrowers => they may pursue strategic objectives other than
maximising shareholder wealth or profits (they are very similar with
commercial banks, typically their business focuses on retail customers and
small businesses);
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2. Retail or personal banking
Co-operative banks: very similar with saving banks (originally had mutual
ownership and typically offered retail and small business banking services);
Building societies: very similar to savings and cooperative banks as they have
mutual ownership and focus primarily on retail deposit-taking and mortgage
lending; most people, who have a savings account, or a mortgage, are members and
have certain rights to vote and receive information, as well as to attend and speak
at meetings;
Credit unions: non-profit institutions owned by their members. Member deposits
are used to offer loans to the members; they are usually regulated differently from
banks;
Finance houses: provide finance to individuals/companies by making consumer,
commercial and other types of loans. They differ from banks because they typically
do not take deposits and raise funds by issuing money market (such as commercial
paper) and capital market instruments (stocks and bonds).
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3. Private banking
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3. Private banking
concerns the high-quality provision of a range of financial
services to wealthy clients (individuals/their families): retail
banking products such as payment and account facilities plus
a wide range of up-market investment-related services.
tailoring services to individual client requirements;
anticipation of client needs;
long-term relationship orientation;
personal contact;
discretion.
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3. Private banking
In terms of AUM (Assets Under Management), the world's 20 largest private banks (or private banking
divisions/subsidiaries of large bank holding companies), as of end-2015.
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4. Corporate banking
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4. Corporate banking
The corporate banking segment of banks typically serves a
diverse range of clients, ranging from small to mid-sized local
businesses with a few millions in revenues to
large conglomerates with billions in sales and offices across
the country.
Corporate banking is typically offered by commercial banks,
and entails all the services that can be extended on a financial
level to corporate entities to ease day-to-day operations.
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4. Corporate banking
Banking services used by small firms
Payment services;
Debt finance;
Equity finance;
Special financing.
Banking services for mid-market and large (multinational) corporate
clients
Cash management and transaction services.
Credit and other debt financing facilities – loans, overdrafts, syndicated loans;
Commercial paper, bonds and other facilities;
Commitments and guarantees;
Foreign exchange and interest rate-related transactions;
Securities underwriting and fund management services.
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5. Investment banking
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5. Investment banking
Investment banks were essentially created in the U.S. by the
passage of the Glass-Steagall Act. Prior to this, investment
banking activities were part of large, money-center
commercial banks.
The lines between investment banks and commercial banks
again begins to blur as legal separation between investment
banks and commercial banks is no longer required.
They mainly deal with companies and other large institutions
and they typically do not deal with retail customers.
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5. Investment banking
Financial advisory (M&A advice);
Underwriting of securities issues (guaranteeing a price that the new
equity or bond issue will sell for);
Trading and investing in securities on behalf of the bank or for clients.
This activity can include trading and investments in a wide range of
financial instruments including bonds, equities and derivatives products;
Asset management – managing wholesale investments (such as pension
funds for corporate clients) as well as providing investment advisory
services to wealthy individuals (private banking) and institutions;
Other securities services – brokerage, financing services and securities
lending.
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Financial advisory (M&A advice)
Investment bankers may assist both acquiring firms
and potential targets (although not both in the same
deal).
Deal may be a hostile takeover, where the target
does not wish to be acquired.
Investment bankers will assist in all areas, including
deal specifics, lining up financing, legal issues, etc.
Underwriting of securities issues
The process of underwriting a stock or a bond issue requires that the investment banker purchase the entire offering at a predetermined price and then resell the offering (securities) in the market. The services provided during this process include:
Giving Advice
Filing Documents
Underwriting, Best Efforts, or Private Placement
Underwriting of securities issues
Giving advice
Explaining current market conditions in to help
determine why type of security (equity, debt, etc.) to
offer
Assisting in determining when to issue, how many, at
what price (more important with IPOs than SEOs)
Underwriting of securities issues
Filing Documents
A portion of the registration statement known as the prospectus is made available to the public.
Debt issues require several additional steps, including acquiring a credit rating, hire a bond counsel, etc.
For equity issues, the investment banker may also arrange for the securities to appear on one of the exchanges.
Underwriting of securities issues
Underwriting (firm commitment)
The investment banker purchases the entire offering at a fixed price and then resells the offering to the market.
An underwriter may form an underwriting syndicate to diffuse part of the underwriting risk.
Placement of a tombstone in, for instance, the Wall Street Journal (example on next slide).
Underwriting of
securities issues
Underwriting of securities issues
The goal of underwriting is for all of the shares in an offering to be spoken for. However, this may not occur.
Fully subscribed: all shares are spoken for
Undersubscribed: underwriting syndicate unable to generate interest in all of the available shares
Oversubscribed: interest in more shares than are available (may lead to rationing).
Underwriting of securities issues
Figure 23.1 Using Investment Bankers to Distribute Securities to the Public
Underwriting of securities issues
Equity Sales: when a firm sells an entire division (or maybe the entire company), enlisting the aid of an investment banker.
Assists in determining the value of the division or firm and find potential buyers
Develop confidential financial statements for the division for prospective buyer (confidential memorandum)
Prepare a letter of intent to continue, assist with due diligence, and help reach a definitive agreement
Trading and investing in securities
Securities firms with brokerage services offer
several types of services:
Brokerage Service
Other services
Full-Service Brokers versus
Discount Brokers
Trading and investing in securities
Securities Orders: when you call a brokerage house
to buy or sell a security, you essentially have three
options:
Market Order: buy or sell security at current price
Limit Order: you specify the most you are willing to pay
(buy) or the least you are willing to accept (sell) for
a security
Short Sales: sell a security you don’t own with the intent of
buying it back at a later date (hopefully at a lower price)
Trading and investing in securities
Other Services
Insurance against loss of actual security documents
Margin credit for purchasing equity with borrowed
funds
Other services driven by market demand (e.g., the cash
management account)
Trading and investing in securities
Full Service Brokers: offer clients research and
investment advice, but usually charge a higher
commission on trades.
Discount Broker: provides facilities to buy/sell
securities but offers no advice. Many on-line
discount brokerage firms do have significant
research available
Trading and investing in securities
Securities Dealers
Hold inventories of securities on their
own account
Provide liquidity to the market by standing by ready to
buy or sell securities (market maker)
Especially important for thinly traded securities
5. Investment banking
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5. Investment banking
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6. Islamic banking
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6. Islamic banking
Islamic Shariah law prohibits the payment of riba or interest
but does encourage entrepreneurial activity.
As such, banks that wish to offer Islamic banking services
have to develop products and services that do not charge or
pay interest.
Their solution is to offer various profit-sharing-related
products whereby depositors share in the risk of the bank’s
lending.
Depositors earn a return (instead of interest)
Borrowers repay loans based on the profits generated from the
project on which the loan is lent.
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6. Islamic banking
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6. Islamic banking
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6. Islamic banking
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6. Islamic banking
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6. Islamic banking
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6. Islamic banking
Total Islamic finance
assets of commercial
banks rose 17% between
2009 and 2013, hitting
$778 billion.
Of that, Gulf Cooperation
Council (GCC)
countries account for
around $517 billion,
ASEAN countries for
$160 billion and South
Asia for $23 billion; with
the rest of the world
(especially Turkey)
making up the remaining
$78 billion.
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6. Islamic banking
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6. Islamic banking
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6. Islamic banking
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