AN OVERVIEW OF

BANKING SECTOR

Chapter 1

William Chittenden edited and updated the PowerPoint slides for this edition.
Key topics
1. Bank definitions
2. Bank regulation
◼ Goals of regulation
◼ Regulators

◼ Rationality of regulation

3. Bank functions
4. Bank services
5. Bank organization
6. Fundamental sources of changes
1. What is a bank?

◼ Definition by functions it serves

◼ Institutions involves in transferring funds from
savers to borrowers (financial intermediation)
& in paying for goods and services
◼ Definition by services it offers to
customers
◼ Accept deposits, make commercial loans,
offer trust services, manage cash, etc.
What is a bank?

◼ Necessity of a legal definition:

◼ Regulation purpose
◼ Banking service menu is expanding
◼ Other financial-service institution provide
similar services
 What is a bank?

◼ Definition by legal basis for regulation

◼ US: any institution that could qualify for
deposit insurance administered by the
FDIC

◼ VN: a credit institution permitted to conduct

all banking activities and other related
business operations.
 What is a bank?

◼ Definition by legal basis for regulation

◼ VN: "Non-bank credit institution" is a credit
institution permitted to engage in some
banking activities as its regular business, but
not permitted to receive deposits from
individuals and to provide payment services.
◼ VN: "Banking activities" are monetary
business activities and banking services, the
regular operation of which is the receipt of
deposits and use of that to extend credits,
provide payment services;
Question???

1. Why non-bank CI are restricted to

provide some banking activities?

2. Who are the main players in the

financial market offering banking
services?
Financial service competitors of banks

◼ Savings associations
◼ Credit unions
◼ Money market funds
◼ Mutual funds (investment companies)
◼ Hedge funds
◼ Security brokers and dealers
◼ Investment banks
◼ Finance companies
◼ Financial holding companies
◼ Life and property-casualty insurance companies
2. Goals of bank regulation

◼ Ensure safety and soundness of banks protecting

public’s savings and confidence
◼ Provide an efficient and competitive financial system
◼ Provide monetary stability to achieve national broad
economic goals
◼ Maintain the integrity of the payments system
◼ Ensure equal opportunity and fairness in the public’s
access to financial services
◼ Provide government with credit, tax revenues and
other services
◼ Help sectors that have special credit needs
Banking principal regulatory agencies (US)

◼ Federal Reserve System (FED)

◼ Comptroller of the Currency (OCC)

◼ Federal Deposit Insurance Corporation (FDIC)

◼ Department of Justice

◼ Securities and Exchange Commission (SEC)

◼ State Boards of Commissions

Banking principal regulatory
agencies (VN)

◼ State Bank of Vietnam (SBV)

◼ Deposit Insurance of Vietnam (DIV)

◼ Ministry of Finance (MOF)

◼ State Securities Commission of Vietnam (SSC)

Why banks are closely regulated?
◼ Banks are among leading repositories of
public’s savings
◼ Bank’s power of creating money in form of
readily spendable deposits
◼ Banks provide individuals and businesses with
loans for consumption and investment, which
should be equally and adequately supplied.
◼ Government rely upon banks in conducting
economic policies, collecting taxes and
dispensing government payment.
Shortcomings of restrictive bank regulation

◼ May encourage monopoly due to conditional

entry
◼ Does not prevent bank failure
◼ Cannot eliminate economic risk
◼ Does not guarantee that bank management will
make good decisions, but create a struggle
between regulators and banks going on
definitively
◼ Less-regulated business win customers away
from more-regulated banks.
The Federal Reserve System

◼ The Federal Reserve System

◼ Fundamental Functions
◼ Conduct monetary policy
◼ Provide and maintain the payments system

◼ Supervise and regulate banking operations

◼ Organization
◼ Board of Governors
◼ 12 Federal Reserve District Banks
State Bank of Vietnam
The Federal Reserve System
◼ Monetary Policy Tools
◼ Open Market Operations
▪ Open market purchases (sales) increase
(decrease) reserves & the money supply
◼ Discount Rate

▪ Decreasing (Increasing) the discount rate

makes bank borrowing less (more) expensive,
which leads to an increase (decrease) in the
money supply
◼ Reserve Requirements

▪ Decreasing (Increasing) reserve requirements

increases (decreases) the money supply
3. Commercial banks and the economy

◼ Banks are the primary conduit for monetary policy

◼ Banks are the primary source of credit for most

small businesses and many individuals

◼ Banks are the major repository of public savings

◼ Banks are the principal operator of payment

system.
4. Traditional services offered by banks

1. Carrying out currency exchange

2. Discounting commercial notes and making
business loans
3. Offering savings deposits
4. Safekeeping of valuables
5. Supporting government activities with credit
6. Offering checking accounts
7. Offering trust services
More recent services offered by banks

8. Granting consumer loans

9. Providing financial advice
10. Managing cash
11. Offering equipment leasing
12. Making venture capital loans
13. Selling insurance policies
14. Selling retirement plans
15. Dealing in securities: brokerage and
investment banking services
Carrying out currency exchange

◼ Bank trade one form of currency to another in

return for fee
◼ Start from early days of banks
◼ Become more complicated in the global
financial market
◼ Be provided by large and well-experienced
banks
Discounting commercial notes and
making business loans
◼ Discounting commercial notes/making loans to
merchants based on accounts receivable
◼ Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)
◼ Be provided by banks and many other financial-
service competitors
◼ Be the core and main revenue-earning service
of many banks
Offering savings deposits

◼ Be the earliest and major source of fund for

making loan

◼ Compose of many types different in maturity,

form of currency, interest, etc.

◼ Be the most stable funding source

◼ Deposit is subject to reserve requirement and

insurance
Safekeeping of valuables

◼ Keep gold and other valuables of customers in

secure vaults in return for fee

◼ Start since the old days of banks in the Middle

Ages
Supporting government with credit

◼ Banks in Europe during the Industrial Revolution

and in America during the Revolutionary War

had to purchase government bonds with a
portion of deposits.

◼ The custom continues in the modern world

◼ Banks use government bond as a shelter of

liquidity risk and a source of revenue
Offering checking accounts

◼ Demand deposits permit depositors to write

draft/cheque for payment of goods and services
◼ Be one of the most important offerings of the
industry
◼ Service is provided by not only banks but also
credit unions, savings associations, etc.
◼ Today the service is extended to the internet
with the use of smart cards
◼ Provide banks with cheap source of fund.
Offering trust services

◼ Banks manage financial affairs and property of

individuals and firms in return for fee
◼ In property management, banks acts as a
trustee for wills, managing the deceased
customer’s estate,…
◼ In commercial trust department, bank manages
pension plan for businesses and acts as an
agent issuing stocks and bonds.
Granting consumer loans

◼ By early 20th century, banks started lending

consumers given the heavy competition for
business deposits and loans
◼ The trend has increased rapidly after the World
War 2
◼ Other current competitors for the consumer
credit accounts are credit unions and credit
card companies.
◼ The service bears high risk but returns high
earnings.
Providing financial advice

◼ Banks gains good reputation for understanding

and experience in the financial market
◼ Customers ask for advice, particularly in credit
utilization, saving or investing funds
◼ Services provided are plentiful including
financial plan preparation, marketing
opportunity consultation, fund seeking,
investment options, etc.
Managing cash

◼ Bank handle cash collection and disbursement

for firms, invest temporary cash surpluses

◼ Service is expanded to individuals and firms

◼ Bank earns not only fee, but also low-cost fund

in demand deposit accounts
Offering equipment leasing

Bank/Lessor

Equipment
Firm/Lessee
Vendor
Making venture capital loans

◼ Finance the start-up cost of new companies

◼ Implement through a venture capital firm

because added risk

◼ The venture capital firm raise fund from

investors looking for high profit
Selling insurance policies

◼ Bank sell insurance policies through acquiring

control of insurance companies
◼ Bank can gain high earning in the high-risk
insurance industry
◼ Bank possess privileges over independent
insurer in terms of customers, branches,
system, etc.
◼ Insurance agencies are affiliates or BHC or
FHC
Selling retirement plans

◼ Bank actively involves in managing retirement

plan of businesses make available to
employees

◼ Incoming fund is invested to wisely selected

securities ensuring acceptable risk and return

◼ Bank also is in charge of dispensing payment to

retired or disabled employees.
 Dealing in securities
◼ Bank provides security brokerage service and security
underwriting/investment banking services
◼ Bank offer mutual funds, annuities and other
investment products with clear consultation to
customers regarding higher expected yields and risk
◼ Bank temporarily buy stocks of large corporation aiding
new business launching or company expansion by
offering merchant banking services
◼ Bank acts as risk intermediation providing customer
with risk hedging tools (e.g. swap, option, future
contract) offered by themselves or from third party
◼ Services are provided through affiliated securities firms
or insurance companies.
 AN OVERVIEW OF
BANKING SECTOR

Chapter 1

William Chittenden edited and updated the PowerPoint slides for this edition.
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