Beruflich Dokumente
Kultur Dokumente
Prof. B.P.Mishra
XIMB
XUB
1
Suggested Ground Rules
Brainstorm freely; disagree openly, but courteously
it stimulates discussion & helps others think aloud!
Speak up, or youll be called upon to speak!
Dont take up more than your fair share of talk time
Avoid side conversations, let all participants benefit!
Keep discussions and comments relevant
Dont leave the room unless you have to
Dont interrupt without reasons
Speak up with interesting & relevant ideas that will
add value
Switch off cell phones/ Laptops!!!
Critique, not criticize
Have fun
2
Lenders Requirement
6
Intermediation
COSTs: POOLING
Transaction
Information (Economies of Scale/ Scope)
Search
Enforcement
Transaction cost is subject to scale economies
Implying with larger the product users, the cost comes down.
8
The Banking firm
Intermediary
I* = I AT NO INTERMEDIATION COST
D
i
SL = Supply of loan curves
SD =Supply of Deposit
IL
I*
ID
DL = Demand for loan
O T B
11
The Core functions of the bank-
Provision of Intermediation & liquidity.
Indirectly a payment service.
Asset transformation.
12
Banking Service As a
Product
Price
Supply of Services
P1
Q1
Quantity of Services Provided
13
Cost of intermediation-
Search
Verification
Monitoring
Enforcement
Other transaction cost
14
The interest margin is equal to the net of lending &
deposit rate
Includes
Intermediation cost
Cost of capital
The risk premium charge on loans
Tax payment
The institutions profit
15
Provided the bank can act as an intermediary with
lowest cost,there will be demand for its services.
16
Banks offer liquidity to their customers- depositors & borrowers.
This separates from others near bank/
Non-bank financial products.
17
Banks engage in ASSET TRANSFORMATION-
Transferring the value of assets and liabilities.
18
Banks also offer services with having non-price features
Associated with them.
The bank can charge for all services offered-
Savings account / ATM card/ Internet banking/ check
book facility etc.
But it pays a lower interest on deposits.
19
Payment Services
Liquidity Risk-
Settlement is not made at expected time
So that Asset/ Liabilities are not transferred from one agent
To another via the system.
Operational Risk-
Arising from the threat of operational Breakdowns,
Preventing timely settlement
20
System Function
APACS: Association of Payment Umbrella organizaion-
Clearing Service 1984
Made up of
BACS,CCCL,CHAPS
BACS: Bankers Association Clearing NON-paper based bulk
System clearing
CCCL: Cheques and Credit Clearing Paper based Clearing
company Ltd
CHAPS: Clearing House Automated Real time Gross
System settlement
FEDWIRE, USA Inter State Clearing
CHIPS: Clearing House Interbank New-York Based Gross
payment System settlement
Real time system
TARGET: Trans European automatic Real Time Gross
Real-time Gross settlement transfer Settlement/ transfer
system
SWIFT :Society for worldwide Forex transfer 21
Information Asymmetry
No information
Un-equal information
Less than perfect information
Insider information
22
Banks have to face agency problem of
Adverse selection & moral hazard.
The nature of contracts banks enter into are-
23
Bank has less information on probability of default,
Hence adverse selection because of information asymmetry.
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Moral Hazard
25
Moral hazards is another problem.
26
Shadow Banking
28
Financial activities under Universal banking are-
29
Commercial & Investment bank-
Originated In USA- Glass Steagall section of banking Act, 1933
Commercial banks are not allowed to Underwrite securities
Investment banks are not to offer banking services.
30
Merchant Banks:-
31
Is investment bank a
bank?
Investment banks act as intermediary,
but do not accept deposit and facilitate payment systems.
But they contribute to increased liquidity to the system
by arranging new form of finance for a corporation.
This is different from meeting liquid demands of depositors.
32
Commercial Banking:-
33
Bank Holding Companies
BHCs can own banking and in some countries Non- banking
Financial subsidiaries, which are legally separate
And individually capitalized.
BHCs were used to circumvent laws in USA
which placed restrictions on interstate branching,
(branches in more than one state)
34
Finance Holding Companies
35
Financial Conglomerate
Briault (2000) defined a financial conglomerate
as a firm that undertakes at least two of the five
Financial activities:-
Intermediary / payments
Securities
Corporate Finance
Fund management
Advising & Selling investment product to retail customer.
36
Advantage :-
37
Disadvantages:-
A) Diversified financial firm encounter difficulties may go
broke Adopting high risk /return strategy- Too big to Fail.
Hence, the systemic threat to the global financial system is
increased.
38
Traditional Vs Modern
Banking
Traditional Banking Modern Banking
Product & Services : Product & Services:
Limited Universal
Loans Loans
Deposits Deposits
Insurance
Securities?
Investment
Pensions
Other Financial
services
39
Traditional Vs Modern
Banking
Income Sources: Income Sources:
Net Interest Net Interest
Income Income
Fee & Commission
Income
Competitive Competitive
Environment: Environment:
42