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]
-------------------------------------------------------------------------------------------------------------------------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
ATMs, 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 banks

Credit Risk
The Probability that Some of the Financial Firms Assets Will Decline in Value and Perhaps Become Worthless

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

Market Risk
Probability of the Market Value of the Financial Firms Investment Portfolio Declining in Value Due to a Change
in Interest Rates

Interest Rate Risk

The Danger that Shifting Interest Rates May Adversely Affect a Banks Net Income, the Value of its Assets or
Equity

Operational Risk
Uncertainty Regarding a Financial Firms 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 Risk

Risk 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 Risk
This 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 Risk
Probability of the Value of the Banks Assets Declining Below the Level of its Total Liabilities.
-----------------------------------------------------------------------------------------------------------------------Reasons for Bank Regulation
1. To protect the public's savings
2. To control the money supply
3. To ensure adequate supply of loans and to ensure fairness
4. To maintain confidence in the system
5. To avoid monopoly powers
6. To provide support for government activities
7. To support special sectors of the economy

-----------------------------------------------------------------------------------------------------------------------The impact of government policy on banks

Governments around the world have created policy for banks and other financial service firms in an
effort to safeguard the publics savings, bring stability to the financial system, and prevent abuse of
financial service customers.
From the technical perspective, the following policies of a government can impact business directly or
indirectly: (a) taxation, (b) subsidies, (c) interest rates, (d) exchange rates, and (e) public-private
partnerships.
The government policy in a politically stable country will also be different from an unstable country. In
a stable political system, a government can take sustained business-friendly decisions to strengthen local
business.

In a negative political culture, a country cannot have a sustained business-friendly environment or

policy.
In an unstable system, a government finds it difficult to maintain law and order which affects the
business environment.
Taxation policy can affect businesses. High tax rate on imported products would encourage local
entrepreneurs to produce goods at home. But high tax rate on raw materials will discourage domestic
production and encourage imports.
Lending rates of the banks and the financial policy of a government can affect the economy. If interest
rate rises, investment falls because businessmen would not borrow at unavailable rates.