INVESTMENT MANAGEMENT

Banks and Financial Institutions

Group 7
Investment
• According to Investopedia, An
investment is an asset or item
acquired with the goal of
generating income or
appreciation. In an economic
sense, an investment is the
purchase of goods that are not
consumed today but are used
in the future to create wealth.
Banks and Financial Institute
• A bank is a commercial or state institution that
provides financial services , including issuing
money in various forms, receiving deposits of
money, lending money and processing
transactions and the creating of credit. A
commercial bank accepts deposits from
customers and in turn makes loans, even in
excess of the deposits; a process known as
fractional-reserve banking. Some banks (called
Banks of issue) issue banknotes as legal
tender. Many banks offer ancillary financial
services to make additional profit; for example,
most banks also rent safe deposit boxes in their
branches.
Financial Institutions
• Financial institutions provide a service as
intermediaries of the capital and debt
markets. They are responsible for
transferring funds from investors to
companies, in need of those funds. The
presence of financial institutions facilitate
the flow of monies through the economy.
To do so, savings accounts are pooled to
mitigate the risk brought by individual
account holders in order to provide funds
for loans. Such is the primary means for
depository institutions to develop revenue.
Should the yield curve become inverse,
firms in this arena will offer additional fee-
generating services including securities
underwriting, sales & trading, and prime
brokerage.
Nature of Banks and Financial Institutions
• A Bank is an institution, which deals
with money and credit accepts
deposits from the public and
mobilizes the fund to productive
sectors. It also provides remittance
facility to transfer money from one
place to another. Generally, bank
accepts deposits from
business.institutions and
individuals, which is mobilized into
productive sectors mainly business
and consumer lending.
Nature of Banks and Financial Institutes
• bank may be engaged in different
types of functions such as
remittance, exchange currency,
joint venture, underwriting, bank
guarantee, discounting bills etc. In
short, the term "modern bank"
refers to an institutions having
following features:
• 1. It deals with money; it
accepts deposits and
advances loans.
• 2. It deals with credit; it
has the ability to create
credit expanding its
liabilities.
• 3. It is commercial
institutions; it aims at
earning profit
Interest rate risk in a Bank

• The possibility that the

value of an investment
will decline as the result
of an unexpected
change in interest
rates.
Interest Rate Risk in a Bank
• IRR = blood pressure for banks

• It can increase or decrease without obvious outward

signs, and such changes can cause failure.

• the potential for changes in interest rates to reduce a

bank's earnings and lower its net worth.
Investment Risk rate in a Bank

HOW DOES IRR OCCUR?

• the assets of the banks, such as the loans it holds,
come due or mature at a different time than the
liabilities of the bank, such as deposits.
Interest Rate risk in a Bank

HOW TO REDUCE IRR?

• ensuring that all of its assets and liabilities have exactly
the same maturities.
Funding sources of a Bank
The 4 (four) Funding Resources are:
• Savings Deposit
• Reserve Funds
• Shareholder's Capital
• Retained Earnings
Savings Deposit
Savings Deposit
• Deposits remain the main source of
funds for a commercial bank. The
money collected can go toward
paying on interest-bearing
accounts, completing customer
withdrawals and other transactions.
Reserve Funds
Reserve Funds
A commercial bank builds a reserve fund
with deposits so it can pay interest on
accounts and complete withdrawals.
Shareholder's Capital

Shareholder's Capital
Some commercial banks that trade on the
stock exchange can use shareholders'
capital to receive the money it needs to
stay in business.
Retained Earnings
Retained Earnings
A retained earning can be collected
through overdraft fees, loan interest
payments, securities and bonds