Banks in Society

Question 1

What is a bank?

Answer 1

• Acts as an intermediary between those in credit (depositers) and those who need to borrow
• Money is their raw material
• Business is based on risk (so trust is needed)

Question 2

What is Money?

Answer 2

• Medium of exchange
• Store of value
• Unit of account
• Means of deferred payment

Question 3

What is a Retail Bank?

Answer 3

Accepts deposits and makes loans

Question 4

What is a Life Assurance Company?

Answer 4

Receives premiums and investments from policy holders to fund claims and pay investment returns

Question 5

What is a Building Society?

Answer 5

Similar to a retail bank but must take a significant proportion of its funds from members

Question 6

What is a Credit Union?

Answer 6

Accepts funds from those who share a common bond

Question 7

What is NS&I?

Answer 7

Takes deposits from the public in order to fund some government borrowing needs

Question 8

What are the choices of corporate form?

Answer 8

1. Joint-stock model
2. Mutuality model

Question 9

What is a joint-stock corporate form?

What are its benefits?

Answer 9

The most common form of commercial organisation where directors serves as shareholder agents.

Benefits:

• shareholders have limited liability
• stock exchange members easily raise capital

Question 10

What is a mutual corporate form?

What are the benefits?

Answer 10

• Owned by members
• No shareholders
• Don’t pay dividends

Benefits:

• Impossible for one individual/group to take over
• Can pay higher interest to depositors and charge lower interest rates to borrowers

Question 11

What does a bank contribute to society?

Answer 11

• Contributes to the UK economy through income and jobs
• London is a major financial centre

Question 12

How has the money transmission system changed?

Answer 12

Previously:

• Cheques were popular
• Primary lending to individuals and businesses

Now:

• Islamic finance, credit cards, offset mortgages
• Cross-selling of complimentary services (bancassurance)

Question 13

What are the banking trends and developments?

Answer 13

• Rationalisation: there used to be many varied small firms, now there is a just a few large firms that cover all areas
• New threats: insider dealing, money laundering is more prominent
• Changing channels to market: it used to be through a large network of branches, but these have been rationalised
• Changing risk-reward relationship: lending approach was relaxed pre-2007, now there is a strict lending critria and capital adequacy rules

Question 14

Who should banks offer their services to?

What are the features & risk of these market segments?

Answer 14

High risk

• Self-employed/small businesses:
  Have unpredictable income streams and a high failure rate
• Socially excluded persons:
  Can use banking services but have limited access to credit
• Students:
  Lucrative market, targeted due to high future earnings
• Young people:
  Targeted for their savings
• Salaried employees:
  Income stram is predictable, so most core products are aimed at them

Low Risk

Question 15

The credit crises damaged the publics confidence and trust in banks.

How do banks rebuild trust?

Answer 15

The Chartered Banker Seminar:

• Ring-fencing retail banking from other banking activities
• Broader drive to separate investment banking from other areas of banking to reduce conflicts of interest risks
• Establishing a more competitive structure with fewer regulatory interventions that hinder entry to the market, thereby encouraging creativity and innovation
• Building a banking culture around relationships rather than transactions with more focus on helping customers and less pressure to cross sell.