Week 4: Types Of Banks And Types Of Banking

Question 1

Name the types of financial institutions in Retail Banking.

Answer 1

• Commercial banks
• savings banks
• Co-operative banks
• Buillding societies
• Credit unions
• Finance houses

Question 2

Describe the features of commercial banks.

Answer 2

1. Focus on business lending but also are the main providers of products and services in retail banking
2. Well diversified deposit and lending books and generally offer a full range of finance services.
3. Due to changes in regulation and technology activities of commercial banks have broadened in the lending business and include real estate and consumer lending.
4. Also rely on fee generating off balance sheet activities and non traditional banking activities
5. Typically joint stock companies and can be publicly or privately owned

Question 3

Describe the features of Savings Banks

Answer 3

1. Mutual organisations owned by their depositors.
2. Activities mainly involve offering saving deposits and mortgage loans.
3. Recently they have started demutualising.
4. Maximisation of shareholder profits shouldn’t be their main objective as social and economic development is.
5. Some savings banks now offer the same services as commercial banks

Question 4

Describe the features of Co-operative Banks.

Answer 4

1. Have mutual ownership and offer retail and small businesses banking services with a local focus.
2. Strong consolidation has created very large cooperative banks listed in the stock exchange.

Question 5

Describe the features of building societies.

Answer 5

1. Mutual institution.
2. They are societies and do not persuade the maximisation of profits for shareholders.
3. They are able to run on lower costs and offer cheaper mortgages and better interest rates than competitors.
4. There’s a limitation on the funding they can receive from wholesale money markets.

Question 6

Describe the features of Credit Unions

Answer 6

1. Mutual Institution
2. Deposits referred to as shares as depositors are members of the union and legally own it.
3. Credit Union membership is restricted to people with a
   “common bond” for example being a resident of the same community.
4. Non profit so exempt from corporation tax.

Question 7

Describe the features of a Finance House.

Answer 7

1. Provide finance to people and firms by making loans.
2. Source of funds are the issuance of securities such as commercial paper and stocks and bonds

Question 8

Explain the current challenges in Retail Banking.

Answer 8

• Very competitive. Community banks, credit unions, fintechs, and national banks are competing for the same customers.
• Customer preferences are changing people like fast simple and easy experiences.

Question 9

What is Corporate Banking? And what are some services offered?

Answer 9

A core activity for banks that offers banking services to companies usually to large firms.

Services offered for SME:

• Payment services
• Debt Finance
• Equity Finance
• Special Financing

Question 10

What are some challenges in corporate banking?

Answer 10

• How to finance the Green Economy?
• Banks currently have strong ties to the brown economy.

Question 11

Explain what is Investment Banking? And elaborate on common activities Investment banks do.

Answer 11

Investment banking relates to banking services provided to large companies and other financial institutions.

Investment banking perform mainly a brokerage function of bringing buyers and sellers of securities together. Thus they are specialised agents in the design and issuance of financial contracts.

Investment banks don’t deal with retail deposits and retail customers apart from private banking services.

Question 12

What do investment banks specialise in?

Answer 12

• Raising financial capital
• Advising on Mergers and Acquisitions
• wealth management
• sales & trading

Question 13

What were investment banks role in the GFC ?

Answer 13

15th September 2008, Lehman Brothers one of the largest investment banks declared itself bankrupt.

The collapse was a turning point as the economy was already going bad however the collapse was when effects on the real economy were realised (systemic crisis)

Question 14

What are Investment Banking’s Current Challenges ?

Answer 14

1. Regulatory compliance
2. Digital Technologies and Financial Technology
3. Cost Reduction

Question 15

What is Wealth Management and Private Banking ?

Answer 15

Wealth management are financial services provided to wealthy clients usually individuals and families with $100000+ in investable assets.

Private Banking is a subset of wealth management, typically with $1million + or investable assets.

Question 16

What are the features of Private Banking and what services are provided?

Answer 16

• Offer high quality services to families and clients
• Offer tailoring services to individual client requirements
• Anticipation of client needs
• Long term relationship orientation
• Personal contact
• Discretion

Private banks offer a range of specialized financial services tailored to high-net-worth individuals (HNWIs), ultra-high-net-worth individuals (UHNWIs), and families. These services typically include:

1. Wealth Management: Private banks provide comprehensive wealth management services, including investment advisory, portfolio management, and asset allocation strategies customized to clients’ financial goals, risk tolerance, and investment preferences.
2. Private Banking Accounts: Private banks offer specialized banking services, including personalized checking and savings accounts, debit and credit cards with exclusive perks and privileges, and access to premium banking facilities.
3. Estate Planning and Trust Services: Private banks assist clients in structuring estate plans, setting up trusts, and implementing wealth transfer strategies to preserve and transfer assets to future generations in a tax-efficient manner.
4. Tax Planning and Advisory: Private banks provide tax planning strategies and advisory services to optimize clients’ tax liabilities, minimize tax exposure, and ensure compliance with tax regulations across multiple jurisdictions.
5. Philanthropy and Charitable Giving: Private banks offer philanthropic advisory services to help clients develop charitable giving strategies, establish charitable foundations, and maximize the impact of their philanthropic efforts while achieving personal and family philanthropic goals.
6. Financing and Lending Solutions: Private banks offer customized lending solutions, including mortgage financing, securities-backed lending, and structured financing arrangements, to meet clients’ liquidity needs, fund personal or business ventures, or optimize wealth transfer strategies.
7. Concierge Services: Private banks provide concierge services to assist clients with lifestyle needs, including travel arrangements, event planning, access to exclusive events and experiences, and other personalized services to enhance the client’s overall wealth management experience.
8. Alternative Investments: Private banks offer access to alternative investment opportunities, such as private equity, hedge funds, real estate investments, and structured products, to diversify clients’ portfolios and enhance risk-adjusted returns.
9. Family Office Services: Some private banks provide comprehensive family office services, including financial planning, investment management, tax and estate planning, philanthropic advisory, and lifestyle management services, to affluent families and multi-generational wealth.

Overall, private banks focus on delivering personalized, high-touch financial services and holistic wealth management solutions to meet the complex and sophisticated needs of their affluent clientele.

Question 17

What are some challenges in Private Banking?

Answer 17

• Strong competition from Fintech with hyper personalisation of services ( with AI)
• Strong focus on sustainability/ESG investments for the years ahead accelerated by the “Great Wealth Transfer”
• Biggest challenge is to stay compliant with regulation ( avoid misconduct)

Question 18

What is Ribā?

Answer 18

Anything pecuniary or non pecuniary in excess of the principle in a loan that must be paid by the borrower to the lender.

Question 19

What is the rationale behind Islamic Banking?

Answer 19

Creating financial products and services that do not charge or pay interest.

Question 20

What is gharar?

Answer 20

To unknowingly expose oneself or property to risk(similar to asymmetric information)

Question 21

What is maysir?

Answer 21

Prohibition of all kinds or gambling and games of chance.

Question 22

How do Islamic banks deal profits and costs?

Answer 22

On the assets side an Islamic bank advances funds on a profit and loss sharing or debt crating basis.

On the liabilities side net earnings are shared with its depositors in a way that depends on the size and date to maturity of each deposit. Depositors earn a return instead of interest.

Question 23

An example of an Islamic banking product ?

Answer 23

Musharakah:

Profits are shared according to a pre-agreed ratio losses are shared in proportion to the capital investment of each partner.