Reading Material Concepts and definitions of various banking terminology. All the information is collected using various free web-sites on internet for the purpose of enhancing knowledge of the participants in the field of banking. 1 Banks in the economy Role in the money supply A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a capital market. The bank then lends out most of these funds to borrowers. However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behaviour is called fractional-reserve banking and it is a central issue of monetary policy. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of bank regulation. Size of global banking industry Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5 trillion. This follows a 19.3% increase in the previous year. EU banks held the largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in Europe’s share was mostly at the expense of Japanese banks whose share more than halved during this period from 33% to 13%. The share of US banks also rose, from 10% to 14%. Most of the remainder was from other Asian and European countries. The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the world. The large number of banks in the US is an indicator of its geographical dispersity and regulatory structure resulting in a large number of small to medium sized institutions in its banking system. Japan had 129 banks and 12,000 branches. In Western Europe, Germany, France and Italy had more than 30,000 branches each. This was twice the number of branches in the UK. Bank crises Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those that owe money to the bank will not repay), and interest rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others. Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the bank run that occurred during the Great Depression, and the recent liquidation by the central Bank of Nigeria.where about 25 banks were liquidated Types of retail banks Commercial bank is the term used for a normal bank to distinguish it from an investment bank. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with corporations or large businesses. 2 Community development bankare regulated banks that provide financial services and credit to underserved markets or populations. Postal savings banks are savings banks associated with national postal systems. Private banks manage the assets of high net worth individuals. Offshore banks are banks located in jurisdictions with low taxation and regulation, . Many offshore banks are essentially private banks. Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks. Building societies and Landesbanks both conduct retail banking A commercial bank is a type of financial intermediary and a type of bank. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds. This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two genres of banks no longer have to be separate companies, some have used the term "commercial bank" to refer to banks which focus mainly on companies. Community development banks (CDBs) are a special kind of bank designed to serve the residents of and spur economic development in low to moderate income (LMI) areas. When CDBs provide retail banking services, they usually target customers from "financially underserved" demographics. Community development banks can apply for formal certification as a Community Development Financial Institution (CDFI) from the Community Development Financial Institutions Fund of the U.S. Department of the Treasury. Organizers wishing to start a de novo CDB in the United States can seek either a State or National bank charter. Like any national bank, all Federally-chartered CDBs are regulated primarily by the Office of the Comptroller of the Currency. According to the OCC Charter Licensing Manual, CDBs are required "to lend, invest, and provide services primarily to LMI individuals or communities in which it is chartered to conduct business." State-chartered Community Development Banks are subject to regulations, qualifications, and definitions that vary from state to state. The largest and oldest community development bank holding company is ShoreBank, headquartered in the South Shore neighborhood of Chicago. Through its holding company structure, ShoreBank Corporation promotes its community development mission by operating CDBs and other affiliates in certain U.S. cities. Private bank Private banks are banks which are not incorporated, and hence the entirety of their assets is available to meet the liabilities of the bank. These banks have a long tradition in Switzerland, dating back to at least the revocation of the Edict of Nantes (1685). However most have now become incorporated companies, so the term is rarely true anymore. Private banking is a term which refers to major institutional banks which offer financial services to private individuals. These banks would normally have two distinct divisions - private banking, and corporate banking. 3 Historically private banking has been viewed as very exclusive, only catering for wealthy individuals with liquidity over $1 million, although it is now possible to open some private bank accounts with no more than $50,000. An institution's private banking division will provide various services such as investment (wealth management), savings, inheritance and tax planning for their clients. The word "private" also alludes to client privacy and minimizing taxes via careful allocation of assets. A Swiss bank or offshore bank account may be used for this purpose. The largest private banking division is at UBS AG, and the most profitable private banking division is at Merrill Lynch. Scale Private banking institutions showed an increase in profits and assets under management in 2004 following a period of slow growth between 2000 and 2003 caused by declines in equity markets and the slowdown of the global economy. According to Scorpio Partnership’s annual Private Banking Benchmark study, pre-tax profits of 120 private banks in their study grew 30% in 2004 while their assets under management rose 13% to $6 trillion. More recent data shows that the top 25 private banks increased their assets by a further 7% in local currency terms in the first six months of 2005. According to Goldman Sachs, the flow of capital to private banking will increase by about 7% a year until 2007. After several years of decreases, private banking employment increased by 3.8% in 2004. Switzerland is the major location of private banking. Swiss banks hold an estimated 35 percent of the world's private and institutional funds, or 3 trillion Swiss francs. Offshore bank An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (aka "tax haven") that provides financial and legal advantages. These advantages typically include some or all of strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) • less restrictive legal regulation • low or no taxation (i.e. tax havens) • easy access to deposits (at least in terms of regulation) • protection against local political or financial instability • An alternative to oppressive governement taxation and Banking regulations. While the term originates from the Channel Islands "offshore" from Britain, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in particular are landlocked). Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements, the personal income tax of most countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts—which may or may not be numbered bank accounts—they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are 4 protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal.