LES 1: WHAT ARE BANKS?
Save our money
• Store of wealth (savings accounts)
Use our money
• Payment methods (checking account, debit/credit card, Bancontact, mobile banking, currency
exchange,…)
Get loans
• Mortgage, personal loan, car loan, student loan, business loan,…
Invest
Via bank or
• Term accounts, bonds, equities, pension saving, funds,… associated
entity
Insurance
• Car insurance, life insurance, family insurance, travel insurance,…
BANK BALANCE SHEET
Banks (and other financial institutions) have a different asset and liability structure compared to other firms
• Funded by financial liabilities:
o Deposits
o Bonds
o Subordinated debt
o (Equity capital)
• Assets are also mainly financial:
o Cash
o Loans
o Securities
o Fixed assets
1
,FIXED ASSETS
Branch network
• Brick and mortar
• Role used to attract new clients, wire transfer money
• Less necessary due to internet banking
• More based on giving advice (e.g. mortgages)
• In combination with fixed high costs, banks are closing down branches
LOANS
• Mortgages
• Consumer credit
• Business loans
• Credit lines
• Interbank loans
• (local) government loans
SECURITIES
Some very liquid and not so risky
• Treasury notes (< 10 years)
• Treasury bonds (> 10 years)
Some more risky, but also higher return
• Corporate bonds
• Equities
• Trading assets
LIABILITIES
Main source of funding are deposits
• Sight deposits
o No interest rates, demandable on sight
• Saving deposits
o Low interest rates, demandable
• Term deposits
o (Generally) higher interest rates, fixed term
• Wholesale/corporate deposits
• Interbank deposits
EQUITY
Banks typically have less equity compared to other firms
• Share capital
2
, • Retained earning
• (Subordinated debt)
The equity buffer is quite small for banks (around 5-6%)
• Defense against non-performing assets
• Regulation (Basel III) mainly concerned with maintaining high enough equity buffers
• Will be a major part of this course
BANK INCOME STATEMENT
Income is derived from:
• Lending
• Investing in other financial assets yielding a return
• Providing services
Expenses:
• Funding costs (deposits and non-deposit liabilities)
• Personnel costs
• Costs of running branch network
• Etc.
INCOME STATEMENT
3
, DECOMPOSING INCOME
Net interest income is the largest part of total income
Other types of income: trading, insurance activities, fee income (e.g. private banking, wealth management)
Costs: operational (personnel), reserves (for bad loans)
WHAT DIFFERENT TYPES OF BANKS ARE THERE?
TYPES OF BANKS
Depending on which business/funding is dominant, Fls can be divided into different business models. Saunders
and Cornett define a few:
• Depository institutions
o High proportion of funding from (retail) deposits, and main source of income real estate
loans
o Commercial banks, savings banks, credit unions
• Finance companies
o Do not accept deposits, but rely on short- and long-term debt as source of funds
o Often give more risky (personal) loans
• Securities firms
o Investment banks (originate, underwrite, distribute new securities)
o Brokerage firms (purchase, sale of existing securities)
TYPES OF BANK
Retail bank
• Consumer deposits, consumer loans, mortgages, small business loans
Wholesale bank (corporate bank)
• Deposits/loans to large companies, governments, pension funds, etc.
Investment bank/brokerage
• Fee/commission generating business (asset management,
M&A, trading)
Universal bank
• Offer all of the above (one-stop-shopping)
4
Save our money
• Store of wealth (savings accounts)
Use our money
• Payment methods (checking account, debit/credit card, Bancontact, mobile banking, currency
exchange,…)
Get loans
• Mortgage, personal loan, car loan, student loan, business loan,…
Invest
Via bank or
• Term accounts, bonds, equities, pension saving, funds,… associated
entity
Insurance
• Car insurance, life insurance, family insurance, travel insurance,…
BANK BALANCE SHEET
Banks (and other financial institutions) have a different asset and liability structure compared to other firms
• Funded by financial liabilities:
o Deposits
o Bonds
o Subordinated debt
o (Equity capital)
• Assets are also mainly financial:
o Cash
o Loans
o Securities
o Fixed assets
1
,FIXED ASSETS
Branch network
• Brick and mortar
• Role used to attract new clients, wire transfer money
• Less necessary due to internet banking
• More based on giving advice (e.g. mortgages)
• In combination with fixed high costs, banks are closing down branches
LOANS
• Mortgages
• Consumer credit
• Business loans
• Credit lines
• Interbank loans
• (local) government loans
SECURITIES
Some very liquid and not so risky
• Treasury notes (< 10 years)
• Treasury bonds (> 10 years)
Some more risky, but also higher return
• Corporate bonds
• Equities
• Trading assets
LIABILITIES
Main source of funding are deposits
• Sight deposits
o No interest rates, demandable on sight
• Saving deposits
o Low interest rates, demandable
• Term deposits
o (Generally) higher interest rates, fixed term
• Wholesale/corporate deposits
• Interbank deposits
EQUITY
Banks typically have less equity compared to other firms
• Share capital
2
, • Retained earning
• (Subordinated debt)
The equity buffer is quite small for banks (around 5-6%)
• Defense against non-performing assets
• Regulation (Basel III) mainly concerned with maintaining high enough equity buffers
• Will be a major part of this course
BANK INCOME STATEMENT
Income is derived from:
• Lending
• Investing in other financial assets yielding a return
• Providing services
Expenses:
• Funding costs (deposits and non-deposit liabilities)
• Personnel costs
• Costs of running branch network
• Etc.
INCOME STATEMENT
3
, DECOMPOSING INCOME
Net interest income is the largest part of total income
Other types of income: trading, insurance activities, fee income (e.g. private banking, wealth management)
Costs: operational (personnel), reserves (for bad loans)
WHAT DIFFERENT TYPES OF BANKS ARE THERE?
TYPES OF BANKS
Depending on which business/funding is dominant, Fls can be divided into different business models. Saunders
and Cornett define a few:
• Depository institutions
o High proportion of funding from (retail) deposits, and main source of income real estate
loans
o Commercial banks, savings banks, credit unions
• Finance companies
o Do not accept deposits, but rely on short- and long-term debt as source of funds
o Often give more risky (personal) loans
• Securities firms
o Investment banks (originate, underwrite, distribute new securities)
o Brokerage firms (purchase, sale of existing securities)
TYPES OF BANK
Retail bank
• Consumer deposits, consumer loans, mortgages, small business loans
Wholesale bank (corporate bank)
• Deposits/loans to large companies, governments, pension funds, etc.
Investment bank/brokerage
• Fee/commission generating business (asset management,
M&A, trading)
Universal bank
• Offer all of the above (one-stop-shopping)
4
