Role of Banks (Mahesh)

8/4/2019 Role of Banks (Mahesh)

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Meaning

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one

of several related types of entities:

A central bank circulates money on behalf of a government and acts as its monetary authority by

implementing monetary policy, which regulates the money supply.

A commercial bank accepts deposits and pools those funds to provide credit, either directly by

lending, or indirectly by investing through the capital markets. Within the global financial markets, these

institutions connect market participants with capital deficits (borrowers) to market participants with

capital surpluses (investors and lenders) by transferring funds from those parties who have surplus

funds to invest (financial assets) to those parties who borrow funds to invest in real assets.

A savings bank (known as a "building society" in the United Kingdom) is similar to a savings and loan

association (S&L). They can either be stockholder owned or mutually owned, in which case they are

permitted to only borrow from members of the financial cooperative. The asset structure of savings

banks and savings and loan associations is similar, with residential mortgage loans providing the

principal assets of the institution's portfolio.

Because of the important role depository institutions play in the financial system, the banking industry is

generally regulated with government restrictions on financial activities by banks varied over time and by

location. Current global bank capital requirements are referred to as Basel II. In some countries, such as

Germany, banks have historically owned major stakes in industrial companies, while in other countries,such as the United States, banks have traditionally been prohibited from owning non-financial

companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the "keiretsu".

In Iceland, banks followed international standards of regulation prior to the recent global financial crisis

that began in 2007.

The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has

been operating continuously since 1472.

A Bank's main source of income is interest. A bank pays out at a lower interest rate on deposits and

receives a higher interest rate on loans. The difference between these rates represents the bank's net

income.

The definition of a bank varies from country to country. See the relevant country page (below)for more information.


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UnderEnglish common law, a banker is defined as a person who carries on the business ofbanking, which is specified as:[7]

y conducting current accounts for his customersy paying cheques drawn on him, andy

collecting cheques for his customers.

Banco de Venezuela in Coro.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law inrelation to negotiable instruments, including cheques, and this Act contains a statutory definitionof the term banker: bankerincludes a body of persons, whether incorporated or not, who carryon the business of banking' (Section 2, Interpretation). Although this definition seems circular, itis actually functional, because it ensures that the legal basis for bank transactions such ascheques does not depend on how the bank is organised or regulated.

The business of banking is in many English common law countries not defined by statute but bycommon law, the definition above. In other English common law jurisdictions there are statutorydefinitions of the business of bankingorbanking business. When looking at these definitions it isimportant to keep in mind that they are defining the business of banking for the purposes of thelegislation, and not necessarily in general. In particular, most of the definitions are fromlegislation that has the purposes of entry regulating and supervising banks rather than regulatingthe actual business of banking. However, in many cases the statutory definition closely mirrorsthe common law one. Examples of statutory definitions:

y "banking business" means the business of receiving money on current or deposit account,paying and collecting cheques drawn by or paid in by customers, the making of advances to

customers, and includes such other business as the Authority may prescribe for the purposes ofthis Act; (Banking Act (Singapore), Section 2, Interpretation).

y "banking business" means the business of either or both of the following:1. receiving from the general public money on current, deposit, savings or other similar account

repayable on demand or within less than [3 months] ... or with a period of call or notice of less

than that period;


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2. paying or collecting cheques drawn by or paid in by customers[8]Since the advent ofEFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, directdebit and internet banking, the cheque has lost its primacy in most banking systems as a paymentinstrument. This has led legal theorists to suggest that the cheque based definition should be

broadened to include financial institutions that conduct current accounts for customers andenable customers to pay and be paid by third parties, even if they do not pay and collectcheques.[9]

[edit] Banking

Origin of the word

The word bankwas borrowed in Middle English from Middle Frenchbanque, from Old Italian

banca, from Old High Germanbanc, bank"bench, counter". Benches were used as desks orexchange counters during the Renaissance by Florentine bankers, who used to make theirtransactions atop desks covered by green tablecloths.[6]

One of the oldest items found showing money-changing activity is a silver Greek drachm coinfrom ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC,presented in the British Museum in London. The coin shows a banker's table (trapeza) ladenwith coins, a pun on the name of the city. In fact, even today in Modern Greekthe word Trapeza() means both a table and a bank.

History

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence

of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is

the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires

shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to

the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed,

with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States,

promoters opened banks to finance trading in Indian cotton. With large exposure to speculative

ventures, most of the banks opened in India during that period failed. The depositors lost money and

lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive

domain of Europeans for next several decades until the beginning of the 20th century.


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Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de

Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and

Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the

most active trading port in India, mainly due to the trade of the British Empire, and so became a bankingcenter.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in

Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which

has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of

stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other

infrastructure had improved. Indians had established small banks, most of which served particular

ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a

number of Indian joint stock banks. All these banks operated in different segments of the economy. The

exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint

stock banks were generally under capitalized and lacked the experience and maturity to compete with

the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect ofbanking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid

wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi

movement. The Swadeshi movement inspired local businessmen and political figures to found banks of

and for the Indian community. A number of banks established then have survived to the present such as

Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and

Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district.

Four nationalised banks started in this district and also a leading private sector bank. Hence undivided

Dakshina Kannada district is known as "Cradle of Indian Banking".


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During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two

years thereafter until the independence of India were challenging for Indian banking. The years of the

First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian

economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed

between 1913 and 1918 as indicated in the following table:

Years Number of banks

that failed Authorised capital

(Rs. Lakhs) Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing

banking activities for months. India's independence marked the end of a regime of the Laissez-faire for

the Indian banking. The Government of India initiated measures to play an active role in the economic

life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a

mixed economy. This resulted into greater involvement of the state in different segments of the

economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949

under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI,

2005b).[Reference www.rbi.org.in]


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In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI)

"to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be

opened without a license from the RBI, and no two banks could have common directors.

Nationalisation

Banks Nationalisation in India: Newspaper Clipping, Times of India, July, 20, 1969

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State

Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian

banking industry had become an important tool to facilitate the development of the Indian economy. At

the same time, it had emerged as a large employer, and a debate had ensued about the nationalization

of the banking industry. Indira Gandhi, then [Prime Minister of India]], expressed the intention of the

Government of India in the annual conference of the All India Congress Meeting in a paper entitled

"Stray thoughts on Bank Nationalisation." The meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an ordinance and

nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.

Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political

sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking

Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9

August 1969.

A second dose of nationalization of 6 more commercial banks followed in

1980. The stated reason for the nationalization was to give the government

more control of credit delivery. With the second dose of nationalization, the

Government of India controlled around 91% of the banking business of India.

Later on, in the year 1993, the government merged New Bank of India withPunjab National Bank. It was the only merger between nationalized banks and

resulted in the reduction of the number of nationalised banks from 20 to 19.

After this, until the 1990s, the nationalised banks grew at a pace of around

4%, closBanking

[edit] Standard activities


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Large door to an old bank vault.

Banks act as payment agents by conducting checking or current accounts for customers, payingcheques drawn by customers on the bank, and collecting cheques deposited to customers' currentaccounts. Banks also enable customer payments via other payment methods such as telegraphic

transfer, EFTPOS, and automated teller machine (ATM).

Banks borrow money by accepting funds deposited on current accounts, by accepting termdeposits, and by issuing debt securities such asbanknotes andbonds. Banks lend money bymaking advances to customers on current accounts, by making installment loans, and byinvesting in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered indispensable bymost businesses, individuals and governments. Non-banks that provide payment services such asremittance companies are not normally considered an adequate substitute for having a bankaccount.

Banks borrow most funds from households and non-financial businesses, and lend most funds tohouseholds and non-financial businesses, but non-bank lenders provide a significant and in manycases adequate substitute for bank loans, and money market funds, cash management trusts andother non-bank financial institutions in many cases provide an adequate substitute to banks forlending savings too.[clarification needed]

[edit] Channels

Banks offer many different channels to access their banking and other services:

y ATM is a machine that dispenses cash and sometimes takes deposits without the need for ahuman bank teller. Some ATMs provide additional services.

y A branch is a retail locationy Call centery Mail: most banks accept check deposits via mail and use mail to communicate to their

customers, e.g. by sending out statements

y Mobile banking is a method of using one's mobile phone to conduct banking transactionsy Online banking is a term used for performing transactions, payments etc. over the Internet


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y Relationship Managers, mostly for private banking or business banking, often visiting customersat their homes or businesses

y Telephone banking is a service which allows its customers to perform transactions over thetelephone without speaking to a human

y Video banking is a term used for performing banking transactions or professional bankingconsultations via a remote video and audio connection. Video banking can be performed via

purpose built banking transaction machines (similar to an Automated teller machine), or via a

videoconference enabled bank branch.clarification

[edit] Business model

A bank can generate revenue in a variety of different ways including interest, transaction feesand financial advice. The main method is via charging interest on the capital it lends out tocustomers[citation needed]. The bank profits from the differential between the level of interest it paysfor deposits and other sources of funds, and the level of interest it charges in its lendingactivities.

This difference is referred to as thespreadbetween the cost of funds and the loan interest rate.Historically, profitability from lending activities has been cyclical and dependent on the needsand strengths of loan customers and the stage of the economic cycle. Fees and financial adviceconstitute a more stable revenue stream and banks have therefore placed more emphasis on theserevenue lines to smooth their financial performance.

In the past 20 years American banks have taken many measures to ensure that they remainprofitable while responding to increasingly changing market conditions. First, this includes theGramm-Leach-Bliley Act, which allows banks again to merge with investment and insurancehouses. Merging banking, investment, and insurance functions allows traditional banks torespond to increasing consumer demands for "one-stop shopping" by enabling cross-selling ofproducts (which, the banks hope, will also increase profitability).

Second, they have expanded the use ofrisk-based pricing from business lending to consumerlending, which means charging higher interest rates to those customers that are considered to bea higher credit risk and thus increased chance ofdefault on loans. This helps to offset the lossesfrom bad loans, lowers the price of loans to those who have better credit histories, and offerscredit products to high risk customers who would otherwise be denied credit.

Third, they have sought to increase the methods of payment processing available to the generalpublic and business clients. These products include debit cards, prepaid cards, smart cards, andcredit cards. They make it easier for consumers to conveniently make transactions and smooththeir consumption over time (in some countries with underdeveloped financial systems, it is stillcommon to deal strictly in cash, including carrying suitcases filled with cash to purchase ahome).

However, with convenience of easy credit, there is also increased risk that consumers willmismanage their financial resources and accumulate excessive debt. Banks make money fromcard products through interest payments and fees charged to consumers and transaction fees to


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companies that accept the credit- debit - cards. This helps in making profit and facilitateseconomic development as a whole.[10]

[edit] Products

A former building society, now a modern retail bank in Leeds, West Yorkshire.

An interior of a branch ofNational Westminster Bank on Castle Street, Liverpool

[edit] Retail

y Business loany Cheque accounty Credit cardy Home loany

Insurance advisory Mutual fundy Personal loany Savings account

[edit] Wholesale

y Capital raising (Equity / Debt / Hybrids)


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y Mezzanine financey Project financey Revolving credity Risk management (FX, interest rates, commodities, derivatives)y Term loan

[edit] Risk and capital

Banks face a number ofrisks in order to conduct their business, and how well these risks aremanaged and understood is a key driver behind profitability, and how much capital a bank isrequired to hold. Some of the main risks faced by banks include:

y Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments aspromised.

y Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the marketto prevent a loss (or make the required profit).

yMarket risk: risk that the value of a portfolio, either an investment portfolio or a tradingportfolio, will decrease due to the change in value of the market risk factors.

y Operational risk: risk arising from execution of a company's business functions.The capital requirement is abank regulation, which sets a framework on how banks anddepository institutions must handle their capital. The categorization of assets and capital is highlystandardized so that it can be risk weighted (see risk-weighted asset).

[edit] Banks in the economy

See also: Financial system

[edit] Economic functions

The economic functions of banks include:

1. Issue of money, in the form ofbanknotes and current accounts subject to cheque or payment atthe customer's order. These claims on banks can act as money because they are negotiable or

repayable on demand, and hence valued at par. They are effectively transferable by mere

delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.

2. Netting and settlement of payments banks act as both collection and paying agents forcustomers, participating in interbank clearing and settlement systems to collect, present, be

presented with, and pay payment instruments. This enables banks to economise on reserves

held for settlement of payments, since inward and outward payments offset each other. It alsoenables the offsetting of payment flows between geographical areas, reducing the cost of

settlement between them.

3. Credit intermediation banks borrow and lend back-to-back on their own account as middlemen.

4. Credit quality improvement banks lend money to ordinary commercial and personalborrowers (ordinary credit quality), but are high quality borrowers. The improvement comes

from diversification of the bank's assets and capital which provides a buffer to absorb losses


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without defaulting on its obligations. However, banknotes and deposits are generally unsecured;

if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to

continue to operate, this puts the note holders and depositors in an economically subordinated

position.

5. Maturity transformation banks borrow more on demand debt and short term debt, butprovide more long term loans. In other words, they borrow short and lend long. With a stronger

credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting

deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of

banknotes), maintaining reserves of cash, investing in marketable securities that can be readily

converted to cash if needed, and raising replacement funding as needed from various sources

(e.g. wholesale cash markets and securities markets).

6. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, anew sum of virtual money is created.

[edit] Bank crisis

Banks are susceptible to many forms of risk which have triggered occasional systemic crises.These include liquidity risk(where many depositors may request withdrawals in excess ofavailable funds), credit risk(the chance that those who owe money to the bank will not repay it),and interest rate risk(the possibility that the bank will become unprofitable, if rising interestrates force it to pay relatively more on its deposits than it receives on its loans).

Banking crises have developed many times throughout history, when one or more risks havematerialized for a banking sector as a whole. Prominent examples include thebank run thatoccurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early1990s, the Japanese banking crisis during the 1990s, and the subprime mortgage crisis in the2000s.

[edit] Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to arecord $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adversemarket conditions was largely a result of recapitalisation. EU banks held the largest share of thetotal, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increasedfrom 12% to 14% during the year, while the share ofUS banks increased from 11% to 13%. Feerevenue generated by global investment banking totalled $66.3bn in 2009, up 12% on theprevious year.[11]

The United States has the most banks in the world in terms of institutions (7,085 at the end of2008) and possibly branches (82,000).[citation needed] This is an indicator of the geography andregulatory structure of the USA, resulting in a large number of small to medium-sizedinstitutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000branches. In 2004, Germany, France, and Italy each had more than 30,000 branchesmore thandouble the 15,000 branches in the UK.[11]


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[edit] Regulation

Main article: Banking regulation

See also: Basel II

Currently in most jurisdictions commercial banks are regulated by government entities andrequire a special bank licence to operate.

Usually the definition of the business of banking for the purposes of regulation is extended toinclude acceptance of deposits, even if they are not repayable to the customer's orderalthoughmoney lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the market,being either a publicly or privately governed central bank. Central banks also typically have amonopoly on the business of issuing banknotes. However, in some countries this is not the case.In the UK, for example, the Financial Services Authority licences banks, and some commercial

banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by theBank of England, the UKgovernment's central bank.

Banking law is based on a contractual analysis of the relationship between the bank(definedabove) and the customerdefined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer: whenthe account is in credit, the bank owes the balance to the customer; when the account is

overdrawn, the customer owes the balance to the bank.

2.

The bank agrees to pay the customer's cheques up to the amount standing to the credit of thecustomer's account, plus any agreed overdraft limit.

3. The bank may not pay from the customer's account without a mandate from the customer, e.g.a cheque drawn by the customer.

4. The bank agrees to promptly collect the cheques deposited to the customer's account as thecustomer's agent, and to credit the proceeds to the customer's account.

5. The bank has a right to combine the customer's accounts, since each account is just an aspect ofthe same credit relationship.

6. The bank has a lien on cheques deposited to the customer's account, to the extent that thecustomer is indebted to the bank.

7. The bank must not disclose details of transactions through the customer's accountunless thecustomer consents, there is a public duty to disclose, the bank's interests require it, or the law

demands it.

8. The bank must not close a customer's account without reasonable notice, since cheques areoutstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customerand the bank. The statutes and regulations in force within a particular jurisdiction may alsomodify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.


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Some types of financial institution, such asbuilding societies and credit unions, may be partly orwholly exempt from bank licence requirements, and therefore regulated under separate rules.

The requirements for the issue of a bank licence vary between jurisdictions but typically include:

1.

Minimum capital2. Minimum capital ratio3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers4. Approval of the bank's business plan as being sufficiently prudent and plausible.

[edit] Types of banks

Banks' activities can be divided into retail banking, dealing directly with individuals and smallbusinesses;business banking, providing services to mid-market business; corporate banking,directed at large business entities;private banking, providing wealth management services tohigh net worth individuals and families; and investment banking, relating to activities on the

financial markets. Most banks are profit-making, private enterprises. However, some are ownedby government, or are non-profit organizations.

[edit] Types of retail banks

National Bank of the Republic, Salt Lake City 1908

ATMAl-Rajhi Bank


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National Copper Bank, Salt Lake City 1911

y Commercial bank: the term used for a normal bank to distinguish it from an investment bank.After the Great Depression, the U.S. Congress required that banks only engage in banking

activities, whereas investment banks were limited to capital market activities. 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 deposits and loans from corporations or

large businesses.

y Community banks: locally operated financial institutions that empower employees to make localdecisions to serve their customers and the partners.

y Community development banks: regulated banks that provide financial services and credit tounder-served markets or populations.

y Credit unions: not-for-profit cooperatives owned by the depositors and often offering ratesmore favorable than for-profit banks. Typically, membership is restricted to employees of a

particular company, residents of a defined neighborhood, members of a certain labor union or

religious organizations, and their immediate families.

y Postal savings banks: savings banks associated with national postal systems.y Private banks: banks that manage the assets of high net worth individuals. Historically a

minimum of USD 1 million was required to open an account, however, over the last years many

private banks have lowered their entry hurdles to USD 250,000 for private investors.[citation needed]

y Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshorebanks are essentially private banks.

ySavings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the18th century. Their original objective was to provide easily accessible savings products to all

strata of the population. In some countries, savings banks were created on public initiative; in

others, socially committed individuals created foundations to put in place the necessary

infrastructure. Nowadays, European savings banks have kept their focus on retail banking:

payments, savings products, credits and insurances for individuals or small and medium-sized

enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly


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decentralised distribution network, providing local and regional outreachand by their socially

responsible approach to business and society.

y Building societies and Landesbanks: institutions that conduct retail banking.y Ethical banks: banks that prioritize the transparency of all operations and make only what they

consider to be socially-responsible investments.

y A Direct or Internet-Only bank is a banking operation without any physical bank branches,conceived and implemented wholly with networked computers.

Types of investment banks

y Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for theirown accounts, make markets, and advise corporations on capital market activities such as

mergers and acquisitions.

y Merchant banks were traditionally banks which engaged in trade finance. The moderndefinition, however, refers to banks which provide capital to firms in the form of shares rather

than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined

y Universal banks, more commonly known as financial services companies, engage in several ofthese activities. These big banks are very diversified groups that, among other services, also

distribute insurance hence the term bancassurance, a portmanteau word combining "banque

or bank" and "assurance", signifying that both banking and insurance are provided by the same

corporate entity.

Other types of banks

y Central banks are normally government-owned and charged with quasi-regulatoryresponsibilities, such as supervising commercial banks, or controlling the cash interest rate. They

generally provide liquidity to the banking system and act as the lender of last resort in event of a

crisis.

y Islamic banks adhere to the concepts ofIslamic law. This form of banking revolves aroundseveral well-established principles based on Islamic canons. All banking activities must avoid

interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees

on the financing facilities that it extends to customers.

Challenges within the banking industry

The examples and perspective in this sectionmay not represent aworldwide view of the

subject. Please improve this article and discuss the issue on the talk page. (September 2009)

This section does not citeany references or sources. Please help improve this section by

adding citations to reliable sources. Unsourced material may be challenged and removed.

(September 2008)

United States


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Main article: Banking in the United States

In the United States, the banking industry is a highly regulated industry with detailed andfocused regulators. All banks with FDIC-insured deposits have the Federal Deposit InsuranceCorporation (FDIC) as a regulator; however, for examinations,[clarification needed] the Federal

Reserve is the primary federal regulator for Fed-member state banks; the Office of theComptroller of the Currency (OCC) is the primary federal regulator for national banks; and theOffice of Thrift Supervision, or OTS, is the primary federal regulator forthrifts. State non-member banks are examined by the state agencies as well as the FDIC. National banks have oneprimary regulatorthe OCC. Qualified Intermediaries & Exchange Accommodators areregulated by MAIC.

Each regulatory agency has their own set of rules and regulations to which banks and thrifts mustadhere.

The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a

formal interagency body empowered to prescribe uniform principles, standards, and report formsfor the federal examination of financial institutions. Although the FFIEC has resulted in a greaterdegree of regulatory consistency between the agencies, the rules and regulations are constantlychanging.

In addition to changing regulations, changes in the industry have led to consolidations within theFederal Reserve, FDIC, OTS, MAIC and OCC. Offices have been closed, supervisory regionshave been merged, staff levels have been reduced and budgets have been cut. The remainingregulators face an increased burden with increased workload and more banks per regulator.While banks struggle to keep up with the changes in the regulatory environment, regulatorsstruggle to manage their workload and effectively regulate their banks. The impact of these

changes is that banks are receiving less hands-on assessment by the regulators, less time spentwith each institution, and the potential for more problems slipping through the cracks, potentiallyresulting in an overall increase in bank failures across the United States.

The changing economic environment has a significant impact on banks and thrifts as theystruggle to effectively manage their interest rate spread in the face of low rates on loans, ratecompetition for deposits and the general market changes, industry trends and economicfluctuations. It has been a challenge for banks to effectively set their growth strategies with therecent economic market. A rising interest rate environment may seem to help financialinstitutions, but the effect of the changes on consumers and businesses is not predictable and thechallenge remains for banks to grow and effectively manage the spread to generate a return to

their shareholders.

The management of the banks asset portfolios also remains a challenge in todays economicenvironment. Loans are a banks primary asset category and when loan quality becomes suspect,the foundation of a bank is shaken to the core. While always an issue for banks, declining assetquality has become a big problem for financial institutions. There are several reasons for this,one of which is the lax attitude some banks have adopted because of the years of good times.The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in


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some cases depth of management. Problems are more likely to go undetected, resulting in asignificant impact on the bank when they are recognized. In addition, banks, like any business,struggle to cut costs and have consequently eliminated certain expenses, such as adequateemployee training programs.

Banks also face a host of other challenges such as aging ownership groups. Across the country,many banks management teams and board of directors are aging. Banks also face ongoingpressure by shareholders, both public and private, to achieve earnings and growth projections.Regulators place added pressure on banks to manage the various categories of risk. Banking isalso an extremely competitive industry. Competing in the financial services industry has becometougher with the entrance of such players as insurance agencies, credit unions, check cashingservices, credit card companies, etc.

As a reaction, banks have developed their activities in financial instruments, through financialmarket operations such asbrokerage and MAIC trust & Securities Clearing services trading andbecome big players in such activities.

er to the average growth rate of the Indian economy.

Date post:	07-Apr-2018
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Role of Banks (Mahesh)

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