Banking Industry Overview

Importance of Banking

• Considered the backbone of the economy.
• Major contribution to economic growth.
• Main driver for currency and financial stability.

Origin of the Term "Bank"

• Derived from the old Italian word "banca" meaning bench.
• Refers to public benches where money changers exchanged coins in marketplaces.

Development of Modern Banking

• 17th Century London Goldsmiths: Pioneered modern banking.
  • Stored wealthy clients' gold in private vaults.
  • Started lending gold in exchange for promissory notes and interest charges.

General Role of a Bank

• Depositors: Individuals or entities with surplus money deposit funds to earn interest.
• Borrowers: Individuals or entities with a shortage of money pay interest to obtain loans for specific purposes.

Profit Generation for Banks

• Primary revenue source: Difference between interest paid to depositors and interest earned from borrowers.
• Additional profits from:
  • Fees or commissions for services.
  • Investments.

Regulation of Banks

• Banks collect small deposits and issue larger loans, posing risks to depositors.
• Potential for borrowers to default on loans.
• Banks may invest deposits in risky assets.
• Central Banks' Role: Protect depositors by monitoring banks' risk levels.

Role of Central Banks

• Oversee monetary policy to achieve:
  • Currency stability.
  • Low inflation.
  • Full employment.
• Determine interest rates affecting banks' pricing and economy's money supply.
• Issue currency and authorize bank establishment.
• Impose capital and reserve requirements for liquidity.
• Shape lending policies and act as a lender of last resort.

Types of Banks

• Retail Banks: Provide services to individuals.
• Commercial and Corporate Banks: Serve small to mid-sized businesses and large enterprises.
• Investment Banks: Focus on large financial transactions.
• Private Banks: Customize services for high-net-worth individuals.

Future of Banking

• Growth of direct channels like mobile and internet banking.
• Increasing customer expectations for:
  • Personalized service.
  • Convenience and reliability.
  • 24/7 accessibility.
• Banking perceived as an action rather than a location.