COMMERCIAL BANK MANAGEMENT
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ASSESSMENTS
1 Participation 5%
2 Mid-term Exam 15%
3 Group Assignment 20%
3.1 Group Presentation 10%
3.2 Individual Assignment 10%
4 Final Exam 60%
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Commercial Bank Management
CHAPTER 1
INTRODUCTION TO BANKING AND FINANCIAL SERVICES
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Learning Objectives
• Identify the roles of financial service-providers play in the economy.
• Identify the services financial service-providers offer to the public
• Examine how and why the banking industry and the financial services marketplace as a
whole is rapidly changing
• Identify the different types of organizations used in banking and financial services
industry
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Chapter 1: Introduction to banking and financial services
1 1.1 An overview of the changing financial services sector
1.1.1 What is bank?
1.1.2 Banks services
2 1.2 The organization and structure of banking and the financial
services industry
1.2.1 The organization and structure of the commercial banking industry
1.2.2 Internal organization of the banking firm
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1. An overview of the changing financial
services sector
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1.1 What is bank?
Could you name some commercial bank in Vietnam?
How many commercial banks in Vietnam?
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1.1 What is bank?
• Definition by functions it serves
- Banks are involves in transferring funds from savers to borrowers (financial
intermediation) & in paying for goods and services
• Definition by services it offers to customers
- Banks accept deposits, make commercial loans, offer trust services, manage cash, etc.
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1.1 What is bank?
• Definition by legal basis for regulation (in Vietnam)
- Bank is a credit institution permitted to conduct all banking activities and other related
business operations.
- "Non-bank credit institution" is a credit institution permitted to engage in some
banking activities as its regular business, but not permitted to receive deposits from
individuals and to provide payment services.
- "Banking activities" are monetary business activities and banking services, the regular
operation of which is the receipt of deposits and use of that to extend credits, provide
payment services
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1.1 What is bank?
• Financial service competitors of banks
o Savings associations o Investment banks
o Credit unions o Finance companies
o Money market funds o Financial holding companies
o Mutual funds (investment companies) o Life and property-casualty insurance
o Hedge funds companies
o Security brokers and dealers
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1.1 What is bank?
• Commerical banks and the economy
o Banks are the primary source of credit for most small businesses and many individuals
o Banks are the major repository of public savings
o Banks are the principal operator of payment system.
o Banks are the primary conduit for monetary policy
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1.2 Banks services
1.2.1 Traditional services offered by banks
1) Carrying out currency exchange
2) Discounting commercial notes and making business loans
3) Offering savings deposits
4) Safekeeping of valuables
5) Supporting government activities with credit
6) Offering checking accounts
7) Offering trust services
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1.2 Banks services
1.2.1 Traditional services offered by banks
1) Carrying out currency exchange
o Starting from early days of banks, bank trade one form of currency to another in
return for a service fee.
o Become more complicated in the global financial market
o Be provided by large and well-experienced banks
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1.2 Banks services
1.2.1 Traditional services offered by banks
2) Discounting commercial notes and making business loans
o Discounting commercial notes/making loans to merchants based on accounts
receivable
o Making direct loans for purchasing inventories of goods (short-term) or for
constructing new facilities (long-term)
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1.2 Banks services
1.2.1 Traditional services offered by banks
2) Discounting commercial notes and making business loans
Sell Discounting
commercial notes
Commercial paper/ notes
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1.2 Banks services
1.2.1 Traditional services offered by banks
3) Offering savings deposits
o Savings deposits are the earliest and major source of fund for making loan
o Compose of many types different in maturity, form of currency, interest, etc.
o Be the most stable funding source
o Deposit is subject to reserve requirement and insurance
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1.2 Banks services
1.2.1 Traditional services offered by banks
4) Safekeeping of valuables
o Keep gold and other valuables of customers in secure vaults in return for fee
o Start since the old days of banks in the Middle Ages
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1.2 Banks services
1.2.1 Traditional services offered by banks
5) Supporting government with credit
o Banks in Europe during the Industrial Revolution and in America during the
Revolutionary War had to purchase government bonds with a portion of deposits.
o The custom continues in the modern world
o Banks use government bond as a shelter of liquidity risk and a source of revenue
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1.2 Banks services
1.2.1 Traditional services offered by banks
6) Offering checking accounts (demand deposits)
o Demand deposits permit depositors to write draft/cheque for payment of goods
and services
o Be one of the most important offerings of the industry
o Service is provided by not only banks but also credit unions, savings associations, etc.
o Today the service is extended to the internet with the use of smart cards
o Provide banks with cheap source of fund.
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1.2 Banks services
1.2.1 Traditional services offered by banks
7) Offering trust services
o Banks manage financial affairs and property of individuals and firms in return for
fee
o In property management, banks acts as a trustee for wills, managing the deceased
customer’s estate,…
o In commercial trust department, bank manages pension plan for businesses and
acts as an agent issuing stocks and bonds.
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1.2 Banks services
WHAT ARE THE OTHER BANKING SERVICES?
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1.2 Banks services
1.2.2 More recent services offered by banks
8) Granting consumer loans
9) Providing financial advice
10) Managing cash
11) Offering equipment leasing
12) Making venture capital loans Selling insurance policies
13) Selling retirement plans
14) Dealing in securities: brokerage and investment banking services
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1.2 Banks services
1.2.2 More recent services offered by banks
8) Granting consumer loans
o By early 20th century, banks started lending consumers given the heavy competition
for business deposits and loans
o The trend has increased rapidly after the World War 2
o Other current competitors for the consumer credit accounts are credit unions and
credit card companies.
o The service bears high risk but returns high earnings.
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1.2 Banks services
1.2.2 More recent services offered by banks
9) Providing financial advice
o Banks gains good reputation for understanding and experience in the financial
market
o Customers ask for advice, particularly in credit utilization, saving or investing funds
o Services provided are plentiful including financial plan preparation, marketing
opportunity consultation, fund seeking, investment options, etc.
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1.2 Banks services
1.2.2 More recent services offered by banks
10) Managing cash
o Bank handle cash collection and disbursement for firms, invest temporary cash
surpluses
o Service is expanded to individuals and firms
o Bank earns not only fee, but also low-cost fund in demand deposit accounts
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1.2 Banks services
1.2.2 More recent services offered by banks
11) Offering equiqment leasing
Bank/Lessor
Eq
uip val
me u e
nt
nt
ini
Re
ialt
Equipment Equipment
Firm/Lessee installation
Vendor
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1.2 Banks services
1.2.2 More recent services offered by banks
12) Making venture capital loans
o Finance the start-up cost of new
companies
o Implement through a venture capital
firm because added risk
o The venture capital firm raise fund from
investors looking for high profit
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1.2 Banks services
1.2.2 More recent services offered by banks
13) Selling insurance policies
o Bank sell insurance policies through acquiring control of insurance companies
o Bank can gain high earning in the high-risk insurance industry
o Bank possess privileges over independent insurer in terms of customers, branches,
system, etc.
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1.2 Banks services
1.2.2 More recent services offered by banks
14) Selling retirement plans
o Bank actively involves in managing retirement plan of businesses make available to
employees
o Incoming fund is invested to wisely selected securities ensuring acceptable risk and
return
o Bank also is in charge of dispensing payment to retired or disabled employees.
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1.2 Banks services
1.2.2 More recent services offered by banks
15) Dealing in securities
o Bank provides security brokerage service and security underwriting
o Bank offer mutual funds, annuities and other investment products with clear
consultation to customers regarding higher expected yields and risk
o Bank temporarily buy stocks of large corporation aiding new business launching or
company expansion by offering merchant banking services
o Bank acts as risk intermediation providing customer with risk hedging tools (e.g. swap,
option, future contract) offered by themselves or from third party
o Services are provided through affiliated securities firms or insurance companies.
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2. The organization and structure of
banking and the financial services industry
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
Unit banking Branch banking
• Offer all services from one office • Offer full range of services from
• New banks are generally unit banks several locations
until can grow and attract more • Each branch has its own management
resources team with limited decision-making
ability.
• Some functions are highly centralized,
while others are decentralized.
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
What are the reasons behind branching’s growth?
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
What are the advantages and disadvantages of branch banking?
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
Advantages of Branch banking Disadvantages of Branch banking
• Improve customer convenience • Difficulties of management, supervision
• Economics of large scale and control
• Diversification of source of funds and • Long decision making process, delayed
assets decision
• Higher operating costs
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
Electionic branching
• Electronic branches include websites offering Internet
banking services, automated teller machines (ATMs)
and ATM networks dispensing cash and accepting deposits,
point-of-sale (POS) terminals in stores and shopping
centers to facilitate payment for goods and services, and
personal computers and call-center systems connecting
the customer to his or her financial institution.
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2.1 The organization and structure of commercial banking industry
2.1.1 The organizational structure of commercial bank
What are the advantages and disadvantages of electronic branching?
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• A corporation chartered for the purpose of holding the stock of one or more banks
(which is called bank subsidiary)
• Control of a bank is assumed when 25% or more of the stock is owned
• Must get approval from federal reserve board to control a bank
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Structure of bank holding company
BANK HOLDING COMPANIES
Bank Non-bank Subsidiaries
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Finance Companies § Investment Banking Firms
§ Mortgage Companies § Trust Companies
§ Data Processing Companies § Credit Card Companies
§ Factoring Companies § Leasing Companies
§ Security Brokerage Firms § Insurance Companies and Agencies
§ Financial Advising § Real Estate Services
§ Credit Insurance Underwriters § Savings Associations
§ Merchant Banking
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Finance Companies:
+ Lend funds to businesses and households
+ Unlike a bank, a finance company does not receive cash deposits from clients,
nor does it provide some other services common to banks, such as checking
accounts.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Mortgage Companies: provide ST credit to improve real property for residential
or commercial use
§ Data Processing Companies: provide computer processing services and
information transmission
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Factoring Companies: purchase accounts receivable from
business in exchange for supplying temporary financing
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Security Brokerage Firms: execute customer buy and sell orders for securities, foreign
exchange, futures, and option contracts.
§ Financial Advising: advise institutions and high-net-worth individuals on managing
assets, mergers, reorganizations, raising capital, and feasibility studies.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Credit insurance underwriters: supply insurance coverage to customers borrowing
money to guarantee repayment of a loan
§ Merchant banking: invest in corporate stock as well as loan money to help finance
the start of new ventures or to support the expansion of existing business
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Investment banking firms: purchase new government and municipal bonds and
corporate stocks and bonds from issuers and offer these securities to buyers.
§ Trust companies: manage and care for the property of businesses, individuals and
nonprofit organizations.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Credit card companies: provide short-term credit to individuals and businesses in order
to support retail trade.
§ Leasing companies: purchase and lease asset for business and individuals nêding úe ò
these assets
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
§ Insurance companies and agencies: sell or underwrite insurance policies to those
seeking risk protection
§ Real estate services: supply real eastate appraisals, arrange for the financing of real
eastate projects, and broker properties
§ Saving associations: offer saving deposit plans and housing-related credit,
predominantly to individuals and families.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
• Bank subsidiaries
o Profits and losses of each subsidiary impact parent bank
o Parent company’s net income is typically derived from dividends, interest,
management fees from equity in subsidiaries, and interest paid on holding
company debt.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies
Multi-bank holding
companies
Bank holding
companies One-bank holding
companies
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2.1 The organization and structure of commercial banking industry
2.1.1 Bank holding companies
Figure 2: Structure of single multibank holding company
Single Bank Holding Company
Board of Directors
Parent Company
Each subsidiary has a
Bank Subsidiary Nonbank Subsidiaries
president and line officers
Bank Branches
The bottom four levels have the same organizational form as the independent bank.
Multibank Holding Company
Board of Directors 52
2.1 The organization
Bank Subsidiary
and structure of commercial banking
Each subsidiary has a industry Nonbank Subsidiaries
president and line officers
Bank Branches
2.1.1 Bank holding companies
The bottom four levels have the same organizational form as the independent bank.
Figure 3: Structure of multibank holding company
Multibank Holding Company
Board of Directors
Parent Company
Bank Subsidiary Nonbank Subsidiaries Bank Subsidiary
Bank Branches Bank Branches
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
Ø What are the advantages and disadvantages of holding companies?
Advantages Disadvantages
- Greater efficiency, more services - Reduce competition
- Lower probability of - High turnover of bank personnel
organizational failure and the lack of personalized service
- Higher and more stable profits. -Delays in service when local office
managers are forced to refer
questions to the home office.
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2.1 The organization and structure of commercial banking industry
2.1.2 Bank holding companies (BHCs)
Ø What are the reasons for the growth of BHCs?
ü Geographic Diversification
ü Product Line Diversification
ü Tax Sheltering
ü Double Leveraging
ü Source of Strength
ü A Way Around Regulatory Restrictions
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2.1 The organization and structure of commercial banking industry
2.1.3 Financial holding companies (FHCs)
• Financial holding company a special type of holding company
• FHCs can engage in financial activities not permitted in a bank or bank holding
company
• FHCs are defined as a special type of holding company that may offer the broadest
range of financial services, including dealing in and underwriting securities and
selling and underwriting insurance.
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2.1 The organization and structure of commercial banking industry
2.1.3 Financial holding companies (FHCs)
• List of activities offered may expand as regulators decide what services are
‘compatible’ with banking
• Each affiliated financial firm has its own capital and management and its own
profit or loss
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2.1 The organization and structure of commercial banking industry
2.1.3 Financial holding companies (FHCs)
Figure 4: Structure of Financial holding companies (FHCs)
Financial Holding
Company
Bank Holding Securities Insurance Thrift Holding Real Estate
Company Subsidiaries Subsidiary Company Subsidiary
Banking Thrift Subsidiaries
Nonbank
Company Company and Service
Subsidiaries
Companies
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2.1 The organization and structure of commercial banking industry
2.1.3 Financial holding companies (FHCs)
Example:
• Citigroup is a multinational banking group, formed through the merger of Citicorp and
Travelers Insurance, including a variety of companies ranging from trade credit to consumer
support, brokerage to insurance.
• Citigroup is headquartered in New York with parent company Citibank.
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2.1 The organization and structure of commercial banking industry
2.1.3 Financial holding companies (FHCs)
Example: MB with the model of a multi-purpose financial group
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2.2 Internal organization of banking firm
• The great differences in size across the have led to marked differences in the way
banks and other service providers are organized internally and in the variety of
financial services each institution sells in the markets it chooses to serve.
• Internal organization of banking form is divided into two types:
Ø Community Banks and other community-oriented financial firms
Ø Larger banks – Money center or wholesale banks
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2.2 Internal organization of banking firm
2.2.1 Community Banks and other community-oriented financial firms
• Community banks devote principally to the markets for smaller, locally based deposits and
loans, is also often referred to as a retail bank.
• Typical size is $400 million
• Community banks are significantly affected by the health of local economy
• They tend to have limited opportunities for advancement
• But they generally know their customers well
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2.2 Internal organization of banking firm
2.2.1 Community Banks and other community-oriented financial firms
• Community banks’ Figure 3: Organizational chart for smaller community bank
organizational chart is not
complicated
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2.2 Internal organization of banking firm
2.2.2 Larger banks – Money center or wholesale banks
• Generally, money center or wholesale banks are multi-billion Dollar company.
• Wholesale banks serve different markets with many different services.
• They are better able to withstand risks of fluctuating economy.
• They are able to raise large amounts of capital at relatively low costs.
• Organizational chart is much more complex.
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2.2 Internal organization of banking firm
2.2.2 Larger banks – Money center or wholesale banks
Figure 4: Organizational chart for a Money center or wholesale bank
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Discussion
1.You recently graduated from college with a business degree and accepted a
position at a major corporation earning more than you could have ever dreamed.
You want to:
(1) open a checking account for transaction purposes,
(2) open a savings account for emergencies,
(3) invest in an equity mutual fund for that far-off future called retirement,
(4) see if you can find more affordable auto insurance,
(5) borrow funds to buy a condo, helped along by your uncle who said he was so
proud of your grades that he wanted to give you $20,000 towards a down
payment. (Is life good or what?)
Make five lists of the financial service firms that could provide you each of these
services.
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Discussion
2. What advantages can you see to banks affiliating with insurance companies?
How might such an affiliation benefit a bank? An insurer?
Can you identify any possible disadvantages to such an affiliation?
Can you cite any real-world examples of bank- insurer affiliations? How well do
they appear to have worked out in practice?
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Q&A session
Thank you for listening!
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