The banking domain has seen a lot of changes in recent years, thanks to advances in technology. Here is a basic overview of what the banking domain entails and how it has changed in recent years.

Basics of Banking

Banking institutions are vital components of the financial sector. Banks manage money, credit, and investments. The banking sector includes personal banking, corporate banking, investment banking, and retail banking.

Some important banking terminologies include:

Asset. An asset is anything that has value and can be converted into cash. Examples of assets include stocks, bonds, and properties. An asset is anything that brings in money.

Liability. A liability is anything that represents a potential loss for a company or an individual. Liabilities include accounts payable, loans, and credit card debt. A liability is anything that causes an outflow of money.

Capital. Capital refers to the available funds that can support businesses and generate profits. Equity is one type of capital, while others include debt and venture capital.

Financial statement. A financial statement is a document that shows a company’s financial position at a specific point in time. Financial statements include the balance sheet, income statement, statement of cash flows, and statement of shareholders’ equity.

There are many other concepts in banking such as risk management and portfolio management to name a few. However, these are some of the basic concepts that every individual must know before venturing into this field.

Banking involves other services like international financing, foreign exchange, money market operations, and government securities.

A few years ago, banking was considered a secure profession. But with the advent of new technologies and changing customer expectations, banks have had to think on their feet to keep up with the times. Today, banks have to deal with various perils like credit risks, interest rate risks, and liquidity risks and have to constantly evolve and adopt new technologies to stay ahead of the competition.

Traditionally, the banking system consisted of different types of banks, each with a specific role. But many modern banks offer services across verticals in an attempt to provide a one-stop solution for their customers.

Commercial Banks

Commercial banks are financial institutions that offer banking services such as deposits, loans, and credit cards to businesses and individuals. Commercial banks are regulated by the government and are typically FDIC-insured.

There are several types of commercial banks, each with its strengths and weaknesses. The most common type of commercial bank is the traditional brick-and-mortar bank. These banks have a physical presence in their communities, with branches and ATMs that customers can use. Traditional banks offer a wide range of services, including checking and savings accounts, loans, and investment products. However, they also tend to have high fees and require customers to maintain a certain balance in their accounts.

Another type of commercial bank is an online bank. Online banks don’t have physical branches, so they can offer lower fees and higher interest rates on deposits. They also tend to have fewer services than traditional banks. However, customers who wish to interact with their banks in person or deposit cash into accounts may not find this convenient.

Finally, there are community development banks. These banks focus on serving low-income and underserved communities. They offer basic banking services, such as checking and savings accounts, as well as loans and financial education programs. Community development banks typically have lower fees than other types of commercial banks and may offer special programs for small businesses or entrepreneurs.

Central Banks

Contemporary central banks are typically government-owned, but separate from the country’s central ministry or finance departments.

The primary responsibility of central banks is to stabilize the country’s currency by controlling inflation. Central banks keep the banking system running by supporting the nation’s economy with funds when commercial banks can’t cover a supply shortage. Central banks are also the regulatory authority when it comes to laying down the nation’s monetary policy and are the only authorized institution that can print currency and mint coins for circulation. They also play a supervisory role to the country’s commercial banks and act as the nation’s bankers for inter-country and government transactions.

Central banks are vital because they help to stabilize the financial system by providing a source of liquidity in times of crisis. They also promote economic growth by providing credit to businesses and households. Some prominent central banks include:

• The Federal Reserve System (USA)
• The European Central Bank (ECB)
• The Bank of England (UK)
• The Bank of Japan (Japan)
• The Swiss National Bank (Switzerland)

Investment Banks

Investment banks serve as an intermediary for large and complex financial transactions such as taking a company public by launching an initial public offering (IPO), mergers between two companies, and advising large companies about financial aspects such as pension funds. Sometimes, such banks also look after the investments of high-net-worth individuals.

They also help companies issue debt, buy other companies, or sell a part of the company in the form of stocks. Investment banks typically make money through fees charged for their services. Other forms of income for investment banks include earning profits from trading securities and providing in-depth research about a company’s prospects.

This research is one of the most vital inputs that the investment banks’ clients depend on when making major financial decisions internally. They may also use these inputs to determine the future course of action for several of their own clients.

Other types of Banks

There are many other types of banks including development banks, online-only banks, and cooperative banks. Each type of bank offers different products and services designed to meet the needs of specific customer groups.

Functions of a Bank

A bank is a financial institution that accepts deposits from the public and creates credit. Banks are critical to the functioning of a market economy.

The primary function of a bank is to act as a financial intermediary. That is, they accept money from depositors and lend it out to borrowers. In this way, banks provide liquidity to the economy by matching savers with borrowers. This function is essential for an economy to function smoothly.

In addition to their role as financial intermediaries, banks also carry out the following important functions:

• Providing a safe place to store money: Depositors entrust their money to banks, and in return, banks agree to keep the money safe and sound. This service provides peace of mind for depositors and helps ensure that funds are available when needed.
• Facilitating payments: Banks make it possible for people and businesses to make payments quickly and easily. This includes everything from a direct deposit of paychecks to online bill payments. Without banks, making payments would be much more difficult.
• Extending credit: When borrowers need funds but do not have enough saved up, they can turn to banks for a loan. This function of banks helps fuel economic growth by making it possible for businesses to invest in expansion or new projects.

The myriad operations coupled with the massive customer base of many banks call for constant vigilance. For this purpose, many banks focus on core operations. Some core bank operations include:

Loans and Advances

Loans and Advances refer to the credit that banks give to their customers. This could be in the form of an overdraft facility, personal loan, home loan, etc. The purpose of providing these loans is to help customers meet their financial needs.

Banks typically charge interest on the outstanding amount of the loan. The rate of interest charged depends on various factors such as the type of loan, tenure of the loan, etc. Customers are required to repay the loan amount along with the interest charges within a stipulated period.

An overdraft facility is a type of loan which allows customers to withdraw funds up to a certain limit even if they don’t have sufficient balance in their account. This facility is usually extended to customers who maintain a good relationship with the bank and have a good track record of repayment.

Personal loans are unsecured loans that people can use to fund sudden capital requirements such as meeting medical expenses, or a family event. These loans are generally given at higher interest rates as compared to other types of loans due to their unsecured nature.

Home loans are provided by banks to help customers purchase a house. These loans are usually given at lower interest rates. The repayment tenure  for such loans is usually longer than for other loans.

Risk Management

Risk management is the process of identifying, measuring, and managing risk.

Banks are exposed to many risks, including credit risk, interest rate risk, liquidity risk, foreign exchange risk, market risk, operational risk, and reputational risk.

• Credit risk is the risk of loss arising from the inability of a borrower to repay a loan. 
• Interest rate risk is the risk of loss arising from changes in interest rates. 
• Liquidity risk is the risk of loss arising from the inability to meet the bank’s financial obligations when they come due. 
• Foreign exchange risk is the risk of loss arising from changes in currency exchange rates. 
• Market risk is the risk of loss arising from changes in the prices of the assets the bank owns.
• Operational risk is the risk of loss arising from the failure of organizational processes or people to execute their duties properly. 
• Reputational risk is the risk of loss arising from the negative perception of  a bank by the public or other stakeholders.

Banks consider all these risks and deploy specific measures to manage them by identifying short-term plans and charting out long-term policies.

Conclusion

Banking is one of the most important domains in our economy, and understanding the basics is crucial for anyone looking to enter the industry.