Accounting for Financial Institutions Banks Accounting Banks Accounting

Accounting for Financial Institutions Banks Accounting

Banks Accounting Chapter (1) Definition & Types

Bank § Institution that deals in money and its substitutes and provides other financial services. § Banks accept deposits and make loans to customers, § and derive a profit from the difference in the interest paid to lenders (depositors) and charged to borrowers, respectively. Definitions & types Dr Makram Bassily 3

Illustration Loans Banks Make + Accept Deposits - charged Interest Earned Paid Profit = IE - IP Definitions & types Dr Makram Bassily Interest Paid 4

Bank § They also profit from fees charged for services. § The three major classes of banks are: - commercial banks, - investment banks, - and central banks. Definitions & types Dr Makram Bassily 5

Bank § Banking depends entirely on public confidence in the system's soundness; § No bank could pay all its depositors should they simultaneously demand cash, as may happen in a panic. may happen in a Definitions & types Dr Makram Bassily 6

(1) SAVING BANK: § Financial institution that gathers savings and pays interest or dividends to savers. § It channels the savings of individuals who wish to consume less than their incomes to borrowers who wish to spend more. § This function is performed by mutual savings banks, savings and loan associations, credit unions, postal savings systems, and municipal savings banks. Definitions & types Dr Makram Bassily 7

SAVING BANK: § Unlike a commercial bank, a savings bank does not accept demand deposits. bank § Many savings banks originated as part of a philanthropic effort to encourage saving among people of modest means. § The earliest municipal savings banks developed from the municipal pawnshops of Italy Definitions & types Dr Makram Bassily 8

SAVING BANK: § Other early savings banks were founded in Germany in 1778 and The Netherlands in 1817. § The first U. S. savings banks were nonprofit institutions established in the early 1800 s for charitable purposes. early 1800 s for Definitions & types Dr Makram Bassily 9

(2) Commercial bank § Bank that makes loans to businesses, consumers, and nonbusiness institutions. § Early commercial banks were limited to accepting deposits of money or valuables for safekeeping and verifying coinage or exchanging one jurisdiction's coins for another's. Definitions & types Dr Makram Bassily 10

Commercial bank § By the 17 th century most of the essentials of modern banking, including foreign exchange, the payment of interest, and the granting of loans, were in place. § It became common for individuals and firms to exchange funds through bankers with a written draft, the precursor to the modern check. Definitions & types Dr Makram Bassily 11

Commercial bank § Because a commercial bank is required to hold only a fraction of its deposits as cash reserves, § it can use some of the money deposited by its customers to extend loans. § Commercial banks also offer a range of other services, including savings accounts, safe-deposit boxes, and trust services. Definitions & types Dr Makram Bassily 12

(3) Investment bank § Firm that originates, underwrites, and distributes new security issues of corporations and government agencies. § The Banking Act of 1933 required the separation of investment banking and commercial banking functions. § Investment banks operate by purchasing all the new securities issued by a corporation at one price, and selling fractions of the new issue to the investing public at prices high enough to yield a profit. Definitions & types Dr Makram Bassily 13

Investment bank Selling Fraction of New At High Price Securities Investment bank + Securities Purchasing - Profit = HP - LP Definitions & types Dr Makram Bassily All New At One Price 14

Investment bank § The investment bank is responsible for setting the public offering price, which it bases on probable demand assessments of the economic climate. § A syndicate of investment banking firms underwrites and distributes most security issues in order to divide the risk of the new issue. § An initial public offering (IPO) refers to the issuance of the first public shares of a formerly nonpublic company. Definitions & types Dr Makram Bassily 15

(4) CENTRAL BANK § Institution, such as the U. S. Federal Reserve System, charged with regulating the size of a nation's money supply, § the availability and cost of credit, and the foreign exchange value of its currency § Central banks act as the fiscal agent of the government, § issuing notes to be used as legal tender, supervising the operations of the commercial banking system, and implementing monetary policy. it’s called bank of banks. Definitions & types Dr Makram Bassily 16

Central bank § By increasing or decreasing the supply of money and credit, they affect interest rates, thereby influencing the economy. § Modern central banks regulate the money supply by buying and selling assets (e. g. , through the purchase or sale of government securities). § They may also raise or lower the discount also rate to discourage or encourage borrowing by commercial banks. Definitions & types Dr Makram Bassily 17

Central bank § By adjusting the reserve requirement (the minimum cash reserves that banks must hold against their deposit liabilities), § central banks contract or expand the money supply. § Their aim is to maintain conditions that support a high level of employment and production and stable domestic prices. Definitions & types Dr Makram Bassily 18

Central bank § Central banks also take part in cooperative international currency arrangements designed to help stabilize or regulate the foreign exchange rates of participating countries. § Central banks have become varied in authority, autonomy, functions, and instruments of action, § but there has been consistent increased emphasis on the interdependence of monetary and other national economic policies, especially fiscal policies and debt management policies. Definitions & types Dr Makram Bassily 19

(5) Discount rate or Bank rate § Interest rate charged by a central bank for loans of reserve funds to commercial bank, and other financial intermediaries. § The discount rate is one important indicator of the condition of monetary policy in an economy. § Because raising or lowering the discount rate alters the rates that commercial banks charge on loans, § Adjustment of the discount rate is used as a tool to combat recession and inflation. Definitions & types Dr Makram Bassily 20

(6) Check § Bill of exchange drawn on a bank and payable on demand. § Checks have become the chief form of money in the domestic commerce of developed countries. § As a written order to pay money, § a check may be transferred from one person to another by endorsement. § Most checks are not paid in currency, but by the debiting and crediting of bank deposits. Definitions & types Dr Makram Bassily 21

Check § There are several special forms of checks. § A cashier's check is issued by a bank and has unquestioned acceptability, as does a certified check, § which is a depositor's check that has been guaranteed by a bank. § Traveler's checks are cashier's checks sold to travelers, § which must be signed twice by the payee ( )ﺍﻟﻤﺴﺘﻔﻴﺪ , once when the check is issued, and once when it is cashed; § Reimbursement is guaranteed if they are lost or stolen. Definitions & types Dr Makram 22 Bassily

(7) National bank § In the U. S. , any commercial bank chartered and supervised by the federal government and operated by private individuals. § National banks were created during the Civil War under the National Bank Act of 1863 to combat financial instability caused by state banks, and to help finance the war effort. Definitions & types Dr Makram Bassily 23

National bank § When these banks purchased federal bonds and deposited them with the comptroller of the currency, they were permitted to circulate national bank notes, thereby creating a stable, uniform national currency. § After the Civil War, the government began to retire the bonds issued during the war, which reduced the number of national bank notes that could be issued. Definitions & types Dr Makram Bassily 24

National bank § Concern over the inflexibility of national bank notes led to the formation of the Federal Reserve System in 1913, which all national banks were required to join. § The U. S. Treasury assumed the obligation of issuing national bank notes in 1935, effectively ending the issue of money by private commercial banks. Definitions & types Dr Makram Bassily 25

(8) Development bank § National or regional financial institution designed to provide medium- and long-term capital for productive investment. § Such investment is usually accompanied by technical assistance. § Some development banks are government-owned and -operated, while others are private. § Many have been established under the auspices ( )ﺗﺤﺖ ﺭﻋﺎﻳﺔ of the World Bank. § Among the largest are the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank. Definitions & types Dr Makram Bassily 26

(9) World Bank § Specialized agency of the United Nations system, established at the Bretton Woods Conference for postwar reconstruction. § It is the principal international development institution. Its five divisions are the International Bank for Reconstruction and Development (IBRD; its main component), § the International Development Association (IDA), § the International Finance Corporation (IFC), § the Multilateral Investment Guarantee Agency (MIGA), § and the International Center for Settlement of Definitions & types Dr Makram 27 Investment Disputes (ICSID). Bassily

World Bank § The IDA (founded 1960) makes interest-free loans to the bank's poorest member countries. § The IFC (founded 1956) lends to private businesses in developing countries. § The MIGA (founded 1985) supports national and private agencies that encourage foreign direct investment by offering insurance against noncommercial risks. § The ICSID (founded 1966) was developed to relieve the IBRD of the burden of settling investment disputes. Definitions & types Dr Makram 28 Bassily