RB1 Very Short Essay

RB1 Very Short Essay RB1 Very Short Essay Retail Banks as Financial Intermediaries Professor John B Holland The University of Glasgow January 15th 2015 RETAIL BANKING – Juggling risks - for profit How do it? How learn how to do it? How develop Retail Bank? How get Competitive Advantage? RETAIL BANKING – Juggling risks - as teams & organisation How do it? How learn how to do it? How develop Retail Bank? How get Competitive Advantage? Real world Models of Retail Banks Overview – ‘juggler’ Retail banking – juggling financial risks - and returns /profits Individuals & teams in Bank firms Retail banking – juggling financial risks - and returns /profits Individuals & teams in Bank firms Banks as ‘middle men’ Bank as ‘Juggler’ Individuals Households Households Cash Deposits safety & Payments Services 1-7 Individuals Banks transform deposits into loans Equity Loans and Cash WHAT IS OVERALL VIEW OF INTERMEDIATION MODEL? =Complex ‘balancing’ or ‘juggling’ of risks – for profit ASSETS LIABILITIES ON BOTH SIDES Contracting & control of Information asymmetry =IS Moral hazard =MH, Adverse selection =AS Active screen of, influence of risky depositor/borrower behaviour. Diversification of risks. Use of capital risk ‘buffers’. Cross balance sheet risk effects. Thus transform Risk, Maturity, Liquidity via these internal mechanisms RETAIL BANKING – MAIN SLIDES ï  · Information asymmetry =IS ï  · Moral hazard =MH ï  · Adverse selection =AS ‘Real world’ model of Retail Banking Details of how they do it Retail banking – key points – about ‘real world’ model ï  · Bank as ‘juggler’ of risks for profit ï  · ï  · Small transactions –on balance sheet – small customers Banks exploit - combination of payments & intermediation ï  · Look at each risk area by itself – assume no dynamics between them – no juggling ï  · Contracting to reduce risk - both assets & liabilities ï  · Diversify risk- both assets & liabilities ï  · Cash ‘absorb’ liability risk ï  · Equity ‘absorb’ bad debt risk ï  · ï  · Bank manage risks – seek profit and added value Via how manage lending, how provide payment /deposits ï  · ï  · Overall Juggling = Bank transform capital = Financial intermediary ï  · Retail bank = risk & return management ‘machine’ = ‘real world’ model by size, risk, maturity etc Characterisitcs of RB RETAIL BANKING - CHARACTERISTICS ï  · Financial service provision to individuals and small firms ï  · Large volumes of low value transactions ï  · Large network of branches ï  · Major technology investment ï  · Close interaction with customers ï  · Retail often combined with wholesale, investment, & corporate banking RETAIL BANKING – BALANCE SHEET LIABILITIES ASSETS ï  · Many small deposits. ï  · Many deposit types current, 60 day etc. * Many small loans *many different terms For loans-rates/maturity ï  · Some large deposits from banks, firms. * loans longer life than Deposits & larger size ï  · High leverage low equity, high debt * cash in excess of required & securities as liquidity ï  · Liabilities mainly to fund financial Assets * real assets large but less than financial assets. RETAIL BANK - INCOME AND EXPENSES ï  · Fees & charges do not cover non interest expenses ï  · Labour costs high ï  · Interest margin wider than wholesale ï  · Payments services & ï  · Technology are major expenses Combine Payments and Intermediation? WHY COMBINE PAYMENTS & INTERMEDIATION ? ï  · Bank - based on links between ï  · Medium of exchange & ï  · Store of value ï  · & Bank advantages = ï  · + ‘Payment via claims on bank ï  · dominates payment via trade credit/IOUs ï  · Because banks have advantages in enforcing contracts, ï  · & Their debit cards / cheques /payments are safe / convenient WHY COMBINE PAYMENTS & INTERMEDIATION ? ï  · Money? Decisions to sell & buy ï  · Are separated in time ï  · Since money allows us to sell goods for general purchasing power which can be exercised later. ï  · Money used as store of purchasing power (= PP ) ï  · Seller can hold the proceeds between sale and future purchase ï  · - in wallet, but often in safe bank account ï  · Or buyer