COMMERCIAL BANKING
Tarrannum Singh
, NOTES
Financial Intermediaries
2 types-
A. Direct intermediation- Wherein the borrower directly borrow from financial market
by selling securities
B. Indirect- Financial intermediary borrows funds from lender and then uses these
funds to make loans to borrowers.
(might come as a part of essay) Asymmetric information
The problem of asymmetric information is at the heart of financial transactions. It arises
because:
• not everyone has the same information;
• everyone has less than perfect information, and
• some parties to a transaction have ‘inside’ information which is not made available to both
sides of the transaction.
• Decisions are made beforehand (ex ante) on the basis of less than complete information
and sometimes with counterparties who have superior information with the potential for
exploitation.
• Information asymmetries or the imperfect distribution of information among parties can
generate adverse selection and moral hazard.
Adverse Selection- refers to the situation that may occur before the transaction where the
potential borrower may produce negative results i.e. apply for loan and cause loss to the
bank. It is also called Lemon problem. It can be avoided by going through screening process.
Moral hazard- Usually takes place after the transaction where the borrower engages in
immoral activities and increases the chances of default. It can be avoided through
monitoring.
INTERMEDIARIES
Depository Financial Institution - This Includes all the banks that seeks public
deposits to lend others. These are also known as Monetary Financial Institution.
Non-Depository Financial Institution - Any financial institution other than
Monetary Financial Institution, such as- Insurance companies, unit trusts,
pension funds etc.
Basis DFI NDFI
Meaning
Type of contracts Discretionary- the depositor Contractual- Clients are
as well as the borrower can bound by a contract
make discretionary decision wherein amount,
about the amount and duration are specified
duration of deposits
Regulations Highly regulated as it forms Comparatively low
the largest part of money
supply in the market
Money created It creates money supply in Money is not created
, the market
Core activities Lending and borrowing To offer specialised
secondary claims (such
as insurance companies,
pension funds,
investment funds, unit
trusts and leasing
companies).
Sources of funds Deposits by Individual and Fees and Commissions
firms
Services Provided Payment services (plastic Insurance
cards, Cheques, Credit Advisory service
payment) Contracts
E- banking Investment
Investment, Insurance,
Pension
Types Personal Mutual Funds
Private Finance companies
Corporate Insurance companies
Investment FIs providing pension
Islamic fund and other
retirement benefits
TYPES OF DFIs-
1. Personal banking- relates to financial services provided to consumer and is small-scale in
nature (aka retail banks).
Large number of customers
Bank’s goal- cost efficiency
Low profitability
Standard financial services and products
It includes- Commercial banks, Saving banks, Co-operative Banks, Building societies, Credit
unions and financial house
It raises funds primarily by issuing current accounts, saving accounts and time deposits
which are used to lend in the form of commercial/mortgage or consumer loans. Collectively,
they have the most diversified asset portfolios.
2. Private banks- It concerns with the high-quality financial services and products tailored
for wealthy clients (Individual and their families)
High profitability
Few clients
Tailored services
Bank’s goal- customer satisfaction and loyalty
3. Corporate banks- Provides financial services and products to companies (usually large
companies)
Tarrannum Singh
, NOTES
Financial Intermediaries
2 types-
A. Direct intermediation- Wherein the borrower directly borrow from financial market
by selling securities
B. Indirect- Financial intermediary borrows funds from lender and then uses these
funds to make loans to borrowers.
(might come as a part of essay) Asymmetric information
The problem of asymmetric information is at the heart of financial transactions. It arises
because:
• not everyone has the same information;
• everyone has less than perfect information, and
• some parties to a transaction have ‘inside’ information which is not made available to both
sides of the transaction.
• Decisions are made beforehand (ex ante) on the basis of less than complete information
and sometimes with counterparties who have superior information with the potential for
exploitation.
• Information asymmetries or the imperfect distribution of information among parties can
generate adverse selection and moral hazard.
Adverse Selection- refers to the situation that may occur before the transaction where the
potential borrower may produce negative results i.e. apply for loan and cause loss to the
bank. It is also called Lemon problem. It can be avoided by going through screening process.
Moral hazard- Usually takes place after the transaction where the borrower engages in
immoral activities and increases the chances of default. It can be avoided through
monitoring.
INTERMEDIARIES
Depository Financial Institution - This Includes all the banks that seeks public
deposits to lend others. These are also known as Monetary Financial Institution.
Non-Depository Financial Institution - Any financial institution other than
Monetary Financial Institution, such as- Insurance companies, unit trusts,
pension funds etc.
Basis DFI NDFI
Meaning
Type of contracts Discretionary- the depositor Contractual- Clients are
as well as the borrower can bound by a contract
make discretionary decision wherein amount,
about the amount and duration are specified
duration of deposits
Regulations Highly regulated as it forms Comparatively low
the largest part of money
supply in the market
Money created It creates money supply in Money is not created
, the market
Core activities Lending and borrowing To offer specialised
secondary claims (such
as insurance companies,
pension funds,
investment funds, unit
trusts and leasing
companies).
Sources of funds Deposits by Individual and Fees and Commissions
firms
Services Provided Payment services (plastic Insurance
cards, Cheques, Credit Advisory service
payment) Contracts
E- banking Investment
Investment, Insurance,
Pension
Types Personal Mutual Funds
Private Finance companies
Corporate Insurance companies
Investment FIs providing pension
Islamic fund and other
retirement benefits
TYPES OF DFIs-
1. Personal banking- relates to financial services provided to consumer and is small-scale in
nature (aka retail banks).
Large number of customers
Bank’s goal- cost efficiency
Low profitability
Standard financial services and products
It includes- Commercial banks, Saving banks, Co-operative Banks, Building societies, Credit
unions and financial house
It raises funds primarily by issuing current accounts, saving accounts and time deposits
which are used to lend in the form of commercial/mortgage or consumer loans. Collectively,
they have the most diversified asset portfolios.
2. Private banks- It concerns with the high-quality financial services and products tailored
for wealthy clients (Individual and their families)
High profitability
Few clients
Tailored services
Bank’s goal- customer satisfaction and loyalty
3. Corporate banks- Provides financial services and products to companies (usually large
companies)
