 Welcome everybody. For today our presentation is about banking. Last week we had this small introduction about finance in the world of international finance and we looked at financial markets, what financial markets are. Now we're moving forward towards banking and we will understand today what our bank, what banking is, the evolution of banking and the different types of banking that we have today. So for today what we're going to discuss together are four main topics. First of all we'll delve into history, we'll look at the history of banking, what happened, how did it evolve. Obviously we'll be looking at modern banking and then we'll progress into discussing the different types of banking. After that we'll look at central banks and what roles central banks play and finally we will have an in-depth discussion about what central banks do and what kind of relationships they have with the financial markets, how they help the financial markets maintain their functions. So without further ado, when it comes to banking, the evolution of banking or modern-day banking could be traced back to the 1600s. Before the 1600s though, before the introduction of the new services, before the introduction of the bank notes, the very first modern-day banking institution that was recorded could be traced to Italy, where the Banco Monte dei Peschi in Siena was the very first modern-day banking institution and that kind of concept was then exported throughout Europe and so from there that kind of banking institution which was basically a way to store money, a way to store whatever money that individuals had progressed into becoming an institution that produces and that issues its own bank notes through silver that were backed by silver or by gold and what happened after that is that once we had the innovation of bank notes, the United Kingdom developed the Bank of England and introduced the Bank of England and the Bank of England was basically the very first bank in a central bank type in Europe that was overlooking the issuance of currency but with that also there was an introduction of another type of a banking institution in the UK as well which was known as regional or country banks and these were basically regional banks that had similar authority in a way to the Bank of England where bank notes were as well issued through these institutions and then we moved towards having a joint stock banking institutions and here we had mostly privately held banks and one of the very first type, one of the very first banks within this category was basically the London and the Westminster Bank again in the UK however this bank did not in the end have the authority to issue currency like the other previous banks in the UK but of course issuance of currency then became something of a monopoly for central banks and not then for commercial banks per se with that in mind if we want to progress again and see how commercial banks and banking in general the banking industry in general progress we could see the introduction of a new service by the banking industry which was basically their function as clearing houses and to make things as simple as possible clearing houses means basically the facilitation of transformation of funds from point A to point B so basically the banks here acts as a mediator between the buyers and the sellers so they make sure that the product actually exists whether it is a security or a stock they make sure that this exists and at the same time they make sure that the funds for these products or services also exist before they facilitate the transaction between A and B now after this we had a new product that was again introduced as part of the banking industry and again this product was introduced in the UK through the Bank of Scotland which is basically the overdraft function or the overdraft service by the banking industry and then after this banks started forgiving out business loans and private loans to individuals and also to businesses now with the introduction of loans we have to emphasize that the saving function of the banking as an institution remained part of its core services and now this this kind of service has even evolved to to to offer some sort of mortgages as well for holders of the account within a banking institution but with all of this in mind after that in the 1700s as the banking industry started to progress even further we had a new function that was introduced to the banking industry and that was trade financing where basically investment banks in specific have been able to grant loans to facilitate international trade and the whole idea behind this was to make sure that the national economies are stimulated which means more creation of jobs which also helps in the end the economic output of a particular country and so trade financing became a very played a very important role as within the evolution of the banking services later on jumping into through history in 1900s banks started offering credit cards and consumer loans as you can see now credit cards are very much at the core of an everyday life whether this is through mobile or whether this is through our daily purchases or even our online purchases and as technology advanced we can see how the reliance now on new products and services became to increase even more so think about online banking within the 1990s and then after that in the mid 2000s how the introduction of mobile banking came to play an important role in modern-day banking and every period in history had its own unique milestones for the banking industry for the services that were introduced for the banking industry and for basically consumers who benefited from these kind of services now with all this in mind perhaps it is very important for us to try to understand what are the different types of banking and here we could mainly divide them into two different categories so we have depository institutions and then we have non-depository institutions let's start first with depository institutions so depository institutions are basically financial institutions that generate or obtain their funds from basically accepting deposits from individuals or maybe from businesses so their whole function or the whole key of how they operate is by accepting funds from the public these come in different types or in different forms for example you have credit unions and credit unions are basically member owned financial institutions these financial institutions do not necessarily they are financially exempt because again they are non-for-profit institutions they basically pool money and funds from these different members and whatever money that is pooled by these by these members that basically gets loaned out to the members who need basically to get loans now normally the way that these institutions function credit unions by providing loans at very favorable interest rates and these basically are only available for members so non-members cannot be benefit from the services that are offered by credit unions with credit unions in mind we have another type of institutions financial institutions that provides similar services to credit unions however these what are known as threat institutions they don't only provide their services for their members but they encourage home ownership or getting out mortgages for the purpose of owning homes and houses now these kinds of institutions or threat institutions they're very much centered around providing their members only the facilities that would enable them or the loans that would enable them to acquire homes or to purchase homes example in the u.s there is the navy federal credit unit an association or financial institution that that only serves veterans of the merit of the army and helps them acquire loans at favorable rates to fund their mortgages and to buy new homes now in addition to threat institutions and to credit unions there is what we know as commercial banks every one of us have dealt with banks at some point of their lives and these commercial banks are basically at their core financial institutions that offer different services for the depositors so these depositors could could utilize services like loans they could get mortgages and at the core commercial banks accept deposits from depositors from people and then provide loans for depositors or for people who are doing banking services or using their banking services and they facilitate the exchange of funds from one bank or from one institution to another and they also facilitate the exchange of funds from one currency to another how do commercial banks make profit basically the way that commercial banks normally make their profit is through the interest rate that is paid on the loans that they give out to to the people who have acquired the loan and for the fees that users of particular services would pay for utilizing these fees now these fees could look something like the overdraft fees or overdraft charges also at the same time they could be late payment fees on the loans that was that were acquired so there are two categories mainly if we want to look at them for banks to generate their a commercial banks to generate their profit which is through repayment on loan and through charges on charges basically or fees on on financial services now if we want to look a little deeper into how they function within how commercial banks function within the US in the US these commercial banks could be categorized into two different categories so we could have state banks and then we can have national banks now starting first with national banks national banks are a higher category of banks so they are allowed to function across state territory and because of that they need to be chartered by the controller of the currency which is basically part of the department of treasury and they have to have a charter basically to be regulated so they need to be regulated by by the by the controller of the currency on the other hand you have the you have the state banks and state banks do not need that kind of authorization from the controller of the currency rather they can operate within the limits of the state that they are operating within or that they anticipate to operate within now when we look at the other category of banks there these were non-depository institutions and as the name refers basically non-depository institutions are financial institutions that do not accept deposits from the public and so these kinds of institutions they enter into agreements to invest in securities this is their whole business model they invest in securities without accepting loan or without accepting deposits one of the prominent examples about non-depository institutions would be brokerage firms so brokerage firms are institutions financial institutions that connects a buyer with a seller a buyer of a security with a seller of that particular security and in their role as a mediator they facilitate the purchase of this of these kinds of securities and they help the clients their clients by providing them with advice by providing them with feedback and with the support that they need to facilitate the purchase or the sale of this particular security the other category of non-depository institutions other than brokerage firms is basically investment banks investment banks are the opposite of commercial banks basically investment banks do not accept deposits rather what they do is they help institutions they help organizations companies that are looking to raise capital they help them with that they help them raise the capital and they act as intermediaries in complex transactions and complex financial transactions for example they facilitate the O's they facilitate private placements at the same time they help with mergers and acquisitions they help with asset management at throughout our presentations we will also see the how investment banks play a role in IPOs and in private placements once we once we go into private placements and IPOs as a method of raising funds in the future now another category of non-depository institutions are central banks central banks are normally financial institutions that have the authority to issue currency so they have the authority to issue the currency to distribute it and as well at the same time they have the power to control credit interest rate and inflation and so these kinds of institutions could either be government-owned they could be owned by the private sector or they could be a combination owned by private sector and by by the governments now we've seen the what central banks are briefly and we will look into within the next few slides we will look again further at what central banks actually do but to understand a little more about their ownership structure if we are looking at government-owned central banks think about the Bank of Spain the Bank of Spain is owned solely by the state it's a government-owned entity if we want to look at an example of a bank of a central bank that is a private sector or that is owned by the private sector think about the United States Federal Reserve which is owned by a consolidation of commercial banks of different banking institutions or financial institutions if you want to understand a little bit more about how financial how private sector players and governments could own a central bank think about the Swiss national bank these are all examples of the different category of the different ownership structure of central banks and so the importance behind looking at what who owns central banks is because we want to see how central banks function and part of looking at how central banks function as we will see within the next few slides you will get to know and you will get to understand that the way that the central banks operate very much have an influence a direct influence on the economy and on the economy of a particular country and so understanding who has the power of making these decisions is going to be important for us now to move forward and emphasizing the role of the US Federal Reserve so the US Federal Reserve is basically as we said a privately owned institution it is created to ensure that the financial system of the US is sound and is functioning well they have the authority conduct monetary policy and the way that they do this is basically by saying how money and credit conditions are within the economy of the US their authority also expands to regulate and supervise the financial institutions that are operating within the US now the way that the Federal Reserve is structured it's basically structured into 12 different regional federal reserves federal reserve banks they are located in different regions within the US and at the same time there is a federal open market committee and a board of governors all of them together all of these three different parties together make the US Federal Reserve now if we want to look at central banks and what kind of effects it has on financial markets the very important first thing to remember for us is that not only central banks have the authority of issuing currency but also in their role regulating through their role of regulating financial institutions and in particular banks what what what central banks do is they make sure that there is a minimum capital reserve that is stored from each financial institution from each finance institution that is formed within the US there is an amount of money that needs to be stored at the Federal Reserve to ensure that should things go wrong the funds or a pool of money is there to help at least pay back some of the debaters or some of the investors who have invested in within these financial institutions now what happens if things go wrong and the financial institution collapses then we might have the option for the central banks to act as lenders of the last resort basically here what happens is the Federal Reserve or the central bank whichever institution it is in terms of a central bank like institutions would intervene and try to save a struggling financial institution and the way that they do this is by providing them with liquidity keeping them afloat helping them stay in business now another function that is very important for central banks is that they monitor and try to mitigate they monitor systemic risk and also try to mitigate it actively and the way that they do this is basically by supporting financial stability within the part within a particular region so within the region that this these central banks are operating and what they do again is should the needs be to support a particular financial institution that is still afloat that is still solvent but has no liquidity they would then intervene and provide them with the liquidity with the support needed to help again mitigate any systemic risk finally another role that they play is by basically working on monetary policy adjusting monetary policy and trying to influence what kind of expectations the market have and what this does it tries to control inflation and it tries to control the demand on the currency that the organization or that a particular country has on on the national currency now with all of this said and with us having had a brief look at the history of banking the different services and different categories of and types of banks and looking at central banks and what central banks actually do let's try to think a little deeper and perhaps this is something for you to do at home try to think about what kind of role you think central banks could do effectively so do you think that the role played or the role that they play in stabilizing inflation or that in ensuring the soundness of a particular economy is effective if so how do you think they are maintaining this effectiveness of their decisions this is something for you to think about until we meet next time good luck