BUB - The Business of Banking Module Overview

The Business of Banking

Introduction

The Businesss of Banking:
Like all other businesses, banks operate to make a profit and profit-making activities come with varying levels of risk. Banks make money in three ways: lending money, charging fees for services, and making investments in securities. Like all other businesses, banks operate to make a profit and profit-making activities come with varying levels of risk. In lending money, banks run the risk that their loans won't be repaid. In offering online banking services, banks run the risk that they are making their customers vulnerable to identity theft. A variety of other risks are also present. Investors can use a bank's financial statements to determine the long-term and short-term financial health of a bank. By examining a bank's liquidity ratios a bank's short-term health can be viewed, while solvency ratios determine a bank's health long-term. With this information, an investor can weigh a bank's risk and return.

Essential Questions

How do banks make a profit?
What types of risks do banks face?
What do bank financial reports reveal about a bank's profitability and how it handles risk?

Key Terms

Profit text annotation indicator : revenue in excess of expenses; money in is more than money out

Loss text annotation indicator : expenses in excess of revenue; money out is more than money in

Asset text annotation indicator : Anything of value used by a business

Current Assets text annotation indicator : assets of a business that would be used within a year; for a bank, cash, short-term receivables, and marketable securities.

Current Liabilities text annotation indicator : obligations owed by the business due within a year; for a bank, demand deposits

Liability text annotation indicator : an obligation owed by a business

Income text annotation indicator : revenue, money coming in

Balance Sheet text annotation indicator : a financial statement that shows that a company's assets equal its liabilities plus the owner's equity

Income Statement text annotation indicator : profit and loss statement

Credit Risk text annotation indicator : the risk a borrower will not repay a debt

Market/Liquidity Risk text annotation indicator : risk that an asset cannot be traded quickly enough for cash

Legal/Reputational Risk text annotation indicator : the risk of damaging a bank's reputation

IT/Operations Risk text annotation indicator : risk that a security breach might occur dealing with either bank operations of cyber security

Financial Analysis text annotation indicator : assessment of the viability, stability, and profitability of a business

Interest Rate Risk text annotation indicator : potential for losses arising from changes in interest rate

Liquidity text annotation indicator : being in cash or easily convertible to cash debt-paying ability

Profitability text annotation indicator : operating income is greater than adjusted operating expenses

Asset Quality text annotation indicator : how immune assets are to a reduction in value

Gap text annotation indicator : the spread between lending and borrowing costs

Spread text annotation indicator : The difference between the interest received from lending and the interest paid to depositors

Capital Adequacy text annotation indicator : a measure of the sufficiency of a firm's funds to meet its business and regulatory obligations

Financial Ratio text annotation indicator : a method of evaluating a firm's financial position

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