Basic Principles of Banking

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Banking
Lecture 2 - Basic Principles of
Banking

Michal Mejstřík, Petr Teplý
Institute of Economic Studies, Faculty of Social Science,
Charles University in Prague, Czech Republic
10 October 2012

Global political governance

Slide 2

Who will pay this game/cost of
crises?

Source: Petr Teplý (2011)

Slide 3

The current financial world is “simple“
and can be described by 3 terms:

1) Planet Ponzi
2) Zombie banks
3) Uroboros
Source: Petr Teplý (2012)

Slide 4

Ponzi scheme
1)
2)
3)
4)
4)
5)

6)
7)

Exponentially increasing
liabilities (rapidly mounting debt)
Crappy, nonexistent or
inadequate assets
Deceitful or nonexistent
accounting
Feeble, inert or toothless
regulators
A get-rich-quick culture, fro
preference salted with a whole
array of inappropriate incentives
Stupid, ignorant, lazy investors
(the greedier, the better)
An astonishng capacity for selfdelusion

Source: Feierstein (2012): Planet Ponzi, Glacier USA LLC

Slide 5

Example 1 of Planet Ponzi: Spanish PM:
“We don´t need any external support!“

Source: Petr Teplý + Open Europe (2012)

Slide 6

Example 2 of Planet Ponzi:
Banking Financial Stability Indicators

Source: IMF (2012): Global Stability Report, 10 October 2012

Slide 7

Content
1.
2.
3.
4.

Bank definition
Banking sector
Traditional operations of banks
Banking risks, efficiency and
profitability of the bank
5. Approaches to bank valuation
6. Bank heterogeneity
7. Competing institutions
Slide 8

Definition of a bank
General definition - a financial provider or a deposit
institution collecting free money and offering loans to
different subjects as well as services (Půlpán a kol.
(1998)).
„EU“ definition - EU Directive 2006/48/EC defines a credit institution (which a bank is), as a) an undertaking whose
business it is to receive deposits and other repayable
funds from the public and to grant credits for its own
account, or b) an electronic money institution within the
meaning of Directive 2000/46/EC.
„Act on Banks“ definition (No. 21/1992 Coll.) - a bank is a joint-stock company accepting deposits from the public
and granting loans, licensed by the Czech National Bank.
Slide 9

The key functions of a bank

Slide 10

What´s the aim of bank´s
management?

Slide 11

Banks´ financial statements

Slide 12

Content
1. Bank definition
2. Banking sector
3. Traditional operations of banks
4. Banking risks, efficiency and
profitability of the bank
5. Approaches to bank valuation
6. Bank heterogeneity
7. Competing institutions
Slide 13

Bank-oriented vs. capital market
oriented financial system

Source: Mejstřík et al. (2008)

Slide 14

Universal vs. separate banking system

Slide 15

Commercial vs investment banks

Source: IMF (2012)
Slide 16

The 2008-2009 financial crisis =
end of an era in investment banking

Slide 17

Fall in market capitalization of banks
(Jan 2007 vs July 2009)

Source:Bloomberg

Slide 18

18

TOP investment banks in 2011

Slide 19

19

World's 10 Biggest Banks in 12/2011
(according to Tier 1 capital and assets)
Rank

Bank Name

Country

1
2
3
4
5
6
7
8
9
10

Bank of America
JP Morgan Chase & Co
ICBC
HSBC Holdings
Citigroup
China Construction Bank Corporation
Mitsubishi UFJ Financial Group
Wells Fargo & Co
Bank of China
Agricultural Bank of China

US
US
China
UK
US
China
Japan
US
China
China

$Bn Tier 1
Capital
159.2
150.4
140.0
139.6
131.9
119.1
117.0
114.0
111.2
96.4

$Bn Assets
2136.6
2265.8
2456.3
2555.6
1873.9
1949.2
2664.2
1313.9
1877.5
1853.3

Assets
rank
10
9
5
3
14
12
2
22
13
15

Source: The Banker (2012)
Slide 20

Assets
%y-y
-5.67%
7%
20.87%
4.11%
-2.09%
19.41%
7.39%
4.43%
18.88%
18.73%

20

Decrease of EU banks profits –
zombie banks are coming!

Source:The Banker (2012)

Source: The Banker (2012)...
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