Student Publications

Author: Jonathan   Dodoo
Title: Commercial Banking & Finance

Country: United States
Avialable for Download: Yes

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A commercial bank is a type of financial intermediary and a type of bank. Commercial bank has two possible meanings, Commercial bank is the term used for a normal bank to distinguish it from an investment bank. This is what people normally call a bank. The term commercial was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies, some have used the term commercial bank to refer to banks which focus mainly on companies.

 In some English-speaking countries outside North America , the term trading bank was and is used to denote a commercial bank. After the great depression and the stock market crash of 1929, the U.S. Congress passed the Glass-Steagal Act 1930 Khambata 1996 requiring that commercial banks only engage in banking activities accepting deposits and making loans, as well as other fee based services, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.

It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time or term deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.

 Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).

 In 1775 there were no commercial banks in Britain 's rebellious American colonies. The commercial Bank of England was already almost a century old, but few colonists had any dealings with it or the Mother Country's enormous funded debt.1 There did exist colonial institutions, both public and private, of which we will treat later, which went by the name of "bank." Most of these institutions were so different from commercial banks that when Robert Morris, Alexander Hamilton, and the other "Founding Financiers" proposed the Bank of North America 2 in 1781 and the Bank of New York in 1784, every aspect of banking had to be discussed repeatedly and in great detail.

  In today�s fast paced global economy managing a firm finance is more complex than ever. For top managers a thorough command of traditional finance activities financial planning, investing, money, and raising funds is only part of their jobs.

 Financial managers are more than number crunchers, as part of the top management team, chief financial officers (CEOs) need a broad understanding of their firms business and industry as well as leadership ability and creativity. They must never lose sight of the primary goal of the financial manager, to maximize the value of the firm to its owners

Financial management raising and spending a firm�s money is both a science and an art the science part is analyzing numbers and flows of cash through the firm.


The art is answering questions like these is the firm using its financial resources in the best way, aside from costs, why choose a particular form of financing, how risky is each options

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks. Equivalently, the goal is to maximize the corporations' return on capital. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms

The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers). 

The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate investment projects for a bank to make investment decisions. Finance is critical to the success of all companies, it may not be as visible as marketing or production but management of a firm�s finances is just as much a key to its success.


A commercial bank is a type of financial intermediary and a type of bank. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.

 Commercial banks are in the business of providing banking services to individuals, small businesses and large organizations. While the banking sector has been consolidating, it is worth noting that far more people are employed in the commercial banking sector than any other part of the financial services industry. Jobs in banking can be exciting and offer excellent opportunities to learn about business interact with people and build up a clientele.

 Today's commercial banks are more diverse than ever. You'll find a tremendous range of opportunities in commercial banking, starting at the branch level where you might start out as a teller to a wide variety of other services such as leasing, credit card banking, international finance and trade credit.

 Ghana Commercial Bank Ltd. established in May 1953 for Ghanaian entrepreneurs, is now the largest indigenous Bank with 133 branches nation-wide. Our objective among others is to support the private sector and facilitate the nation's economic growth.

 Some of the main activities of a Commercial Banking are as follows,


 Savings accounts are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but can not be used directly as money (by, for example, writing a cheque). These accounts let customers set aside a portion of their liquid assets that could be used to make purchases while earning a monetary return.

Withdrawals from a savings account are occasionally costly and are sometimes much higher and more time-consuming than the same financial transaction being performed on a demand account. However, most savings accounts do not limit withdrawals, unlike certificates of deposit. In the United States, violations of Regulation D often involve a service charge, or even a downgrade of the account to a checking account. With online accounts, the main penalty is the time required for the Automated Clearing House to transfer funds from the online account to a "brick and mortar" bank where it can be easily accessed. During the period between when funds are withdrawn from the online bank and transferred to the local bank, no interest is earned.

In some countries, such as the United Kingdom, an account called the "notice deposit" account is available. A slight interest premium is paid, with the caveat that one must give up to 90 days notice to make a withdrawal without a fee.


Often, withdrawals can be made without notice by paying a penalty equivalent to the interest earned in the notice period. This is in contrast to "instant access deposit" accounts, which do not require notice for withdrawals. Notice deposit accounts are not common in North America.


 The GCB Current Account makes it convenient for any of our cherished customers to make payment and have access to cash using cheques or any other acceptable means.

 The current account of the balance of payments is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers of the current account. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. It, with Net Capital Outflow, is a major metric of how much a nation invests or is invested in.

Kudi Nkosuo Account

Kudi Nkosuo is a hybrid of savings and credit account designed for the informal sector. This account helps the customer cultivate the habit of saving and also be eligible for a loan to expand one's business.

A fixed amount (determined by the customer) is contributed on daily, weekly or on monthly basis. Contributions will have to be consistent without any withdrawal for a minimum of six months to make the customer eligible to apply for a loan.

Flexsave Account

Enjoy a flexible way to save with any of the Bank's branches with low minimum balance requirement plus a Ready cash (ATM) card for easy access to funds.

 The benefits of flexsave account:

 Ready cash Benefits your account can be linked with the Ready cash (ATM-24/7/365) so you have access to your funds and can track your banking activities at any time.

 Frequent Withdrawals Flexibility in making up to twenty (20) withdrawals in a month.


Access to all branches you personally have access to your account at any of the Bank's branches nationwide.

 Competitive Interest Rate Flexsave allows you to earn more on the money you save

 Initial Deposit Requirement Attractive minimum cash deposit requirement

 Access to Loan There is a possibility of accessing a loan

Save & Prosper Account

Save & Prosper is a specially designed product for salaried workers who want to set aside part of their regular income as savings. A fixed amount is saved by the customer on weekly, fortnightly or on monthly basis.

The benefits of Save and Prosper Account as follows,

 Secure funds for a rainy day, Earn more on your money with attractive interest rates,

Withdrawals could be made from the account, Access to loan facility (should the need arise) after saving consistently for a minimum of six months, the repayment of the loan will not exceed your regular contribution.

 Some of the products of Commercial Banks are as follows

  • Fixed Deposit
  • Payment / Subscription & Remittance
  • Overdraft Facilities
  • Domestic Transfers
  • Custody of Securities & Documents
  • Call Accounts
  • Bonds & Guarantees
  • Personal Loans
  • Cash Management
  • Internet Banking
  • Insurance and Investment
  • Relationship Banking

Capital Investment Decision

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate.


These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management returns excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision

Management must allocate limited resources between competing opportunities projects in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows

In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected. This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value Time value of money. These present values are then summed, and this sum net of the initial investment outlay is the NPV

The NPV is greatly influenced by the discount rate thus selecting the proper discount rate the project "hurdle rate s critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment .e. the project appropriate discount rate. The hurdle rate should reflect the risk of the investment, typically measured by volatility of cash flows, and must take into account the financing mix.

 Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected.

 A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.

In conjunction with NPV, there are several other measures used as selection criteria in corporate finance.

  These are visible from the DCF and include payback, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI. In many cases, for example R&D projects, a project may open or close paths of action to the company, but this reality will not typically be captured in a strict NPV approach. Management will therefore (sometimes) employ tools which place an explicit value on these options.


The financing decision

Achieving the goals of corporate finance requires that any corporate investment be financed appropriately since both hurdle rate and cash flows and hence the risk of the firm will be affected, the financing mix can impact the valuation. Management must therefore identify the optimal mix of financing the capital structures that result in maximum value.

The sources of financing will, generically, comprise some combination of debt and equity. Financing a project through debt results in a liability that must be serviced and hence there are cash flow implications regardless of the project's success. Equity financing is less risky in the sense of cash flow commitments, but results in a dilution of ownership and earnings. The cost of equity is also typically higher than the cost of debt and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.

Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows.

Profit Maximisation

Financial management is he same as the objective of a company which is to earn profit but profit maximization alone cannot be the sole objective of a company. It is a limited objective. If profits are given undue importance then problems may arise as discussed below. The term profit is vague and it involves much more contradictions.

Profit maximization must be attempted with a realization of risks involved. A positive relationship exists between risk and profits. So both risk and profit objectives should be balanced. Profit Maximization fails to take into account the time pattern of returns. Profit maximization does not take into account the social considerations.

Wealth Maximization

It is commonly understood that the objective of a firm is to maximize value and wealth. The value of a firm is represented by the market price of the company's stock. The market price of a firm's stock represents the assessment of all market participants as to what the value of the particular firm is.

It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm's progress and potential.


 Prices in the share markets are affected by many factors like general economic outlook, outlook of the particular company, technical factors and even mass psychology.

 Normally this value is a function of two factors the anticipated rate of earnings per share of the company the capitalization rate the likely rate of earnings per shares depend upon the assessment of how profitable a company may be in the future. The capitalization rate reflects the liking of the investors for the company.

A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit. A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional-reserve banking. Some banks called Banks of issue banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches

Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is granted by bank regulatory authorities which provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank

Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Commercial lending today is a very intense activity, with banks carefully analysing the financial condition of their business clients to determine the level of risk in each loan transaction. Banking services have expanded to include services directed at individuals, and risks in these much smaller transactions are pooled

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services international banking, foreign exchange, insurance, investments, wire transfers, etc. However, lending activities still provide the bulk of a commercial bank's income

There are several types of banks, which differ in the number of services they provide and the clientele they serve. Although some of the differences between these types of banks have lessened as they begin to expand the range of products and services they offer, there are still key distinguishing traits. Commercial banks, which dominate this industry, offer a full range of services for individuals, businesses, and governments.

These banks come in a wide range of sizes, from large global banks to regional and community banks. Global banks are involved in international lending and foreign currency trading, in addition to the more typical banking services.


  Regional banks have numerous branches and automated teller machine (ATM) locations throughout a multi-state area that provide banking services to individuals. Banks have become more oriented toward marketing and sales. As a result, employees need to know about all types of products and services offered by banks.

 In the United States the first bank was the Bank of North America, established (1781) in Philadelphia . Congress chartered the first Bank of the United States in 1791 to engage in general commercial banking and to act as the fiscal agent of the government, but did not renew its charter in 1811. A similar fate befell the second Bank of the United States , chartered in 1816 and closed in 1836.

 Prior to 1838 a bank charter could be obtained only by a specific legislative act, but in that year New York adopted the Free Banking Act, which permitted anyone to engage in banking, upon compliance with certain charter conditions. Free banking spread rapidly to other states, and from 1840 to 1863 all banking business was done by state-chartered institutions. In many Western states it degenerated into �wildcat� banking because of the laxity and abuse of state laws. Bank notes were issued against little or no security, and credit was over expanded depressions brought waves of bank failures. In particular, the multiplicity of state bank notes caused great confusion and loss. To correct such conditions, Congress passed (1863) the National Bank Act, which provided for a system of banks to be chartered by the federal government.

  In 1865, by granting national banks the authority to issue bank notes and by placing a prohibitive tax on state bank notes, an amendment to the act brought all banks under federal supervision. Most banks in existence did take out national charters, but some, being banks of deposit, were unaffected by the tax and continued under their state charters, thus giving rise to what is generally known as the �dual banking system.� The number of state banks expanded rapidly with the increasing use of bank checks.

Recurrent banking panics caused by overexpansion of credit, inadequate bank reserves, and inelastic currency prompted Congress in 1908 to create the National Monetary Commission to investigate the banking and currency fields and to recommend legislation. Its suggestions were embodied in the Federal Reserve Act (1913), which provided for a central banking organization,

 Since the establishment of the Federal Reserve System, federal banking legislation has been limited largely to detailed amendments to the National Bank and Federal Reserve acts. The Glass Steagall Act of 1932 and the Banking Act of 1933 together formed an extensive reform measure designed to correct the abuses that had led to numerous bank crises in the years following the stock market crash of 1929. The Glass-Steagall Act prohibited commercial banks from involvement in the securities and insurance businesses. The Banking Act strengthened the powers of supervisory authorities, increased controls over the volume and use of credit, and provided for the insurance of bank deposits under the Federal Deposit Insurance Corporation (FDIC).


   The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the field of credit management, tightened existing restrictions on banks engaging in certain activities, and enlarged the supervisory powers of the FDI

Several deregulatory moves made by the federal government in the 1980s diminished the distinctions among various financial institutions in the United States. Two major changes were the Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions Act (1982), which allowed savings and loan associations to engage in often-risky commercial loans and real estate investments, and to receive checking deposits. By 1984, banks had federal support in buying discount brokerage firms, and commercial banks were beginning to acquire failed savings banks; in 1985 interstate banking was declared constitutional

Such deregulation was blamed for the unprecedented number of bank failures among savings and loan associations, with over 500 such institutions closing between 1980 and 1988. The Federal Savings and Loan Insurance Corporation (FSLIC), until it became insolvent in 1989, insured deposits in all federally chartered and in many state-chartered savings and loan associations. Its outstanding insurance obligations in connection with savings and loan failures, over $100 billion, were transferred (1989) to the FDIC

Further deregulation occurred in 1999, when Congress overhauled the entire U.S. financial system. Among other actions, the legislation repealed the Glass-Steagall Act, thus allowing banks to enter the insurance and securities businesses. Supporters predicted that the measure would permit U.S. banks to diversify and compete more effectively on an international scale. Opponents warned that this deregulation could lead to failures of many financial institutions, as had occurred with the savings and loans. In the last decades of the 20th cent., computer technology transformed the banking industry. The wide distribution of automated teller machines (ATMs) by the mid-1980s gave customers 24-hour access to cash and account information. On-line banking through the Internet and banking through automated phone systems now allow for electronic payment of bills, money transfers, and loan applications without entering a bank branch

Banks have traditionally been distinguished according to their primary functions. Commercial banks, which include national- and state-chartered banks, trust companies, stock savings banks, and industrial banks, have traditionally rendered a wide range of services in addition to their primary functions of making loans and investments and handling demand as well as savings and other time deposits. Mutual savings banks, until recently, accepted only savings and other time deposits, and offered limited types of loans and services.


 The fact that commercial banks were able to expand or contract their loans and investments in accordance with changes in reserves and reserve requirements further differentiated them from mutual savings banks where the volume of loans and investments was governed by changes in customers' deposits,

 Federal Reserve banks are Government agencies that perform many financial services for the Government. Their chief responsibilities are to regulate the banking industry and to help implement our Nation�s monetary policy so our economy can run more efficiently by controlling the Nation�s money supply the total quantity of money in the country, including cash and bank deposits. For example, during slower periods of economic activity, the Federal Reserve may purchase government securities from commercial banks, giving them more money to lend, thus expanding the economy. Federal Reserve banks also perform a variety of services for other banks. For example, they may make emergency loans to banks that are short of cash, and clear checks that are drawn and paid out by different banks.

 Interest on loans is the principal source of revenue for most banks, making their various lending departments critical to their success The commercial lending department loans money to companies to start or expand a business or to purchase inventory and capital equipment. The consumer lending department handles student loans, credit cards, and loans for home improvements, debt consolidation, and automobile purchases. Finally, the mortgage lending department loans money to individuals and businesses to purchase real estate. The money to lend comes primarily from deposits in checking and savings accounts, certificates of deposit, money market accounts, and other deposit accounts that consumers and businesses set up with the bank.

 These deposits often earn interest for the owner, and accounts that offer checking provides an easy method for making payments safely without using cash. Deposits in many banks are insured by the Federal Deposit Insurance Corporation, which ensures that depositors will get their money back, up to a stated limit, if a bank should fail.

  Technology is having a major impact on the banking industry. For example, many routine bank services that once required a teller, such as making a withdrawal or deposit, are now available through ATMs that allow people to access their accounts 24 hours a day. Also, direct deposit allows companies and governments to electronically transfer payments into various accounts. Further, debit cards, which may also use as ATM cards, instantaneously deduct money from an account when the card is swiped across a machine at a store�s cash register. Electronic banking by phone or computer allows customers to pay bills and transfer money from one account to another.

 Through these channels, bank customers can also access information such as account balances and statement history


  Some banks have begun offering online account aggregation, which makes available in one place detailed and up to date information on a customer�s accounts held at various institutions. Advancements in technology have also led to improvements in the ways in which banks process information. Use of check imaging, which allows banks to store photographed checks on the computer, is one such example that has been implemented by some banks. Other types of technology have greatly impacted the lending side of banking. For example, the availability and growing use of credit scoring software allows loans to be approved in minutes, rather than days, making lending departments more efficient.

 Other fundamental changes are occurring in the industry as banks diversify their services to become more competitive. Many banks now offer their customers financial planning and asset management services, as well as brokerage and insurance services, often through a subsidiary or third party. Others are beginning to provide investment banking services that help companies and governments raise money through the issuance of stocks and bonds, also usually through a subsidiary. As banks respond to deregulation and as competition in this sector grows, the nature of the banking industry will continue to undergo significant change.

 Office and administrative support occupations account for 2 out of 3 jobs in the banking industry. Bank tellers, the largest number of workers in banking, provide routine financial services to the public. They handle customers� deposits and withdrawals, change money, sell money orders and traveler�s checks, and accept payment for loans and utility bills. Increasingly, tellers also are selling bank services to customers. New accounts clerks and customer service representatives answer questions from customers, and help them open and close accounts and fill out forms to apply for banking services.

 They are knowledgeable about a broad array of bank services and must be able to sell those services to potential clients. Some customer service representatives work in a call or customer contact center environment, taking phone calls and answering emails from customers.

 In addition to responding to inquiries, these workers also help customers over the phone with routine banking transactions and handle and resolve problems or complaints.

Loan and credit clerks assemble and prepare paperwork, process applications, and complete the documentation after a loan or line of credit has been approved. They also verify applications for completeness. Bill and account collectors attempt to collect payments on overdue loans. Many general office clerks and bookkeeping, accounting, and auditing clerks are employed to maintain financial records, enter data, and process the thousands of deposit slips, checks, and other documents that banks handle daily. Banks also employ many secretaries, data entry and information processing workers, receptionists, and other office and administrative support workers.


Office and administrative support worker supervisors and managers oversee the activities and training of workers in the various administrative support occupations. Management, business, and financial occupations account for about 25 percent of employment in the banking industry. Financial managers direct bank branches and departments, resolve customers� problems, ensure that standards of service are maintained, and administer the institutions� operations and investments. Loan officers evaluate loan applications, determine an applicant�s ability to pay back a loan, and recommend approval of loans.

 They usually specialize in commercial, consumer, or mortgage lending. When loans become delinquent, loan officers, or loan counselors, may advise borrowers on the management of their finances or take action to collect outstanding amounts. Loan officers also play a major role in bringing in new business and spend much of their time developing relationships with potential customers. Trust officers manage a variety of assets that were placed in trust with the bank for other people or organizations; these assets can include pension funds, school endowments, or a company�s profit-sharing plan. Sometimes, trust officers act as executors of estates upon a person�s death. They also may work as accountants, lawyers, and investment managers.

 Securities, commodities, and financial services sales agents, who make up the majority of sales positions in banks, sell complex banking services. They contact potential customers to explain their services and to ascertain the customer�s banking and other financial needs. They also may discuss services such as deposit accounts, lines of credit, sales or inventory financing, certificates of deposit, cash management, or investment services. These sales agents also solicit businesses to participate in consumer credit card programs. At most small and medium-size banks, however, branch managers and commercial loan officers are responsible for marketing the bank�s financial services. This has become a more important task in recent years.

  Other occupations used widely by banks to maintain financial records and ensure the bank�s compliance with Federal and State regulations are accountants and auditors, and lawyers. In addition, computer specialists are needed to maintain and upgrade the bank�s computer systems and to implement the bank�s entry into the world of electronic banking and paperless transactions


  Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.

Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks.

Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger.

The table below provides a June 2001 snapshot of the balance sheet for the entire U.S. commercial banking industry. It shows that the bulk of banks' sources of funds come from deposits - checking, savings, money market deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. Individual banks' asset and liability composition may vary widely from the industry figures, because some institutions provide specialized or limited banking services.


    Finally, the U.S. financial services industry and financial markets are highly developed. In recent decades, many new products and services have been created, as well as new financial instruments and institutions. Today, in addition to banks, there are several other important types of financial intermediaries. These include savings institutions, credit unions, insurance companies, mutual funds, pension funds, finance companies, and real estate investment trusts (REITS).

Banks' assets have grown in recent decades in absolute terms; however, banks have tended to lose market share to even faster growing intermediaries such as pension funds and mutual funds. Still, banks continue to account for a significant share-over 23 percent-of the assets of all financial intermediaries at the end of year 2000, as the chart below shows.

Chart: Financial Intermediary Asset Market Share Yearend 2000 (%)


These are accounts mostly operated by Corporate who want to benefit from interest incomes on their deposits while enjoying flexibility at the same time. They enable the customer to withdraw any amount of money at any time without prior notice to the Bank.

The interest rates on these deposits are mostly negotiated between the customer and the Bank. Interest is however calculated daily.

    To maximise the yield on one�s investment, a customer could operate both a current account and a call account in which case instructions could be given that balances above a certain threshold on one�s current account could be transferred to the call account so as to earn higher interest.

In the event of the customer�s current account not being able to meet an anticipated debit, instructions could be given for a transfer from the customer�s call account to his current account to meet the debit.

Community banks are based locally and offer more personal attention, which many individuals and small businesses prefer. In recent years, online banks which provide all services entirely over the Internet have entered the market, with some success. However, many traditional banks have also expanded to offer online banking, and some formerly Internet-only banks are opting to open branches.

 Savings banks and savings and loan associations, sometimes called thrift institutions, are the second largest group of depository institutions. They were first established as community-based institutions to finance mortgages for people to buy homes and still cater mostly to the savings and lending needs of individuals.

 Credit unions are another kind of depository institution. Most credit unions are formed by people with a common bond, such as those who work for the same company or belong to the same labor union or church. Members pool their savings and, when they need money, they may borrow from the credit union, often at a lower interest rate than that demanded by other financial institutions.

 Treasury Bills, the Bank acts as an intermediary and purchases government securities on behalf of customers. Government Bonds purchased are another form of security and such investments may be retired or rolled over on the date of maturity depending on what the customer wants. With the 91 and 182-day bills, interest can be discounted up front and the bill again rediscounted before maturity (i.e. it can be redeemed before maturity).

 In 2004, about 83 percent of establishments in banking employed fewer than 20 workers (chart 1). However, these small establishments, mostly bank branch offices, employed 34 percent of all employees. About 66 percent of the jobs were in establishments with 20 or more workers. Banks are found everywhere in the United States, but most bank employees work in heavily populated States such as New York, California, Illinois, Pennsylvania, and Texas.

  Chart 1.  Number of workers employed by establishment, March 2004.  More than four-fifths of the establishments in banking employ fewer than 20 workers.


 Financial Management we mean efficient uses of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise.

Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with Procurement of funds and their effective utilization in the business. So the analysis simply states two main aspects of financial management like procurement of funds and an effective use of funds to achieve business objectives

 As funds can be procured from multiple sources so procurement of funds is considered an important problem of business concerns. Funds obtained from different sources have different characteristics in terms of potential risk, cost and control. Funds issued by the issue of equity shares are the best from risk point of view for the company as there is no question of repayment of equity capital except when the company is liquidated.

 From the cost point of view equity capital is the most expensive source of funds as dividend expectations of shareholders are normally higher than that of prevailing interest rates. Financial management constitutes risk, cost and control.

The cost of funds should be at minimum for a proper balancing of risk and control. In the globalised competitive scenario, mobilization of funds plays a very significant role. Funds can be raised either through the domestic market or from abroad. Foreign Direct Investment (FDI) as well as Foreign Institutional Investors (FII) are two major sources of raising funds.

The mechanism of procurement of funds has to be modified in the light of requirements of foreign investors

 Effective utilization of funds as an important aspect of financial management avoids the situations where funds are either kept idle or proper uses are not being made. Funds procured involve a certain cost and risk. If the funds are not used properly then running business will be too difficult. In case of dividend decisions we also consider this. So it is crucial to employ the funds properly and profitably.

  Sound financial management is essential in all types of organizations whether it be profit or non-profit. Financial management is essential in a planned Economy as well as in a capitalist set-up as it involves efficient use of the resources. From time to time it is observed that many firms have been liquidated not because their technology was obsolete or because their products were not in demand or their labour was not skilled and motivated, but that there was a mismanagement of financial affairs. Even in a boom period, when a company make high profits there is also a fear of liquidation because of bad financial management

Banking primarily the business of dealing in money and instruments of credit, Banks were traditionally differentiated from other financial institutions by their principal functions of accepting deposits subject to withdrawal or transfer by check and of making loans.


Loan and credit clerks assemble and prepare paperwork, process applications, and complete the documentation after a loan or line of credit has been approved. They also verify applications for completeness. Bill and account collectors attempt to collect payments on overdue loans. Many general office clerks and bookkeeping, accounting, and auditing clerks are employed to maintain financial records, enter data, and process the thousands of deposit slips, checks, and other documents that banks handle daily. Banks also employ many secretaries, data entry and information processing workers, receptionists, and other office and administrative support workers.

Office and administrative support worker supervisors and managers oversee the activities and training of workers in the various administrative support occupations. Management, business, and financial occupations account for about 25 percent of employment in the banking industry. Financial managers direct bank branches and departments, resolve customers� problems, ensure that standards of service are maintained, and administer the institutions� operations and investments. Loan officers evaluate loan applications, determine an applicant�s ability to pay back a loan, and recommend approval of loans. They usually specialize in commercial, consumer, or mortgage lending.

 When loans become delinquent, loan officers, or loan counselors, may advise borrowers on the management of their finances or take action to collect outstanding amounts. Loan officers also play a major role in bringing in new business and spend much of their time developing relationships with potential customers. Trust officers manage a variety of assets that were placed in trust with the bank for other people or organizations; these assets can include pension funds, school endowments, or a company�s profit-sharing plan. Sometimes, trust officers act as executors of estates upon a person�s death. They also may work as accountants, lawyers, and investment managers.

 Securities, commodities, and financial services sales agents, who make up the majority of sales positions in banks, sell complex banking services. They contact potential customers to explain their services and to ascertain the customer�s banking and other financial needs. They also may discuss services such as deposit accounts, lines of credit, sales or inventory financing, certificates of deposit, cash management, or investment services. These sales agents also solicit businesses to participate in consumer credit card programs. At most small and medium-size banks, however, branch managers and commercial loan officers are responsible for marketing the bank�s financial services. This has become a more important task in recent years.

 Bank tellers and other clerks usually need only a high school education. Most banks seek people who have good basic math and communication skills, enjoy public contact, and feel comfortable handling large amounts of money. Through a combination of formal classroom instruction and on-the-job training under the guidance of an experienced worker, tellers learn the procedures, rules, and regulations that govern their jobs.

Banks are offering more products and spending more on reaching out to their customers. As a result, they will need more creative and talented people to compete in the market place. Banks encourage upward mobility by providing access to higher education and other sources of additional training. Some banks have their own training programs which result in teller certification. Experienced tellers qualify for certification by taking required courses and passing examinations. Experienced tellers and clerks may advance to head teller, new accounts clerk, or customer service representative. Outstanding tellers who have had some college or specialized training are sometimes promoted to managerial positions.

  Workers in management, business, and financial occupations usually have at least a college degree. A bachelor�s degree in business administration or a liberal arts degree with business administration courses is suitable preparation, as is a bachelor�s degree in any field followed by a master�s degree in business administration (MBA). Many management positions are filled by promoting experienced, technically skilled professional personnel for example, accountants, auditors, budget analysts, credit analysts, or financial analysts or accounting or related department supervisors in large banks.

 Advancement to higher level executive, administrative, managerial, and professional positions may be accelerated by taking additional training. Banks often provide opportunities and encourage employees to take classes offered by banking and financial management affiliated organizations or other educational institutions. Classes often deal with a different phase of financial management and banking, such as accounting management, budget management, corporate cash management, financial analysis, international banking, and data processing systems procedures and management. Employers also sponsor seminars and conferences, and provide textbooks and other educational materials. Many employers pay all or part of the costs for those who successfully complete courses.

 A Financial Planner or Personal Financial Planner is a practicing professional who helps people to deal with various personal financial issues through proper planning, which includes but not limited to these major areas tertiary education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning for business owners.

 The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a detailed strategy tailored to a client's specific situation, for meeting a client's specific goals.

 Personal financial planning is broadly defined as a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals. The individual's goals are used as guideposts to map a course of action on 'what needs to be done' to reach those goals.

 Along sde the data gathering exercise, the purpose of each goal is determined to ensure that the goal is meaningful in the context of the individual's situation. Through a process of careful analysis, these goals are subjected to a reality check by considering the individual's current and future resources available to achieve them. In the process, the constraints and obstacles to these goals are noted. The information will be used later to determine if there are sufficient resources available to get to these goals, and what other things need to be considered in the process.

 If the resources are insufficient or absent to meet any of the goals, the particular goal will be adjusted to a more realistic level or will be replaced with a new goal. Planning often requires consideration of self-constraints in postponing some enjoyment today for the sake of the future. To be effective, the plan should consider the individual's current lifestyle so that the 'pain' in postponing current pleasures is bearable over the term of the plan. In times where current sacrifices are involved, the plan should help ensure that the pursuit of the goal will continue.

A plan should consider the importance of each goal and should prioritize each goal. Many financial plans fail because these practical points were not sufficiently considered.

  Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved. The Financial Planning activity involves the following tasks Assess the business environment Confirm the business vision and objectives Identify the types of resources needed to achieve these objectives Quantify the amount of resource (labor, equipment, materials)

Calculate the total cost of each type of resource Summarize the costs to create a budget Identify any risks and issues with the budget set.

 Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set.

 Financial Management for IT Services (ITSM) is an IT Service Management process area.

It is an element of the Service Delivery section of the ITIL best practice framework. The aim of Financial Management for IT Services is to give accurate and cost effective stewardship of IT assets and resources used in providing IT Services. It is used to plan, control and recover costs expended in providing the IT Service negotiated and agreed to in the Service Level Agreement (SLA).

  To be able to account fully for the spend on IT services and to be able to attribute these costs to the services delivered to the organization�s customers and to assist management by providing detailed and costed business cases for proposed changes to IT services Financial Management for IT Services contains 3 sub-processes, budgeting, IT Accounting Charging

 Budgeting enables an organisation to plan future IT expenditure, thus reducing the risk of over-spending and ensuring the revenues are available to cover the predicted spend. Additionally it allows an organisation to compare actual costs with previously predicted costs in order to improve the reliability of budgeting predictions.

 IT accounting is concerned with the amount of money spent in providing IT Services. It allows an organisation to perform various financial analyses to gauge the efficiency of the IT service provision and determine areas where cost savings can be made. It will also provide financial transparency to aid management in the decision making process.

Capital Costs: Any type of purchases which would have a residual value as hardware and building infrastructure Operational Costs: Day to day recurring expenses cost like rental fees, monthly electrical invoices and salaries. Direct Costs: Any cost expenses which are directly attributed to one single or specific service or customer. A typical example would be the purchase of a dedicated server which cannot be shared and is needed to host a new application for a specific service or customer.

 Indirect Costs One specific service provision which cost needs to be distributed in between several customers in a fair breakdown. A fair example is the cost associated to overall Local Area Network on which every customer are connected to. Breakdown could be done using total amount of users per customer or total amount of bandwidth usage per customer to accurately distribute the cost of providing this service. Fixed Costs Any expenses established for long periods of time like annual maintenance contracts or a lease contracts.

 Charging provides the ability to assign costs of an IT Service proportionally and fairly to the users of that service. It may be used as a first step towards an IT organisation operating as an autonomous business. It may also be used to encourage users to move in a strategically important direction - for example by subsidising newer systems and imposing additional charges for the use of legacy systems.

 Transparency of charging will encourage users to avoid expensive activities where slightly more inconvenient but far cheaper alternatives are available.

 For example, a user might browse a dump on screen rather than printing it off.

Charging is arguably the most complex of the three sub-processes, requiring a large investment of resources and a high degree of care to avoid anomalies, where an individual department may benefit from behaviour which is detrimental to the company as a whole. Charging policy needs to be simultaneously simple, fair and realistic.

 Charging need not necessarily mean money changing hands (Full Charging). It may take the form of information passed to management on the cost of provision of IT services (No Charging), or may detail what would be charged if full charging were in place without transactions actually being applied to the financial ledgers (Notional Charging). Notional Charging may also be used as a way of piloting Full Charging.

 Service Level Management provides key information regarding the level of service required by the customer (SLAs) and therefore forms the basis for calculations of all three sub-processes. Customers can only be charged for services agreed in the SLAs and based on the Service Catalog.

 Given that the aim of Financial Management for IT is the stewardship of IT assets and resources, it is imperative that information from Configuration Management and in particular from the CMDB is available.

 Capacity Management are charged with planning and controlling the IT capacity requirements of the organisation. Changes in capacity requirements - which usually increase - will inevitably lead to changes in costs. This may mean unit costs will increase because capacity has to be increased in an emergency or it may mean unit costs will drop as a result of purchasing newer technology, economies of scale or increased purchasing power from an external supplier.

 Changes ar often linked to costs. It is vital that Financial Management for IT is involved in the Change Management process so that the on-going analysis of costs can take place. Where changes are frequent IT Financial Management may choose either to include anticipated changes in the original cost model or to adjust the cost model once the IT Service has stabilised.


A simple form of banking was practiced by the ancient temples of Egypt, Babylonia, and Greece, which loaned at high rates of interest the gold and silver deposited for safekeeping. Private banking existed by 600 B.C. and was considerably developed by the Greeks, Romans, and Byzantines. Medieval banking was dominated by the Jews and Levantines because of the strictures of the Christian Church against interest and because many other occupations were largely closed to Jews.

 The forerunners of modern banks were frequently chartered for a specific purpose, e.g., the Bank of Venice (1171) and the Bank of England (1694), in connection with loans to the government; the Bank of Amsterdam (1609), to receive deposits of gold and silver. Banking developed rapidly throughout the 18th and 19th cent., accompanying the expansion of industry and trade, with each nation evolving the distinctive forms peculiar to its economic and social life.

 Financial institutions that have not traditionally been subject to the supervision of state or federal banking authorities but that perform one or more of the traditional banking functions are savings and loan associations, mortgage companies, finance companies, insurance companies, credit agencies owned in whole or in part by the federal government, credit unions, brokers and dealers in securities, and investment bankers. Savings and loan associations, which are state institutions, provide home-building loans to their members out of funds obtained from savings deposits and from the sale of shares to members. Finance companies make small loans with funds obtained from invested capital, surplus, and borrowings.

 Credit unions, which are institutions owned cooperatively by groups of persons having a common business, fraternal, or other interest, make small loans to their members out of funds derived from the sale of shares to members. The primary functions of investment bankers are to act as advisers to governments and corporations seeking to raise funds, and to act as intermediaries between these issuers of securities, on the one hand, and institutional and individual investors, on the other.

 Advances in technology should continue to have the most significant effect on employment in the banking industry. Demand for computer specialists will grow as more banks make their services available electronically and eliminate much of the paperwork involved in many banking transactions. On the other hand, these changes in technology will reduce the need for some office and administrative support occupations. Employment growth among tellers will be limited as customers increasingly use ATMs, direct deposit, debit cards, and telephone and Internet banking to perform routine transactions.

  Other technological improvements, such as digital imaging and computer networking, are likely to lead to a decrease or change in the nature of employment of the �back-office� clerical workers who process checks and other bank statement

Deregulation of the banking industry allows banks to offer a variety of financial and insurance products that they were once prohibited from selling. The need to develop, analyze, and sell these new services will spur demand for securities and financial services sales representatives, financial analysts, and personal financial advisors. Demand for �personal bankers� to advise and manage the assets of wealthy clients, as well as the aging baby-boom generation, also will grow. However, banks will continue to face considerable competition particularly in lending from nonbank establishments, such as consumer credit companies and mortgage brokers. Companies and individuals now are able to obtain loans and credit and raise money through a variety of means other than bank loans. Therefore, some loan officers may be replaced by financial services sales representatives, who sell loans along with other bank services

In general, greater responsibilities result in a higher salary. Experience, length of service, and, especially, the location and size of the bank also are important. In addition to typical benefits, equity sharing and performance-based pay increasingly are part of compensation packages for some bank employees. As banks encourage employees to become more sales-oriented, incentives are increasingly tied to meeting sales goals, and some workers may even receive commissions for sales or referrals.

 A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk. For example, a US Treasury bond is considered to be one of the safest investments and, when compared to a corporate bond, provides a lower rate of return. The reason for this is that a corporation is much more likely to go bankrupt than the U.S. government. Because the risk of investing in a corporate bond is higher, investors are offered a higher rate of return

 Unlike financial measurements that often record past accounting numbers, a good Performance Measurement system should also capture its relevance to the organisation vision, validate its strategies and chart new directions. It should not dwell in the past but focus on measurements that impact future deliverables.

 Unfortunately, enduring goals require more effort and many organisations prefer to focus on initiatives that promise short-term financial results even though other initiatives may have higher long-term payoffs. A possible reason is the increasing competitiveness and high staff turnover. This builds a culture of short-term permanent employment, where employees do not foresee themselves to stay on with any organisation long enough to see any long-term plans bear fruit.

 One possible solution for such long-term goals which cannot be realised for many years (such as in the case of government initiatives), is to identify meaningful output-oriented milestones that lead to achieving the long-term outcome.

 Having a clear and transparent benchmark tells team members the minimum standards to meet organisational goals. With guidance and support, this can be a powerful motivation for team members to move together towards the objective. When performance is tied effectively to rewards, it will be possible to cultivate a competitive environment as team members know the targets to meet and bring home the attractive year end bonus.

  Leading companies are integrating various business intelligence applications and processes in order to achieve Corporate Performance Management. The first step in is for senior management to formulate the organization�s strategy and to articulate specific strategic objectives supported by key financial and non-financial metrics. These metrics and targets feed the next step in the process, Planning and Budgeting, and are eventually communicated to the front-line employees that will carry out the day-to-day activities. Targets and thresholds are loaded from the planning systems into a Business Activity Monitoring engine that will automatically notify responsible persons of potential problems in real time.

 The status of the business is reviewed regularly and re-forecast and, if necessary, budget changes are made. If the business performance is significantly off plan, executives may need to re-evaluate the strategy as some of the original assumptions may have changed. Optionally, activity-based costing efforts can enhance the strategic planning process deciding to outsource key activities, for example. ABC can also facilitate improved budgeting and controls through Activity-Based Budgeting which helps coordinate operational and financial planning.

 The ability to establish CPM to enhance control on budget depends first upon achieving a better understanding of the business through unified, consistent data to provide the basis for a 360-degree view of the organization. The unified data model allows you to establish a single repository of information where users can quickly access consistent information related to both financial and management reporting, easily move between reporting the past and projecting the future, and drill to detailed information.

 By then, you are ready to plug in - on the unified data - the applications that support consolidations, reporting, analysis, budgeting, planning, forecasting, activity-based costing, and profitability measurement. The applications are then integrated with the single repository of information and are delivered with a set of tools that allow users to follow the assessment path from strategy, to plans and budgets and to the supporting transactional data

CPM and the adoption of more public-sector oriented PBB are not easy to tackle, but in the ever-changing business and political climate they are definitely worth a closer look. Every Financial Management an objective or goal is a personal or organizational desired end point in development. It is usually endeavourer to be reached in finite time by setting deadlines.

Financial Managers must have Goal Setting; a goal setting involves setting specific, measurable and time targeted objectives. In an organizational or business context, it may be an effective tool for making progress by ensuring that participants are clearly aware of what is expected from them, if an objective is to be achieved. On a personal level, Goal setting is a process that allows people to specify then work towards their own objectives - most commonly with financial or career-based goals. Goal setting is a major component of Personal development literature.

 The business technique of Management by objectives uses the principle of goal setting. In business, goal setting has the advantages of encouraging participants to put in substantial effort; and, because every member is aware of what is expected of him or her (high role perception), little room is left for inadequate effort going unnoticed. To be most effective goals should be tangible, specific, and realistic and have a time targeted for completion. There must be realistic plans to achieve the intended goal.


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