Development of banking
We differentiate central bank and commercial banks.
Commercial banks are public limited companies, owned by shareholders that accepts deposits from individuals and corporations in the form of checking and saving accounts. They use some of these funds to give loans to their customers, which they have to pay for in form of an interest. Commercial banks make profit from the difference known as the margin between the interest rate they charge the borrowers, and the rates they pay to depositors.
Specialized banks only have certain functions:
- Retail banks eork eith individuals or small companies. They receve deposits and make loans for them.
- Investment banks work with big companies. They give financial advice and make money by issuing shares and bonds.
- Clearing banks pass cheques and other payments through the banking system.
- Private banks manage the assets of rich people or high net worth individuals.
- Building societies provide loans to people who want a mortgage. They can also arrange insurance, and since they are non-profit organizations, they spend their "profit" on making the business better or offering their savers higher rates of interest.
- Saving and loan associations - accept saving and demand deposits, and provide home mortgage loans.
Universal banks do all kinds of financial business. Today, many large international companies offer a complete range of financial services, so individuals and companies can use a single financial institution for all their financial needs. (e. g. Tatrabanka, SLSP, VÚB, ČSOB, UniCredit...)
Services of commercial banks
- Accepting and holding deposits - people deposit their savings in banks because they know their can ge it when they want, and it is also protected against theft. Banks also offer deposit insurance.
- Making loans - main function of banks is to act as a financial middleman by channeling money from depositors (people who save) to borrowers.
- Foreign currency exchange - banks can buy and sell foreign currencies.
- Safekeeping - many banks rent safe-deposit boxes in their vaults to people looking for a safe and secure place for their valuables.
- Cards - debit cards allow customers to make withdrawals and make transactions. Credit cards can be used for buying stuff as well as for borrowing money.
- Brokerage - they buy and sell stocks and bonds for their clients.
- Letter of credit - in these documents, the bank guarantees one party (the seller) payment when certain conditions are met, such as delivery of merchandise.
- Counseling - give financial advice
- Funds transfer system - the bank can transfer money from one account to another, you can pay for things this way
- E-banking - people can use their mobiles or computers to transfer funds between accounts, make payments and monitor their account
- Factoring - When a firm sells many of its products on credit to consumers and buyers are too slow in paying their bills, the company thus has a large amount of money in accounts of receivable. A factor (bank) buys the accounts receivable from the firm in cash (paying 50% - 70% of the value of the accounts receivable). The factor then collects the money due the firm. How much this cost the fiňrm depends on the rate the factor charges for this service. The discount rate consists of interest rate to the maturity, risk fee that depends on the nature of the business and conditions of the economy, and also expense fee.
- Lease - the lessor (bank or financial institution) makes the purchase for the company that needs the equipment (lesee) and provides the use of that equipment for monthly payments over an agreed number of years. At the end of the lease period the equipment belongs to the lesee. Under an operating lease (shot-term lease) the lessor provides not just financing, but also training and maintenance
Passive operations of banks
1. Demand deposit means that money is available on demand from the depositor.
- A current account allow customers to take out or withdraw money with no restriction and they use them to make payments. A customer can deposit and withdraw money from this account without giving any notice. Standing order is when you instruct your bank to make monthly payments of the same value. Direct debit is when the amount of money and payment date varies.
- A NOW (negotiable order of withdrawal) account typically pays an annual interest rate, but requires a certain minimum balance that must be maintained in the account at all times and restricts the number of checks that can be written each month.
2. Saving accounts are used for savings and do not offer a cheque-book. Interest is offered to encourage people to save, but a notice of withdrawal has to be given to the bank. The most common form of saving account is called a passbook savings account. Depositors get a passbook where all turnovers and the total balance are recorded.
3. Time deposits are represented mainly by cetificate of deposit that earns an interest rate, which is given to the depositor when the saving period ends. The depositor agrees not to withdraw any of the funds in the account until the end of this period, which can be from 1 month up to 5 years.
Active operations of banks
Short-term loans to consumers and businesses have to be repaid within 1 year. We distinguish:
- Overdrafts allow customers to overdraw an account – they can have a debt up to an agreed limit on which interest is calculated daily. This is cheaper than an ordinary personal loan in cash for a short-period for buying consumer goods. The purpose of a line of credit is to speed the borrowing process so that the firm does not have to go through the hassle of applying for a new loan every time it needs funds.
- Personal loans to people to buy consumer goods. The purpose of taking loan can be stated or unstated which means that people get a loan in cash. They are usually unsecured by collateral, banks rely on the earning power of the borrowers or may require the third party liability as a guarantee.
- Short-term secured loans to businesses, usually. Banks require adequate collateral, such as inventory (raw material or merchandise).
Long-term loans are given to individuals, corporations and domestic or foreign governments. They have to be repaid typically in 2-5 year,s but could be extended for longer periods of time up to 20 or 30 years.
- Mortgages are loans to people, local government or companies who want to buy, build or refurbish a real estate. On these loans a property acts as collateral for the bank.
- Long-term secured loan where movables are pledged for a loan. A bank accepts the firm´s signed statement that the inventories or movables are pledged to the lender if they won´t pay.
The nation´s central bank (National Bank of Slovakia) stands at the centre of the banking system.
- It is responsible for looking after the money received by the Government (mainly taxes) and making its payments (spending on hospitals, schools, social security benefits). It manages the national debt.
- It stores the nation´s gold and foreign currency reserves. These reserves are used to influence the value of the currency. It is responsible for printing and issuing of banknotes and coins and putting them into circulation.
- It acts as a supervisor to the banking system, deciding who can be a bank and how banks should behave. NBS transfers funds from one commercial bank to the other and it will lend money to banks to try to prevent them from going bankrupt if they run out of money.
- It tries to control the rate of inflation to maintain financial stability and the value of currency. It supervises the whole financial sector including the financial market.
- It is a member of the European System of Central Banks.