People used gold, gold bullion, as money. Those were dangerous times, and people wanted a safe place to keep their gold. So they deposited it with goldsmiths, people who worked with gold for jewellery and so on and also had a guarded vault to keep it safe in. And when people wanted some of their gold to pay for things with, they went and fetched it from the goldsmith.

Two developments turned these goldsmiths into bankers. The first was that people found it a lot easier to give the seller a letter than it was to fetch some gold and then physically hand it over to him. This letter transferred some of the gold they bad at the goldsmith’s to the seller. This letter we would nowadays call a cheque. And, of course, once these letters or cheques, became acceptable as a way of paying for goods, people felt that the gold they had deposited with the goldsmith, was just as good as gold in their own pockets. And as letters or cheques, were easier to carry around than gold, and a lot less dangerous, people started to say that their money holdings were what they had with them plus their deposits. So a system of deposits was started. The second development was that goldsmiths realized they had a great deal of unused gold lying in their vaults doing nothing. This development was actually of greater importance than the first.

Now let’s turn to the first bank loan ever and see what happened. A firm asked a goldsmith for a loan. The goldsmith realized that some of the gold in his vault could be lent to the firm, and of course he asked the firm to pay it back later with a little interest. Of course, at that moment the goldsmith was short of gold, it wasn’t actually his gold, but he reckoned it was unlikely that everyone who had deposited gold with him would want it back at the same time, at any rate - not before the firm had repaid him his gold with a little interest. He thought it safe enough.

To understand what actually happened in this simple transaction let’s consider the following table.

Таbl. 6. Goldsmiths as bankers

The first row shows what the goldsmith did before he made this loan- He had a hundred dollars of gold, which he owed to the people who had deposited it with him, so his assets and liabilities were the same. But when he lent, say, $10 of gold to the firm, he actually had only $90 of gold in his vault plus the value of his loan. His assets still equalled his liabilities, but he was going to get some interest

It so happened that the firm, that took out the loan, didn’t really want to carry that $10 of gold around, so It asked me goldsmith if, instead of actually taking the gold, it could be given a deposit. The third row of Tabl. 6 shows what happened then. Although the goldsmith’s assets and liabilities were the same, but were then worth $110, not $100. When the firm wrote a cheque for $10, and that person came in to collect his $10 worth of gold, the goldsmith’s assets failed, but so did his liabilities (the fourth row of the table). The important point to notice here is that it made no difference to the goldsmith whether his initial loan was in actual gold or in a form of a deposit.

Now let’s turn to the question of reserves. Reserves are the amount of gold that is immediately available in the vault to meet depositors’ demands. People originally deposited $100 of gold with the goldsmith. The goldsmith lent $10, leaving himself with $90. As a banker he was relying on the fact that not everyone would want their gold back at the same time. If they had done, be couldn’t have paid out. His reserves of $90 were not enough.

The goldsmith in the table has a 100% reserve ratio. The reserve ratio is the ratio of reserves to deposits. Once he has made his loan, he has a 90% deposit ratio. This is a small risk with a small profit. How much dare he lend out in order to make a profit through his interest charges?  What are the risks involved? Suppose the goldsmith took too much of a risk. He lent 80% of the gold he had. This panicked people. They doubted he could pay them all back, he was bound to lose some of the gold he had lent, so they rushed to get their gold back before it was too late. That was what we would now call a run on the bank, a financial panic. And the financial panic leads to exactly what people fear: the bank cannot pay them, goes bankrupt, and they go bankrupt as well.

Partnerships have certain properties. They are characterized by:

1) voluntary;

2) mutual interest;

3) a commercial nature. Each client, regardless of geographic location itself defines the services of the bank, it should take. There is no registration, forced consolidation of banks. Equally, it rushes to the bank, which chooses a client. This choice may have short-or long-term nature, much depends on the mutual interest to use one-time services of a bank, or have a relationship on an ongoing basis. “Attraction” partners to each other based on a commercial basis. The client is willing to pay for the credit, payment transactions or other services, which are favorable to him. The Bank is ready to sell your product, while receiving appropriate remuneration. The Bank is working with the customer (adheres to the philosophy “everything for the customer”), contributes to the continuity, quality, and competitiveness of its production, income, sufficient for reproduction. Providing income-customer, the bank sells its own commercial interest and to give compensation in the form of interest on loans or commission.

Banking legislation, protecting the interests of two parties, provide to the client:

- The right to open a bank account;

- Eligible for deferral of payment to the bank;

- The possibility in some cases independently perform certain banking transactions;

- The opportunity to participate in the Council of banks, banking associations;

- Preservation of secrecy;

- The protection of his contributions.

The right to open accounts, as noted earlier, can be purely declarative character, because the bank, not wanting to “mess around” with a small customer can always near to all kinds of pretext to deny him his rights. That is why in some jurisdictions the client is entitled to require the central bank to show him what a credit institution, where he must open an account (in France account can be opened by mail).

Very important for the client is not only the right to use a particular banking service, but its protection from unauthorized actions of the bank in the event of termination of credit assistance.

The right to delay payment for the borrower performs a vital factor in determining its further development. It is known that in many cases a bank customer may experience difficulty in repayment. Of course, we are talking about financial difficulties due to objective circumstances not related to his poor performance. Where the client’s creditworthiness is broken, where the client has repeatedly allowed violations of the loan agreement with the bank, compromised, get a deferred payment is impossible. The law in this case protects only that customer, who neatly fulfills its obligations. Essentially, in this case, legislation blocking bank’s actions to undermine the financial capacity of the borrower, the “strangulation” of the client banker.

Such a danger does exist, it practically becomes the most significant impact to small or medium-sized enterprises. According to the “laws of some countries to reduce or suspend credit support are made possible by a written customer base and in advance – from 30 to 60 days depending on the type of credit granted. The procedure for revising the terms of the reduction or termination of credit is usually fixed in a written agreement. It may be clarified liability lending institution.

Eligible for Customers to carry out banking operations for a long time was of debatable character. Calls into question the very possibility of the client to perform these operations, firstly, at the appropriate level of economic and, secondly, without increasing risk. A compromise was reached mainly due to the fact that the conduct of banking transactions require the appropriate license, issued only under certain conditions (material, technical, professional). This is only for large customers that can open in their special units that meet the requirements of the bank. With regard to risk, it is considered that even in the fact of implementation of an enterprise (in addition to its core business) of additional banking operations provides evidence of diversification and, consequently, reduce the risk. Typically, in this case acts and other rules: no additional client’s business (in the form of certain banking operations) should not exceed 10% threshold in relation to its core activities.

The possibility of joining the client to the Board of the bank’s general provisions on joint stock companies. According to the legal standards to the Board of the Bank include its founders, who have a stake in the bank’s authorized capital.

Unfortunately, the shareholders, in turn, often do not have strict legal obligations, while for them the implementation of joint commitments is essential. The law protects the bank, because it regulates on the stage of creation, in formulating the requirements for the founder. The law also prohibits the founders of the bank withdraw from the participants during the first three years from the date of its registration.

At the macro level, the client’s interests can be ensured through the participation of large enterprises as agents of management in the banking sector in the various banking associations. When the central banks of several countries is organized as a consultative advisory council, among participants who may be prominent practitioners of the national economic sector.

Customer relationships with banks are largely determined by a variety of possible use of bank credit (deposit, credit, and so on.) Availability of money market funds.

As will be shown later Enterprises – bank customers have a rather broad possibilities of using banking services. There are many types of bank loans. However, in practice they are issued with consideration of the last financial “biography” of the client, rather than its future development (quantity and quality of customers and markets), the so-called global economic development credit is not received.

More developed individual targeted lending business operations. However, the law should work not only on the present state, but also provide a theoretical possibility for wider use of banking product. Of course, this can be done not only through economic stabilization, but also the introduction of legal innovation, giving, in particular, the possibility of transfer of power of attorney for property. In this case the enterprise by guaranteeing the services of credit institutions receive strong support in financing their programs. According to the legislation of some European countries, transfer of power of attorney for property can be a simple calculation note or media (eg magnetic tape).

The availability of the money market is determined and the extent to which the country developed the market short of money (getting credit for a period of 1 to 10 days), the securities market, including coupons enterprise, making it possible to finance the activities of the enterprises – the bank’s clients.

The legislation provides the customer’s interests and by bank secrecy. Banks and nonbank lenders guarantee secrecy of the operations, accounts and deposits of its clients and correspondents. For information on transactions and accounts of legal entities and individuals engaged in entrepreneurial activities without forming a legal entity, issued by it, courts and arbitration courts (judges), the Chamber, the state tax service and tax police, customs authorities in cases provided by the relevant legislation about their activities.

Bodies of preliminary investigation on cases under their consideration, the information about the client and its operations are given only with the consent of the prosecutor. Information on accounts and deposits of physical persons issued by banks themselves, the courts and authorities of the preliminary investigation of cases in manufacturing, with the consent of the prosecutor.

During the lifting of bank secrecy, commercial banks, nonbank credit, and auditing organizations and their officials and employees have a responsibility, including damages.

Special place in the banking law belongs to the protection of human contributor. The law prescribes the establishment of the Federal Deposit Insurance Fund, which should guarantee the return of funds attracted by the banks of the population.

In accordance with international practice, protection system can acquire the following forms:

- The State acts as guarantor of deposits;

- The guarantor of the central bank acts creating special reserves of commercial banks’ compulsory contributions;

- The guarantor serves all the banking community (banks may establish funds (reserves) by paying special contributions to cover losses bankrupt lending institution on the fact and given the amount of capital and current operations of the bank);

- Additional (double) a guarantee of protection of deposits through the formation of central reserves of the banking system in general and special reserve funds of banks, such as mortgage banks.

Banks may also create a voluntary deposit insurance funds, which also ensures the safety of deposits, including the payment of income for them.

The law protects a certain way as cash and other assets of individuals and entities within their accounts from unnecessary penalties. Determined that such a punishment can only be carried out on the basis of executive documents. The arrest may be imposed only by a court, arbitration, judge, and the decision of the body of the preliminary investigation in the presence of the prosecutor’s sanction.

First banks, according to some scholars, have in a manufactory stage of capitalism, and appeared primarily in certain Italian cities (Venice, Genoa), in the XIV and XV centuries. In their view, the bank as a special institution of commodity production did not arise in connection with the development of commodity-money relations in the early stages of the commodity economy, namely that their time when needed was a network of special institutions that regulate currency circulation and produced in larger scale credit operation. The Bank has just appeared on the stage of the loan, when, without his broad support could not have been functioning capitalist enterprises. Not by chance the bank is characterized solely as a phenomenon of the capitalist economy.

Another part of the experts believe that banks have in the earlier period – under feudalism. They note that even in ancient and feudal economy there was a need for the function of banks as intermediaries in the payments.

Thus, the prevailing view about the period of the emergence of banks diverge not on one or two decades, a span of almost two thousand years. Hence, the subject matter of the first banks is not so much in identifying a historical date that is acceptable to various parties, although economics is also not a formal issue, but in determining what is considered by the bank.

Unfortunately, the word “bank” to us, not only does not clarify his essence, and creates additional difficulties in the truth of our judgments and perceptions about the first credit institutions. The word “bank” derives from the Italian “banco”, meaning “table”. These bank-tables were set in squares, which hosted a lively trade in goods. It was conducted using a variety of coins struck both by states and cities, and even individuals. Uniform system of coins did not exist. When buying and selling coins met various shapes of different denominations, often below par value, which was shown to them. Under these conditions, it took experts who would know and understand a set of circulating coins, could assess and provide advice on their exchange. These experts, money-changers are usually located with its own special tables for markets, where the trade. If we consider that in X. Italy was the center of world trade, where goods and money flowed in different countries, it becomes clear why the bankers were indispensable parties in commercial transactions, and their bank-tables are becoming more common. The concept of the bank, anchored in our understanding, identified with the exchangers and their special table in ancient Greece. Bankers were in ancient Rome, where there were mensarii (from the Latin word “mensa” – table), engaged in currency exchange, as well as certain other monetary transactions. It turns out that the first banks appeared as if on the basis of the case are exchange – an exchange of money for different cities and countries.

This kind of identification of the nature of the bank with operations in foreign exchange veils the true origin of the first credit institutions and, naturally, can not be the basis of our understanding of its essence. By itself, the exchange operation is a reflection of the commodity exchange, there is no more credit platform, which determines the main direction in the activities of banks in the later period. But it’s not just that. Purely semantic interpretation of the word “bank” leads us to conclude that the origin of the Bank applies only to this period of development of the economy, when money began to perform the function of world money. It turns out that at an earlier stage, when the money is accessed only in the domestic market, the banks did not exist. However, it is known that the operation of Intact, adhered to the internal circulation is more ancient and that it largely takes us closer to disclosing the contents of credit institutions.

According to historians, even 2300 years BC there were trading companies, which together with the implementation of their tasks were given as loans. Mention of the first stand-alone credit related to VI. BC In ancient Babylon practiced deposit operations: receiving deposits and paying interest on it. These same steps in the IV. BC practiced in Greece. It is noteworthy that in addition to taking deposits to the ancient Greeks for a certain fee to exchange money.

Who carried out these first bank transactions? According to historians, they were as individuals, as well as some church institutions that have focused significant amounts of money. Temples have been a reliable place to store valuables. Thieves are treated with reverence to the altar, not robbing them. Deposits are guaranteed inviolability of the respectful attitude to religion, made famous Greek temples (Delphi, Delian, Samos, Ephesus), which became both a kind of banking institutions. In the Temple of Artemis at Ephesus, concentrated deposits of banded coast and in the temple of Apollo at Delphi were concentrated free cash flow throughout the European Greece.

The first bankers realized that accumulate huge amounts of wealth, lying motionless, unproductive, as they could be used to receive a substantial benefit, paying cash for temporary use or self-opening trade and craft enterprises. A pledge it usually acted ships and goods, and in some cases – at home, valuables and even people (slaves).

Bank loans was accompanied by levying high interest rate which reached 36% per annum. However, this rate could increase to 40% per annum, if the loan was granted for a short time. The penalty for excessively high percentage was assumed only if its size reached 60% per annum.

Together with the lending operations of the ancient banks gradually have been developed and calculations for servicing investors. Calculations were performed using the so-called transfer, ie transfer funds from one table (accounts) to another. Each depositor in the bank had its own table with the symbol of his name. If customers, as they are now called, returned to save their spare money in the bank, they no longer had to personally pay for whatever amount, all payments for them served as a banker, whose contributions were, and table (from the modern understanding of) with the name of the depositor. Money from one depositor tables were transferred to another table, forming the simplest forms of cashless payments. Characteristically, that you must first was a private oral order customer about the transfer of funds, but then there were written orders (the prototype of modern checks), which facilitates and accelerates the mutual payments.

Facilities that are created by banks could not attract the attention of business people. Gradually, bank customers expanded. Banks, in turn, went to the works of clients on drafting contracts between clients, began to act as intermediaries in commercial transactions. For ease of calculation, even old jars produced bank notes (hudu – “Hood”) that are accessed on a par with primary money. According to one of the authors, “can be considered quite significant by the fact that although the bill transactions ancient bankers not involved, yet there were letters of credit from applying for a payment to the banker.”

All this evidence does not confirm the perceived view that the first banks appeared in a manufactory stage of capitalism in the form of banking houses.

Of course, it would be unfair to assume that the operations of an ancient commodity-money circulation demonstrate the functioning of the bank. The process of release and accumulation of their own and others’ money (receipt of money deposited as the oldest credit transaction) and provision for temporary use are characteristic of all forms of credit, including personal loan, arising, apparently, along with the development of the function of money as a means of payment, ie Long before becoming a party to the credit relationship of the creditor to the bank. The presence of the lender and the borrower, therefore, – it is far from the birth of the bank, but its premise.

Under what conditions the possibility of converting to a bank lender becomes apparent? Where is the dividing line between the personal form of the loan, and then the form of usury and bank credit, when one party credit relations is not a single individual (for example, the lender), and the lending institution?

In reference publications Bank is uniquely characterized as “a major lending institution.” The case, therefore, to the extent of the credit system and a set of operations that are executed by the lender servicing their clients. Pawnbroker ceases to be a moneylender, as credit operations carried out by them (in their entirety), into a system. Credit based on their functional purposes, ceases to satisfy a purely consumer needs of the borrower and is issued to conduct business transactions. Along with the commission of credit transactions lender begins on the order of their clients to perform calculations and other operations. The Bank, therefore, – it is such a stage of development of the monetary economy in which credit, cash and settlement operations have become concentrated in their entirety in a single center. It can therefore be assumed that the first banks emerged long before the manufactory stage of capitalism, during the formation of the state during brisk development of commodity exchange, monetary and credit relations. This kind of relationship, as evidenced by history, were already in the slave society.

In ancient Rome, there were primary rules of banking and credit law. According to these standards in the III. BC Roman bankers, specializing in business of exchange, they are no longer permitted to conduct credit operations. Argentarii, specializing in the credit business, got an opportunity on the basis of house payments provide loans to their customers. First Banking Houses do not just serve, and often not so much the consumer needs. The range of credit transactions first bank was quite extensive. According to historians, ancient Babylon, banks provide not only loans but also bought and sold land, performed a number of other operations.

Sign the bank is the fact that the loan in its basis is paid. Loan interest not only covers the cost of the banking house, but also makes productive use of resources by the borrower, he had received for temporary use.

Banking institutions varied. In modern society, banks have engaged in various kinds of operations. They not only organize cash flow and credit relations. They are being financed through the national economy, buying and selling securities, and in some cases, brokerage and property management. Lending institutions provide advice, participate in the discussion of legislative and economic programs, keep statistics, have their own utility company. The impression is not about specifics, but a multifaceted essence of the bank. In the discharge of its activities are connected its such species that can carry, and other institutions.

To reveal the essence of the bank can be approached from two sides: the legal and economic. In the first case the initial value takes the concept of “banking”. In their list includes those who, in accordance with the laws relate exclusively to banking.

Despite the importance of legal aspects of the essence of the bank remains open. Investigating the reality – is not only the ratio of the bank’s activities with the law. Not a legal law defines the essence of the bank itself, not surgery, allowed him to perform, and the economic side of things, the nature of the bank, giving him a legal right to carry out the relevant transactions.

In analyzing the nature of the bank’s important not to lose the historical patterns, consider the stable, traditional transactions were marked before (Intact operation, foreign exchange, credit, payments) to allocate, on the other hand, those who brought economic environment, the peculiarities of a particular stage of social development. In general, knowledge of essence of the bank, like any other phenomena that requires no response to questions about what he does, what actions to fulfill or perform, and about what he has the qualities, expressing his substantial certainty and isolation.

Analysis of the nature of the bank requires a phase of research is not a random set of questions that characterize banking activities, and answer specific questions posed by the methodology. Without these requirements the question of the nature of the bank loses the target orientation, the analysis turns to the description of work performed by the bank, which in spite of their importance, do not clarify the central question of what the true nature of the bank.

In analyzing the nature of the bank’s important to adhere to a number of methodological requirements, which can be summarized as follows:

1. The essence of it is difficult to understand based on the consideration of those operations which are carried out every single bank in relation to this or that to his client. The Bank can not perform certain banking transactions at any given moment, every single customer is entitled to only a limited number of services, but on this particular bank does not cease to be a bank. In the analysis should be abstracted from the operations of individual banks. Its essence is abstract in that sense, it expresses the totality of characteristics of real activity of the bank as a whole. The essence of it is expedient so to consider at the macro level in relation to the economy as a whole, including all variety of real activity of specific banks.

The essence of the Bank united regardless of its type, it does not depend on what we consider a bank – commercial or emission, or special-purpose, private or public, international, inter-regional or local. Of course, this does not mean that in practice all these banks are the same, on the contrary, they have their own characteristics, but all these features reflect a variety of banks as a whole.

3. The essence of the bank requires the opening of its features, specific features that differentiate the bank from other economic institutions.

In this sense, the bank is primarily a company producing a special, specific product.

Characteristics of the bank as a business requires some clarification first from the position prevailing traditional views on the merits. Bank as the governing authority in this case is an element of superstructure, part of the state apparatus. In essence, the bank and as such was its purpose in society has been adequately established the general system of distribution for the period of centralized economic management.

Bank as a specific company produces a product substantially different from the product of material production, it produces not just a commodity, and commodities of a unique kind of money, means of payment. Money is the reproductive categories, cash, issued by the Bank as the sole monopoly on the total weight of the subjects of reproduction, served as the sphere of production and distribution, exchange and consumption. In addition to this product, banks also offer various services mainly pecuniary nature.

The main product of the bank in the service sector (as opposed to an industrial enterprise) is not the production of things, commodities, and provision of credit. Feature of the bank loan is that it is not granted as a certain amount of money, but as capital. This means that lent the money not just have to make gyre in the premises of the borrower, but also to return to its original legal point increments in the form of interest on loans as part of the newly created value.

If the bank is further working mostly on other people’s money, accruing on the basis of repayment, the company carries out its activities mainly on their own resources.

The Bank is different from the industrial enterprise by the nature of his emitting. Not only did he issue shares and other securities, but also performs operations on accounting and custody of securities of other issuers.

The bank operates a special assistance – mainly employees and not working: people who are employed are not physical labor, and monetary transactions, processing figures, information, economic analysis, accounting, settlements between enterprises.

Bank rather trade, intermediary, rather than an industrial enterprise. The similarity of the bank’s trade is not coincidental. Bank really like “buy” resources “sell” them, operate in the field of redistribution, promotes the exchange of goods. He has his “Sellers” store, a special “commercial reserve” and its activities are largely dependent on turnover.

Commercial enterprise, in turn, is similar to a bank in the sense that it can provide some banking services. For example, a large commercial enterprise may, like the bank to issue significant amounts of cash credit. In turn, the trade may be more work than on its own, and borrowed capital.

Finally, as well as in trade, there are often takes place a counter-movement value. The Bank provides its services, the cost of its goods moving away, while the recipient of its product comes to the equivalent payment (for example, the commission for conducting payment operations, cash, consulting and other services).

The resemblance between the bank and trade, mostly ends. The fundamental difference between the bank from commercial enterprise lies in the basis of the bank. Under the framework of the bank means its superior quality – a credit matter, what is the mass of other activities, historically stuck by the bank as a fundamental lesson in scale, require special organization.

In these circumstances, the bank appears to us not as a commercial, but as a particular, specific company, because:

when trading takes place a counter-movement cost, while the credit of its unilateral movement (loaned value is passed to the borrower, which returns the loan only after a certain period);

when trading ownership of goods passes from seller to buyer, the credit does not happen (loaned cost goes to the borrower only in temporary possession);

a trade deal to sell something that belongs to the owner, in a loan it does not always happen (for example, a bank in most of the passes that he does not own, he sells other people’s money);

when trading seller receives from the buyer the price of goods, with the lender receives a credit not only the amount of lending, but the increment in the form of borrowing.

With all the conventions of the notion of the bank as a business (regardless of whether it has similarities or differences to an industrial enterprise), has a right to exist, for more productive characterizes the nature of its activities.

The essence of the bank require disclosure of its structure. Structure of the bank should not be confused with the structure of the apparatus of bank management. Under the structure of the bank is understood it is a device that allows him to function as a specific entity (institution) In this sense, the unit of the bank consists of four compulsory unit, without which it can not exist and develop.

The first block includes bank capital as a specific capital, freed from the industrial and commercial capital, as capital, existing mainly in the form of lending, and is found only in motion.

The second block covers the banking activities, which differs from the activities of other enterprises and institutions, the nature of their product, which became his main occupation (unlike other actors who could perform only certain banking operations, to which they are not the main, underlying business).

The third block consists of a special group of people with specific expertise in banking and bank management.

The fourth unit may be called productive, because it includes the bank machines, buildings, communications equipment and communications, internal and external information, certain types of industrial materials.

An analysis of the specificity of the bank, its foundations and structure of the bank can be defined as an entity or a monetary institution in charge of regulation of payments in cash and cashless forms.

1) have such generic properties that allow it to be an organic part of the whole (to have the status of the bank, the license for banking operations), operate under the general rules of the game;

2) operate within the general and specific laws of the legal norms of society;

3) be capable of self-regulation (responding and adapting to the environment), development and improvement;

4) interact with other elements of the banking system.

In addition to banks in the banking system includes some special financial institutions that perform banking transactions, but do not have the status of the bank, other institutions that make up the banking infrastructure and providing the support of monetary institutions.

For all the unity of the essence of the bank’s practice of operating many of their species.

Differ primarily in emission and commercial banks. Since the subject of this tutorial is to introduce the activities of commercial banks, we do not set ourselves the task of a detailed description of the work of central banks, which are designed to solve the problem of emission of cash money. We select only those criteria that can be in a variety of commercial banks to allocate their individual styles.

By the nature of the operations are different universal and specialized banks. The universal banks decided to refer those who are capable of “one-stop” to perform a wide variety of operations and services. Universality, however, has other shades. “Universality” means the type of activity, not limited to:

by branches of national economy;

on the composition of clientele served;

quantitatively;

by region.

Universal bank lending tends to be diverse industries, while specialized bank is most often associated with lending to any sector (subsector) of the national economy, a group of enterprises (for example, some banks cater mostly just forest, road, air, hours and other sub-sectors of industry).

Even more significantly affected by a universal type of bank in respect of client service. Typical for the universal bank is when it serves, and legal and natural persons. In contrast, a specialized bank may withdraw only at the service of individuals.

Terms of operations performed by a universal bank, as a rule, is extremely broad. Quantitative indication here is a list of permitted operations, which includes the open-market operations, where the bank can act as a full participant in the securities market to invest their capital in the capital of other enterprises. For example, the number of U.S. commercial banks, as a specialized, in accordance with banking legislation can not perform these operations. Universal banks of the European countries, by contrast, can perform such operations.

The activities of universal banks is not confined to any one region. Universal Bank is present in the regions in a variety of areas, has branches, including overseas. The activities of a specialized bank, by contrast, is often local in nature.

In modern banking institutions sometimes difficult to distinguish the type of universal and specialized banks. Often, for example, large specialized mortgage banks are not confined only to one region, may have branches abroad, provide hundreds of services to its customers. We can say that the activities of commercial banks can often be seen features of both universal and specialized banks.

By type of ownership are classified as state banks, joint, cooperative, private or mixed.

In the transition state form of ownership of the bank retains its value. Though not on such a scale as in the distribution system management, where only the state has a monopoly on the creation of the bank, but in the present conditions in a number of state banks remains a stake in the banks.

State ownership is present in the banking sector and other modified forms. Banks, for example, can be created on the basis of the state. In international practice, banks are full of competent state (they can be joint-stock banks) to finance government programs for economic development. Commercial Bank’s shareholders may also be state-owned enterprises, in connection with which this form of ownership can actually be present in the capital of commercial banks.

In an economic crisis and disorder of the banking system, the state seeks to strengthen its influence in the banks. Government regulation not only leads to a tight monetary policy, raising reserve requirements, liquidity, but also to the formation of special credit institutions, with a predominance of state ownership in the banking capital. Such banks in the world is often called development banks

In the market economy the most typical form of ownership of the commercial bank is a joint-stock form (an international language it is often called the private form, since the establishment of the bank’s capital attended mostly private companies and individual private individuals).

In some countries, a significant fraction of the total number of credit institutions occupy the so-called small-scale credit institutions. These include credit cooperatives, mutual credit societies, savings and loan banks, building-savings banks, etc. The advantages of the monetary institutions should include their ability to work with small enterprises, support small and medium-sized businesses, and accumulate small savings mobilize them to local needs. According to the service sector banks can be divided into regional (local), inter-regional, national and international. The regional banks are banks that cater mainly to local customers, clients of one of the region. These include municipal and banks that serve the needs of a particular region (the city). Inter-regional banks serving the needs of several regions. National Bank – a bank doing business within the country and serve primarily the needs of clients in their countries, international banks mainly serve the communication clients from different countries.

On the number of bank branches are divided into non-branch and multi-branch. Increase in the number of branches occurs on the basis of the parent bank, is expanding its network and based on the conversion of a number of independent banks into branches of other more powerful lending institutions.

Depending on the industries served by the banks can be divided into multi-serving and predominantly one of the branches. In international practice, you can meet industrial banks, merchant banks.

In international banking practice, there are other criteria of classification. In the U.S. system is installed dual subordination, there is a group of banks belonging to the Federal Reserve, and banks, regulated by individual states, on the relationship with insurance are banks, whose deposits are insured by the Federal Deposit Insurance Corporation and are not insured there.

Benchmarking studies comparing how banks in different countries go about their business, show that there is a wide spread in productivity. In 1991, added value per working hour was 93 USD in America versus 84 USD in Asia and only 52 USD in Europe. The number of people employed by the banking industry rose 24 percent between 1980 and 1992 in West Germany – in the U.S., there was a decline of 4.06 percent. Japanese retail banking is more than twice as productive as German banks, which serve only 170 customers per employee versus 360 in Japan. Branch networks reveal reserves in productivity for European banks: whilst Great Britain has only 31 bank branches per 100,000 inhabitants, the U.S. has 43 and Germany 69. In most countries, branch networks are shrinking due to cost pressure. Sweden’s banking network has been reduced by 3.7 percent in the last five years, from 38 branches per 100,000 inhabitants to 33. If German banks are to follow this path, they still have a long way to go, because their branch networks have only receded by 0.4 percent.

2. Lean banking

Business process analysis in corporate banking; has shown that there is much room for improvement. As a general rule, only 10 to 20 percent of total costs are spent directly serving the customer, this means where the largest proportion of value added is created. The remaining 80 to 90 percent are consumed by internal processes, adding little or no value at all.

Traditionally, work was performed in most banks in a whole array of hierarchical levels, both in the branch system and within individual branches. The segregation of duties between account officers (who call on the customers and add value) and the credit department (which adds value by analyzing risks, but hardly by the many administrative activities it has to do as well) on each level has resulted in long processing times, wasted resources, and tied up staff. In many cases, a single loan request was signed by 15 (fifteen) loan officers or more. Banking law requires only two signatures, internal regulations may demand six to eight signatures. Processing a loan request over two hierarchical branch levels took as much as 30 days on average. And to make matters worse, a considerable proportion of credits could not be finally decided upon in those branches that were responsible for the account, but decisions were passed to higher levels. Studies showed that credit processing time multiplied with each additional hierarchical level. Moreover, additional decision levels did not improve credit quality, instead they ” socialize” responsibility and do not add significant value: 70 to 80 percent of the credit analysis done at the branch level is duplicated by a central credit department.

If all this had only wasted time and money, it would have been bad enough. But during a recession, such inefficient credit processes steal the time, that account managers and credit analysts need to better manage the risks in their credit portfolio. And it consumes the funds that otherwise could help make up for loan losses.

As a result, many banks found that they had to re-engineer their credit process The objective was to arrive at a lean credit process that would enhance the banks capacities for risk management, quality control, and relationship management. Lean organizational structures would follow naturally, once the credit process had been re-engineered. Finally, a business process controlling system had to be implemented, providing information on the quality, cost and speed of the new credit process.

3. Structural re-organization

Considerations like these have led many banks to flatten their branch structure and credit decision hierarchies. In some cases, a traditional five-stage-branch system was replaced by a lean two-stage branch structure. Local operational units were empowered to decide up to 90 percent of their business on their own. The credit decision function was de-centralized, which in turn implies that the operational units are held fully accountable for their performance. At the branch level, the traditional segregation of relationship management department and credit department has been abolished. Account managers and credit analysts now work together in one team (the account management unit) and share the joint responsibility for the performance after risk of their loan portfolio. So, the account manager not only has to generate interest revenues by “selling” new loans, but he also has to manage the credit risks. The credit analyst, vice versa, can no longer be content avoiding loans (”A denied loan request can never result in a loss”), but he is held accountable for the profit of his unit as well. The job of the banker has become more entrepreneurial. This is reflected in new compensation systems which link yearly bonuses to business performance. So far, results show that this re-engineered credit system has accelerated credit decisions, clarified personal accountability and has led to first measurable steps towards significantly improving the quality of the credit portfolio.

Nevertheless, account management units which are empowered to act on their own need proper controlling. A top-down / bottom-up planning process sets the framework for the overall business results, which are to be achieved. The head office’s central credit department formulates the credit policy which must be followed by each unit. The credit portfolio planning and controlling must be in coherence with credit policy. This is supervised by regular credit reviews and audits. “Management by objectives” makes senior managers and their staff discuss and finally mutually agree upon what should be achieved during the next year. Benchmarking shows which branch does best in which field – and why, so that others can learn from it. And finally, bonuses are tied to a customer satisfaction index, that shows the extent to which the corporate client is satisfied with the banking services received.

1. The nature of the transaction

The nature of the requested credit transaction is the most critical aspect of the pricing. Obviously, premiums will be charged for complex transactions that require a lot of analytical skills and expert knowledge. The size of the loan will affect the price as well:-small amounts often require almost the same time for analysis and administration as large facilities, which should be relatively cheaper. The terms and conditions of the facility can influence pricing – as long-term loans will normally have a fixed interest rate with a moderate margin, short-term loans tend to have variable interest rates with higher margins.

2. The credit risk

The price for a credit facility must have a component reflecting the risk of default. This premium, which is charged to all credits in proportion to the risk they pose, should be large enough to finally make up for loan losses in the credit portfolio. The capital markets can be a good indicator showing if the risk premium is appropriate. Bonds issued by companies with an excellent credit rating have considerably lower interest margins than those of companies with a poor credit standing. The bond markets correctly reflect the risks associated with the respective companies. Interest rates for loans, however, used to overcharge good credits, whilst bad risks were underpriced.

Banks have started to read just their pricing according to the different risk levels. Each credit facility is rated within a coherent rating system. Such a rating mirrors the risk connected with the company, ranging from “A”, for an excellent credit rating, to “E”, for a poor standing. As poorly rated companies have a larger probability of going bankrupt, they must be charged a considerably higher premium. Below you find an example of how a German regional bank has implemented this into its pricing process. The premiums shown are the minimum margins which a have to be added to the interest rate after the refinancing and administrative expenses are covered:

3. Market conditions and competitive behavior

As price is a function of supply and demand, market forces are another determinant of price. Banking is a highly competitive business, leaving little room to charge higher margins than the competing banks would do. Price information is not freely available to everybody, but as bank rates are closely connected to money market interest rates, which are published daily in the financial pages of each newspaper, clients are at least aware if prices are going up or down. Companies with a good credit rating tend to do some cherry-picking, asking a number of banks for their rates and picking the best one.

4. Relationship with counterparty

A bank may consider if it wants to win new business from a particular corporation and then charge a preferential price. A loan may be priced more attractively if the bank has had a long and profitable relationship with a well trusted, loyal corporate client – provided the client has at least a good credit standing. As has been mentioned above, extending existing business comes much cheaper than winning new ones.

5. Bank Strategy

The banks business strategy may want to penetrate a particular market or build up some niche activities in specific areas. It may offer attractive prices to win such business.

A. The financing needs of a company

One of the most common criteria for classifying the financial needs of a company is to discern whether they are short-term, medium-term or long-term needs.

1. Short-term loans

Short-term loans are needed to enable a company to pay its current debt, mainly trade payables as they fall due. Short-term loans help to balance the different terms between the time ,when current assets can be realized and be transferred into cash, and when short-term liabilities fall due. Short-term loans are most often used to finance accounts receivables and inventories. Their purpose should be to finance one business cycle, or a temporary seasonal need.

The source of repayment is the completion of the business cycle, that is when all business activities have, hopefully, been converted into cash. Risk assessment must focus on the liquidity of the assets of the company and on management’s ability to mitigate risks.

Short-term loans are granted in a revolving manner. They are normally due on one day’s notice. In most cases, however, they are needed time and again, which is why banks allow a company to utilize a certain credit line for a period of up to 12 months. If a borrower exceeds his overdraft facility , the bank will charge a premium for this.

2. Medium and long-term loans

Medium and long-term loans are normally needed to finance substantial investments or long-term capital expenditure. The life of the loan should not be longer than the useful economic life of the financed asset.

The funds for repayment should be generated by the cash flow that is derived from the output or production from the financed investment. The financial effects of such investments have to be taken into account when undertaking financial planning. A company must disclose its financial planning showing if the future cash flow is enough to service the additional debt.

The longer the life of the loan, the more difficult is it to predict the future of the borrowing company. This is why medium and long-term loans are often accompanied by covenants. These covenants are part of the loan contract and oblige the company, e.g., to observe certain financial ratios, or not to sell any substantial assets without prior consent of the bank, and so on. Collateral, like mortgages, can safeguard a bank against the risk that the loan cannot be eventually repaid. In theory, the collateral should be valuable enough to recover principal and outstanding interest payments, but often this is not the case, for example as the market value of land and buildings fell dramatically.

3. Leasing and factoring

Leasing means that assets, that would otherwise be financed by credit, are bought by the leasing company, which is normally a subsidiary of a bank. The leasing company then leases the asset back to the corporate client, who pays a rent (instead of installments for principal and interest) and can use the asset in the same manner as if it had been bought by himself.

Most medium and long-term assets can be leased. So, many corporate buildings are leased. All kinds of equipment is leased, often by specialized leasing companies. A large proportion of new car sales is financed via leasing. The leasing contract can even contain a clause obliging the leasing company to “buy back” the financed asset at a fixed price. This is of interest for clients who lease assets which will probably be technically obsolete, like computer systems, in a couple of years.

The credit risk is the same as with lending: the leasing company must properly assess the corporate client’s ability to pay the rent. Leasing may in some cases be cheaper than borrowing, but in most countries the reasons why companies resort to leasing instead of lending are mainly tax-driven.

Corporations can sell their accounts receivables to a factoring company, which will pay them a price for the receivables. The advantage for the corporate client is, that the receivables are immediately converted into cash, and that he does not have to waste too many resources on bookkeeping, controlling and recovering of the receivables.

The factoring contract can even stipulate that the risk that some of the corporation’s debtors fail to pay, lies with the factoring company, which charges appropriate premiums for its business. The risks associated with factoring are similar to credit risks. The factoring company has to analyze whether its corporate client’s receivables are good enough to be bought. It has to consider everything that has been said about a corporation‘s industry, its products and its customers.

1 Objectives may be different:

To accompany their customers when they invest abroad

To develop a standard banking activity

To participate in the financing of local projects

To get operations from abroad

To offer a larger range of products to customers.

2 Constraints

The international function deals with operations quite similar to those carried out nationally (means of payments, guarantees, credit, money transfers), but there are changes on different points:

Human aspect: Banks need specialised staff to operate because of different local characteristics.

Financial aspect: these operations need specific accounting and telecommunication networks (SWIFT) that make this activity very costly.

3 Technical aspect

The local characteristics of the networks demand a costly adaptation of working applications

4 Juridical and fiscal aspect:

operations do not depend only on the laws of the country of the bank.

5 Commercial aspect:

To sell its range of international services, a bank must have highly specialised staff able to develop new operations.

International presence

A bank will use its correspondent banking network to process its transactions (transfers, letters / credit). The number of vosmo and nosmo accounts is being reduced.

A bank can be implemented abroad through:

A representative office in charge of developing business between the local companies and the Bank’s local clients.

A partnership with a local bank for a chosen activity.

An implementation to develop a local banking activity.

A bank can participate, through the market activities, without a physical presence; to:

Foreign exchange transactions

International financing

Issuing International securities.

The choice of the form of local presence is a matter of management strategy as it depends on the objectives of the bank concerning the range of customers to be served and the types of operations to be done; this has to be decided keeping in mind the costs to be paid.

diagram 2.9

market connections

Facing increasing difficulties in its traditional activities, Banks have tried to find additional profits on money markets.

Missions

1 Transactions on behalf of customers

Processing of operations (buying and selling of securities) on the Financial Markets, the monetary market or derivatives.

Managing the financial assets of wealthy customers

Creating new financial products.

Managing collective products.

Managing the issuing of mutual funds securities.

2 Transactions of banks on their own

Managing and getting the best results from cash management

Managing the range of derivatives necessary to cover risks (Exchange Rates).

Maximizing financial products of the bank through arbitrage and speculation, under the control of Bank Management.

Organization and tools of market function

1 The organisation is centred on risk Management

Risks are a permanent element in any market transaction and profitability might suffer.

An authorised level of risk has to be decided upon by management and its application has to be controlled on three points:

Clear definition of the security rules in accordance with objectives.

The registering and controlling of transactions by a competent back office.

Immediate and safe computerisation.

The best controls on real time.

2 An efficient organisation

The front office is divided according to the kind of support on specialised desks irrespective of the origin of the operation (customers, cash management, arbitrage, speculation).

the transaction are dealt in real time with very little administrative formalism.

The back office is in charge of the registering, the globalisation, the control, the accounting of profits and losses.

3 The tools

In the front office:

Connection to extend information data base (Reuter-Telerate)

Software for simulations of calculations to help with decision making

In the back office:

Different software for calculation, evaluation, simulation, controls

Accounting connection to the bank accounting functions.

Setting up abroad has for long been the strategy of large banks to be in a position to finance local projects. Today, the evolution of telecommunications and the development of strategic international financial places allow operators to participate and intervene at distance. For cost reasons, the number of subsidiaries abroad is decreasing.