Foundations of Financial Risk: An Overview of Financial Risk and Risk-based Financial Regulation, 2nd Edition

CHAPTER 1 Functions and Forms of Banking

Chapter 1 introduces banks and the banking system: their roles in facili­tating economic activity, and their relevant risks banks face. The three core banking functions—collecting deposits, arranging payments, and mak­ing loans—and their attendant risks are described. As this chapter intends to provide a foundation for the more detailed discussions in subsequent chap­ters, most of the key topics are presented within a risk management frame­work. A glossary is provided at the end of the book.

Chapter Outline

• 1.1 Banks and Banking
• 1.2 Different Bank Types
• 1.3 Banking Risks
• 1.4 Forces Shaping the Banking Industry

Key Learning Points

• Banks provide three core banking services: deposit collection, payment arrangement, and loan underwriting. Banks may also offer financial serv­ices such as cash, asset, and risk management.
• Banks play a central role in facilitating economic activity through three interrelated processes: financial intermediation, asset transformation, and money creation.
• Retail banks primarily serve retail customers, and wholesale banks pri­marily serve corporate customers. A country's central bank sets monetary policy on behalf of the country's government, liaises with other central banks, and may act as the bank regulator. Sometimes a body other than the central bank is responsible for the regulation of individual banks.
• The main risks that banks face are credit, market, operational, and liq­uidity risks. Other types of ...