Retail Banks as Financial Intermediaries
Professor John B Holland
The University of Glasgow
January 15th 2015

RETAIL BANKING – Juggling risks - for profit

How do it? How learn how to do it?
How develop Retail Bank?
How get Competitive Advantage?

RETAIL BANKING – Juggling risks - as teams & organisation

How do it? How learn how to do it?
How develop Retail Bank?
How get Competitive Advantage?

Real world Models of Retail Banks
Overview – ‘juggler’

Retail banking – juggling financial risks - and returns /profits

Individuals
& teams in
Bank firms

Retail banking – juggling financial risks - and returns /profits

Individuals
& teams in
Bank firms

Banks as ‘middle men’

Bank as ‘Juggler’

Individuals
Households

Households

Cash

Deposits safety &
Payments Services
1-7

Individuals

Banks transform deposits into loans Equity

Loans and Cash

WHAT IS OVERALL VIEW OF INTERMEDIATION MODEL?

=Complex ‘balancing’ or ‘juggling’ of risks – for profit
ASSETS

LIABILITIES

ON BOTH SIDES
Contracting & control of Information asymmetry =IS
Moral hazard =MH, Adverse selection =AS

Active screen of, influence of risky depositor/borrower behaviour.
Diversification of risks.
Use of capital risk ‘buffers’.
Cross balance sheet risk effects.
Thus transform Risk, Maturity, Liquidity via these internal mechanisms

RETAIL BANKING – MAIN SLIDES

 Information asymmetry =IS
 Moral hazard =MH
 Adverse selection =AS

‘Real world’ model of Retail Banking
Details of how they do it

Retail banking – key points – about ‘real world’ model


Bank as ‘juggler’ of risks for profit




Small transactions –on balance sheet – small customers
Banks exploit - combination of payments & intermediation



Look at each risk area by itself – assume no dynamics between them – no juggling



Contracting to reduce risk - both assets & liabilities



Diversify risk- both assets & liabilities



Cash ‘absorb’ liability risk



Equity ‘absorb’ bad debt risk




Bank manage risks – seek profit and added value
Via how manage lending, how provide payment /deposits




Overall Juggling = Bank transform capital
= Financial intermediary



Retail bank = risk & return management ‘machine’ = ‘real world’ model

by

size, risk, maturity etc

Characterisitcs of RB

RETAIL BANKING - CHARACTERISTICS

 Financial service provision to individuals and small firms
 Large volumes of low value transactions
 Large network of branches
 Major technology investment
 Close interaction with customers
 Retail often combined with wholesale, investment, & corporate banking RETAIL BANKING – BALANCE SHEET
LIABILITIES

ASSETS

 Many small deposits.
 Many deposit types current, 60 day etc.

* Many small loans
*many different terms
For loans-rates/maturity

 Some large deposits from banks, firms.

* loans longer life than
Deposits & larger size

 High leverage low equity, high debt

* cash in excess of required
& securities as liquidity

 Liabilities mainly to fund financial
Assets

* real assets large but less than financial assets.

RETAIL BANK - INCOME AND EXPENSES

 Fees & charges do not cover non interest expenses
 Labour costs high
 Interest margin wider than wholesale
 Payments services &
 Technology are major expenses

Combine
Payments
and Intermediation?

WHY COMBINE PAYMENTS & INTERMEDIATION ?
 Bank - based on links between
 Medium of exchange &
 Store of value
 & Bank advantages = ??
 + ‘Payment via claims on bank
 dominates payment via trade credit/IOUs
 Because banks have advantages in enforcing contracts,
 & Their debit cards / cheques /payments are safe / convenient

WHY COMBINE PAYMENTS & INTERMEDIATION ?  Money? Decisions to sell & buy
 Are separated in time
 Since money allows us to sell goods for general purchasing power which can be exercised later.  Money used as store of purchasing power (= PP )
 Seller can hold the proceeds between sale and future purchase
 - in wallet, but often in safe bank account
 Or buyer