A Basic Understanding to Corporate Banking

• Published on July 7, 2014

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Syed Ali Ameer

Financial Modeler | IFRS 9 | Python Developer | Blockchain | Power BI Trainer

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This Published Notes enables those People who are not aware to Banking Scope in Corporate Finance such as Accountants, Tax Practitioners, Economics Students, Audit Students etc to get basic understanding on Corporate Banking.

It is not a Rocket Science, but have a great significance in an Economy.

Its also guide to Investment Students such as (ACCA F9/P4) and CA Final (BFD).

A Basic Understanding is compiled but its still require some additional knowledge.

To understand deeply, please refer Working Capital Management Section of any Investment / Corporate Finance Book. Because this topic stands only and only at this section.

Corporate Banking is one of the Three Pillars on which Wholesale Banking stands.

(i.e. Corporate Banking, Investment Banking & Treasury).

Corporate Banking is defined as those Products and Services that relate to the Lending Activities between a Bank and its clients.

It is different to Retail Banking activities for Individual Accounts, where a Bank deals with Corporate Clients such as Corporations, Listed Companies etc.

A Bank maintains specific Divisions or Department for corporate banking which is responsible for handling the needs of corporate clients.

The Main function of Corporate Banking is lie in Category of

Working Capital Management, Where it provides a highly sophisticated structured finance to its corporate clients which may be secured or unsecured.

All those facilities related to managing Working Capital

(Current Assets – Current Liabilities) such as managing Receivables, Invoice Discounting, Cash Management, Trade Finance, overdraft etc. Running Finance and Sales & Leaseback also fall in this Definition.

In short, Corporate Banking provides Alternative Sources of Finance for Short Term Funding Strategy. While on the other side, Companies goes to Treasury and Investment Banking for Long Term Financing Strategy. Where the Alternative Sources of Finance will be either Debt Finance (Long Term Liability / Interest Based) or Equity Finance or Islamic Finance (Profit Based) in case of Islamic Banking. The Sources of Finance for Short Term Funding Strategy are following below.

Products & Services:

1. Cash Management

2. Overdraft Facility or Running Finance (RF) / Running Musharakah (RM)

3. Bill & Receivable Discounting

4. Leasing or Ijarah

5. Trade Finance or Mudarabha

6. Pledge Finance / Mortgage Finance / Murabaha

7. Term Loans (Short/Long)

8. Fund Transfers / Remittances

9. Corporate Transactional Convenience via Online Internet Banking

10. Short Term Joint Venture / Musharakah

11. Import & Export Bills for Collection / Salam Financing

12. Letters of Credit (LC) or Tijarah Financing

13. Letter of Guarantee on Shipment & Bill of Lading

14. Secured Cash Mobilizing

15. Insurance in Transit or Takaful

16. Alternative Delivery Channels (ADC)

17. Other Products which also available in Retail Banking

Banking Basics: 5 Types of Bank Accounts

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Lane Kareska is a Digital Marketing Director at OppLoans. He holds a degree from Columbia College Chicago and an MFA from Southern Illinois University. His work has been widely published in national journals and media outlets. His areas of focus include personal finance, consumer credit access, and the prime and subprime lending industry.

Updated on October 6, 2021

You love your money. You want more of it. That’s why you work. But once you get that fresh new paycheck, what do you do with it? Are there other ways to bank your money rather than just a simple checking account? Yep. Get the basics of bank accounts in the OppLoans blog.

Bank accounts can be a necessity for modern life. They’re convenient (using a debit card is faster and simpler than cash—the people in line behind you at Starbucks thank you), they’re safe (money in the bank is insured up to $100k), and many types of bank accounts pay interest (meaning your money earns you more money). So, let’s dive into the basics of bank accounts and see which can work best for you now.

Checking Account

A basic checking account is what’s known as a transactional account. These are designed for daily purchases. You deposit money into a checking account with the intention of spending, rather than saving. A checking account will come with—you guessed it—checks, and/or a debit card for a more convenient way to spend.

Unlike other accounts, checking accounts don’t usually pay interest. And you’ll want to watch out for penalties like overdraft fees. There may be other limitations or fees as well. Some banks only allow you to write a certain amount of checks per month. So make sure to read the fine print when evaluating new checking accounts.¹

Savings Account

It’s all in the name. A savings account is designed to save you money. Money you put into a savings account will actually grow over time by accruing interest. Interest is, essentially, the money you charge the bank for letting them store your money. This value is expressed in a percentage called the interest rate. If you put $100 in a savings account that pays an interest rate of 1%, at the end of the year, you’re savings account would have $101. You earned interest!

The amount of interest that accrues, the service fees and the minimum opening deposit will all very depending on the bank. These are all details you’ll want to know before deciding which bank and savings account is right for you.²

Certificate of Deposit (CD)

A CD account allows you to save money at a set interest rate, for a specific amount of time. While a CD is also designed for saving, it’s different than a savings account. With a CD you don’t have access to the money you’re saving throughout the life of the certificate. Because of this, the interest that accrues on a CD is usually higher than a savings account.

Think of it like putting money into a time capsule and burying it in the backyard. Only this time capsule is magic, and it multiplies your money. That’s a CD. The life of the certificate can last a few months to several years. If you’re considering a CD, make sure you won’t need to withdraw the cash before the certificate is over, as this could lead to fees and penalties.²

Money Market Account

These accounts are also similar to a savings accounts, only you’re required to maintain a certain amount of money in the account. Having less will lead to fees. Another difference from a traditional savings account is that the interest accrued in a money market account will fluctuate based on the financial markets. Some accounts will even have the option to withdraw funds using checks.¹

Money Market accounts typically pay out higher interest rates, but of course they also require more money to get started. (Hey, you gotta pay to play.)

Individual Retirement Accounts (IRA)

Just like your Uncle Joe, IRAs are all about retirement. They’re broken down into two types: a traditional IRA and a Roth IRA.

A traditional IRA is tax deductible and allows deposits of up to $4k per year (or more if you’re over 50 years old). You contribute to this account through your yearly income. With a Roth IRA, the taxes are deducted when the funds are deposited, so you don’t owe taxes when you withdraw your funds. However, there are certain requirements and contribution limits for both types, so talk to your employer or provider to get more information.²

No matter which bank accounts you use, the important thing is to focus on saving. Having a checking account is necessary for everyday spending, but it’s also beneficial to have other accounts for long-term saving.

References

1. “5 Different Types of Bank Accounts” Investorguide.com. Accessed February 10, 2016. https://www.investorguide.com/article/11655/types-of-accounts-typically-offered-by-banks-igu/

2. “Types of Bank Accounts” Wells Fargo. Accessed February 10, 2016. https://www.wellsfargo.com/financial-education/basic-finances/manage-money/options/bank-account-types/

Banking Fundamentals

The concepts and principles relating to the practice of banking

Home › Resources › Knowledge › Finance › Banking Fundamentals

What are Banking Fundamentals?

Banking fundamentals refer to the concepts and principles relating to the practice of banking. Banking is an industry that deals with credit facilities, storage for cash, investments, and other financial transactions. The banking industry is one of the key drivers of most economies because it channels funds to borrowers with productive investments.

Banks perform a myriad of functions, including deposits and withdrawals, currency exchange, forex trading, and wealth management. Also, they act as a link between depositors and borrowers, and they use the funds deposited by their customers to provide credit facilities to people who want to borrow.

Banks make money by charging an interest rate on loans, where they profit by charging a higher interest rate than the interest rate they pay on customer deposits. However, they must comply with the regulations set by the central bank or national government.

Summary

• A bank is an institution that accepts customer deposits and offers loans to individuals and corporate clients.

• Banks make money by charging higher interest on loans than the interest they pay on customer deposits.

• In the United States, banks are required to retain 10% of the customer deposits as reserves, while using the other 90% to provide loans.

Banking Fundamentals – How the Banking Industry Works

In the United States, banks are regulated by the Federal Reserve. Banks must retain at least 10% of each deposit on hand but can lend out the other 90% as loans. The reserve requirement applies to all types of banks that are licensed to operate in the United States, and they can hold the reserve as a deposit in the local Fed bank or as cash in the vault.

The actual reserve requirement is determined by the Federal Reserve Board of Governors. When the Fed reduces the reserve requirement for member banks, it is implementing an expansionary monetary policy, which increases the amount of money in the economy. On the other hand, when it increases the reserve requirement, it is implementing a contractionary monetary policy that reduces liquidity.

All the Fed’s member banks must be insured with the Federal Deposit Insurance Corporation (FDIC). The FDIC was created in 1933 after the Great Depression through the enactment of the Glass-Steagall Act. It came after multiple bank failures that resulted in banking panics, with depositors demanding all their deposits held at the bank.

The FDIC was formed to prevent such occurrences by insuring all deposits that customers keep at the bank. It insures savings accounts, checking accounts, and other deposit accounts. During the 2008 Global Financial Crisis, the FDIC raised the deposit limit to $250,000 per account to protect depositors from the crisis.

For a deeper understanding of the banking industry and its workings, see CFI’s Introduction to Banking course!

Banking Fundamentals – Types of Bank Accounts

The common types of bank accounts include:

1. Savings account

A savings account is a bank account that a customer can deposit money in that they do not need right away, but that is available for withdrawal whenever needed. The bank loans out the money to borrowers and charges interest on the amount of credit disbursed.

2. Checking account

A checking account allows customers to access their deposited funds with ease, and they can use it to make their financial transactions such as paying bills. A customer can access the funds by writing a check, using a debit card to withdraw money or make payments, or by setting up automatic transfers to another account.

3. Certificate of deposit

A certificate of deposit is a bank account that holds a fixed amount of money for a defined period of time such as six months, one year, two years, etc. It pays a fixed interest rate on the amount held.

Banking Fundamentals – Types of Banks

Below are the most common types of banks in the United States:

1. Commercial banks

Commercial banks are the most common type of bank. They provide various services such as providing business loans, accepting deposits, and offering basic investment products to both individuals and private businesses.

Commercial banks also offer other financial services such as global trade services, merchant services, insurance products, retirement products, and treasury services. They make money by providing business loans to individual and corporate borrowers and earning interest income from them, and also by charging service fees.

2. Credit unions

A credit union is a type of bank that is open to a specific category of people who are eligible for membership. It is member-owned and is operated by the members on the basis of people helping people. Traditionally, credit unions served either residents of a local community, members of a church, employees of a specific company or school, etc.

The ownership structure of credit unions allows them to offer more personalized and lower-cost banking services to their members. Due to their small operating size, credit unions may pay higher interest rates than banks, and customers can build a better relationship with the banking staff. On the downside, the credit unions’ operations are limited, and the customer’s deposits are less accessible.

3. Investment banks

Investment banks are banks that provide corporate clients access to the capital markets to raise funds for expansion. They help companies raise funds in the stock market and bond market to finance their expansion, acquisitions, or other financial plans. They also facilitate mergers and acquisitions by identifying viable companies for acquisition that meet the buyer’s criteria.

Investment banks make money by offering advisory services to corporate clients, trading in the financial markets, and representing clients in mergers and acquisitions. Some examples of large investment banks in the U.S. include Merrill Lynch, Goldman Sachs, J.P. Morgan, and Bank of America.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Banking Certifications

• Checking Account

• Financial Accounting Theory

• Glass-Steagall Act

Financial Analyst Training

Get world-class financial training with CFI’s online certified financial analyst training program!

Gain the confidence you need to move up the ladder in a high powered corporate finance career path.

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