Keith Pond Retail Banking fourth edition G Gosbrook Keith Pond Retail Banking fourth edition G Gosbrook This edition published in 2017 by Gosbrook Professional Publishing Ltd 20 Patrick Road Reading RG4 8DD, UK www.gosbrook.com First published in 2007 by Global Professional Publishing Ltd Copyright © Gosbrook Professional Publishing Ltd The right of Keith Pond to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act of 1988 All rights reserved No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the publisher Reprographic reproduction is permitted only in accordance with the terms and licences issued by the Copyright Licencing Agency Disclaimer The author and publisher believe that the sources of information on which this book is based are reliable and have made every effort to ensure the accuracy of the text However, neither the publisher nor the author can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions, or from any opinion or advice given In particular, the contents of this book should in no way be taken to constitute legal advice Note Throughout the text reference is made to fictitious organizations, including ‘Countryside Bank plc’ and ‘Riverside Bank Pte Limited’ These organizations are pure inventions by the author and any resemblance to any organization carrying these names or any similar names is entirely coincidental ISBN 978 912184 00 2 (paperback) ISBN 978 912184 01 9 (hardback) ISBN 978 912184 02 6 (ePub) ISBN 978 912184 03 3 (PDF) Cover and text design: Anke Ueberberg Cover image: Matthias Hloucha To Judy Blink To my grandchildren, Connor, Dylan, Alfie and Isabelle (with thanks for the offer of help, Alfie, but apologies that the publisher did want more than four lines on each page) And to Eric and Tracey Dobby for their support, as publishers, for so many years Contents List of figures vi List of tables vii Preface to the fourth edition viii Acronyms and abbreviations ix Glossary xi Part I THE RETAIL BANKING ENVIRONMENT 1 The retail banking environment 2 What is retail banking? 17 How retail banks work? 31 Retail banks and the economy 42 Retail banking regulation 53 Competition in retail banking 67 PArt II INSIDE THE RETAIL BANK 75 Retail banking products 76 Retail banking channels 91 Payments and payment systems 104 10 Credit appraisal 116 11 Banking securities 129 12 The recovery of money 140 Appendix A Personal credit scoring 151 Appendix B Business lending proposition 154 Appendix C Personal case studies 157 Supplementary material and a Tutor Resource are available from www.gosbrook.com/retailbanking4e or http://keithpond.co.uk/extras.html List of figures 1.1 Retail banking environment 1.2 Retail banking at work 2.1 A timeline of bank consolidation in the UK 18 2.2 Constituent parts of a universal bank 19 2.3 Lenders and borrowers 23 4.1 Liquidity spectrum 44 4.2 Transmission mechanism of monetary policy 49 5.1 Three pillars of Basel II 58 5.2 Functions of the Monetary Authority of Singapore (MAS) 62 5.3 ‘Ring-fencing’ bank assets 65 6.1 Average market share of four largest banks, 2000–07 68 6.2 Porter’s ‘five forces’ model of competition 71 7.1 Evolution of UK banking law 77 7.2 Saver’s life cycle 80 7.3 Insurable risks 86 7.4 Investment risks and returns 88 8.1 Retail banking systems in mid-20th century 93 8.2 Commercial bank branches per 100.000 adults, 2007 and 2014 94 8.3 ATMs per 100,000 population, 2007 and 2014 96 8.4 Anatomy of an ATM transaction 97 8.5 Evolution of internet banking 99 8.6 Channel preferences 100 8.7 Retail banking systems in the 21st century 101 8.8 ‘Virtual’ banking 102 9.1 Payments environment 105 9.2 Non-cash payments in Australia (a) and Mozambique (b) 105 9.3 Analysis of payment preferences 106 9.4 Anatomy of a mobile cheque transaction (UK) 108 9.5 Anatomy of a debit card 110 9.6 Flow of data and funds in a card transaction 112 9.7 Flow of data and funds in a mobile phone transaction 113 10.1 Lending life cycle 117 10.2 How credit scoring works 126 10.3 Credit-scoring probabilities 128 11.1 Global house prices index 137 12.1 Causes of non-repayment of loans 142 12.2 Bad debt risk strategies 144 12.3 Possible bank actions in bad debt situations 145 12.4 Decision tree for debt collection 146 12.5 Formal insolvency recovery (average % repayment) 149 vi List of tables 2.1 Banking losses and compensation (2010–16) 27 2.2 Riverside Bank Pte Ltd balance sheet 28 2.3 Riverside Bank Pte Ltd balance sheet #2 29 2.4 Riverside Bank Pte Ltd balance sheet #3 29 2.5 Riverside Bank Pte Ltd balance sheet #4 29 3.1 Assets on a typical bank balance sheet 32 3.2 Riskiness of banking assets 35 3.3 Liabilities on a typical bank balance sheet 36 3.4 Estimating return on equity (ROE) 38 3.5 Example of interest and liquidity risk 40 4.1 Definitions of monetary aggregates in the UK 46 4.2 Extent of quantitative easing (QE) 50 5.1 Deposit insurance scheme limits – selected countries 55 5.2 Risk-weighted assets of Countryside Bank plc 57 5.3 Capital adequacy of Countryside Bank plc under Basel I 57 5.4 Capital adequacy of Countryside Bank plc under Basel II 60 5.5 Key ratios in Basel I, II and III compared 61 5.6 Types of banking risk 63 7.1 Types of savings account 78 7.2 Types of credit account 81 7.3 Mortgage loans around the world (2016) 83 7.4 Interest-rate types 84 7.5 Ratios of non-interest income to total income 85 7.6 Basic foreign exchange products 90 9.1 Qualities of cash 107 9.2 Typical fees in a card transaction 111 10.1 Common lending mnemonics 119 10.2 Lowest lending rates for retail bank products (selected countries) 124 11.1 Real estate ownership in various countries 131 11.2 Legal systems around the world 133 11.3 Key banking securities (offered by individuals, jointly, by partnerships or by companies) 136 11.4 Key banking securities (offered by companies only) 136 11.5 Typical considerations when taking UK land as security – DIVAN 138 12.1 Insolvency choices 148 A.1 Riverside Bank Pte Ltd credit-scoring template 152 A.2 CAMPARI assessment 153 B.1 CAMPARI assessment 155 vii Preface to the fourth edition Retail banks have undergone considerable changes in the last thirty years – and their capacity to react to economic, environmental, political, social and technological pressures will guarantee further changes in the decades to come This edition updates earlier versions of the book in its treatment of issues surrounding the industry It also emphasizes the priorities of retail banks today, and their regulatory and practical environment The text itself is divided broadly into two parts, Chapters 1–6 covering banking concepts and the current banking environment, and Chapter 7–12, key retail banking operations In the first half of the book, we consider what banking actually is and what banks We discuss some key economic concepts that underpin much banking activity in both historical and modern-day contexts and we examine banking risks, along with some of the ways in which banks overcome or minimize the adverse impact of such risks We go on to review the position of banks within the economy, and their regulation by national and international bodies, and look at a bank’s profitability from the perspective of its annual accounts In the second half of the book, we cover the key banking transactions – from the different types of bank account and product offered, to the use of payment systems (a necessary adjunct to intermediation) The book goes on to introduce the topic of lending, whereby some key credit risk tools are reviewed and applied, and basic securities are considered as a vital ‘secondary repayment method’ in the event of credit default The book ends with an overview of the recovery of money by means of court action and insolvency procedures Throughout the book, you should consider the content in relation to particular examples of practice in your own national and regulatory environment Often the differences in law, history and geography result in different banking responses to familiar questions and challenges This book cannot promise to be an exhaustive review of all such practice, but it employs specific examples to highlight generic principles and common responses to them While I have made every effort to ensure that the information contained in the text is accurate and up to date, errors may remain and I take full responsibility for them Your feedback is welcomed Keith Pond Loughborough University April 2017 Acknowledgement I am grateful to the School of Business and Economics at Loughborough University for allowing republication of materials previously used in teaching at that institution viii Acronyms and abbreviations Cs character, capability, capital Cs Cs plus connection ATM automated teller machine B2B business-to-business Basel I 1988 Basel Accord Basel II 2004 Basel Accord (Revised FOS Financial Ombudsman Service Capital Framework) Basel III 2010–11 Basel Accord BBA British Bankers’ Association BCBS Basel Committee on Bank Supervision BCOBS Banking Conduct of Business Sourcebook (UK) CAMPARI character, ability, means, purpose, amount, repayment and insurance CCJ county court judgment CD certificate of deposit CHAPS Clearing House Automated Payments System COB conduct of business CPI Consumer Price Index CRA credit reference agency CRIS character, repayment, incentive and security CSFI Centre for Study of Financial Innovation CSR corporate social responsibility CVA company voluntary arrangement DIVAN deposit, investigation, valuation, authorization and notification ECB European Central Bank (Euro area) EPOS electronic point of sale Euribor Euro inter-bank offered rate FCA Financial Conduct Authority (UK) FSMA 2000 Financial Services and (UK) FPC Financial Policy Committee (Bank of England) FSA Financial Services Authority (UK, defunct) Markets Act 2000 (UK) G10 Group of 10 industrialized nations HP hire purchase IASs International Accounting Standards ICB Independent Commission on Banking (Vickers Committee, UK) ICE Intercontinental Exchange; interest, charges and extras (usually added to CAMPARI) ILA independent legal advice IPARTS integrity, purpose, amount, repayment, terms and security ISA individual savings account IVA individual voluntary arrangement JCCC Joint Credit Card Company (later known as Access) Libor London inter-bank offered rate LOLR lender of last resort LSE London Stock Exchange LTV loan-to-value M&A mergers and acquisitions MARG maturity transformation, asset transformation (or aggregation), risk transformation and geographical location MAS Monetary Authority of Singapore ix RHYL PIER – SOME FEEDBACK Table B.1 CAMPARI assessment Factor Considerations Character Perhaps the first question that the bank should ask is: to whom who are we lending? The case study does not suggest that the business will be incorporated If it is, the legal credentials of the company will need to be checked Regardless of legal personality in the borrower, however, there needs to be a level of trust in the competence and morality of the Jones family, and questions about how the business is to be run must be raised Ability The Jones family represents long experience, success in business and good levels of qualification, but how specific to the running of a leisure attraction are these skills? It would give more comfort to hear about the specific experience of day-to-day management of the pier and its attractions Means The family investment of £ 1 million and the EU grant represent a level of comfort to the bank that it would not assume the whole risk if things were to go wrong In balance-sheet terms, the ‘gearing’ should not be high, but the nature of the Jones family’s investment (equity or loan) needs to be discovered Purpose The purchase of assets to generate a business, economic activity in the region and a positive relationship with the bank are all points in favour of this loan The bank’s portfolio approach will limit its overall exposure to the leisure industry, but this will not, at first, inhibit the lending officer’s consideration Reputation of the bank is a difficult issue to assess, but, in the case of a leisure business, it might think about the bad publicity that such a business could attract Reputational issues would also be at stake should the loan go bad and the bank be perceived negatively for collecting the debt Amount It is remarkably difficult to value such rare structures as piers and so the bank will have to ask a lot of questions, including profits expected, to assess the pier on a positive cash-flow basis (i.e how long it will take to repay the amount spent on the asset from profits it generates) The amount of the loan is one concern; the amount of trading support (perhaps via an overdraft) is another The bank needs to consider its entire potential exposure Repayment Always the key considerations for the bank are the term of the loan within the useful life of the asset, and the ability of the business to fund the borrowing and repay the loan Business forecasts based on realistic assumptions are vital here, and sight of a business plan outlining the strategy and profitability of the venture will be essential If the pier has been run as a going concern in recent times, then the existing operator will have furnished the Jones family with trading accounts Insurance The pier, with uncertainty in its value, will be the primary security There should be enough value to satisfy a prudent banker, but the MAST test for security (that is, consideration of the marketability, ascertainability of value, simplicity of title and transferability of title) shows some weaknesses Is there a ready market? Is there a stable value? Further, the pier must be insured against all potential risks and the bank’s interest must be noted on the policy It may be that the bank could offer insurance (see ICE next), although group exposure to the business risks would need to be considered Continued on next page 155 BUSINESS LENDING PROPOSITION Table B.1 CAMPARI assessment cont Factor Considerations ICE Most banks would provide a detailed breakdown of interest and fees for the deal Arthur could expect to pay between and per cent over the base rate or the London inter-bank offered rate (Libor), depending on the level of repayment risk perceived A fee of per cent of the loan (£ 1,500 or £ 2,000) would be realistic The loan would involve a good deal of work and monitoring by the bank, and the fee needs to reflect this Other relevant services, such as insurance, could also be offered Note Rhyl Pier Ltd is a fictitious company devised solely for the purposes of this illustration Even the pier itself is a fiction: Rhyl’s Victorian pier was demolished in 1973 156 Appendix C Personal case studies ZoË Young – A Micro-business Lending Proposition Your branch of Countryside Bank plc has held the account of Zoë Young ever since she started her studies at Anytown University Zoë graduated with a firstclass degree in photographic studies two years ago and then trained with a prestigious studio in London Zoë has always conducted her account satisfactorily, even while an undergraduate, and because of her generous parents, and her talent for taking and selling photographs to the media, she has never needed to borrow or take out a student loan While training in London, she continued to support herself from freelance earnings; several of her pictures have been used by national magazines and her fame is beginning to grow You have arranged an appointment with Zoë to discuss an expedition that she wishes to organize Her initial letter to you shows that she seeks to borrow £ 20,000 to cover equipment purchase and flights to Africa for herself and an assistant Once in Africa, Zoë will take wildlife photographs, marketing them around the world to journals, publishers and websites Required Before Zoë comes to the bank for an interview, reflect on the questions you will ask her to help you make a decision What key questions and considerations will you have in mind? Anton Varga – Consumer Debt collection After graduating from university, Anton Varga, a Slovak citizen, worked for an investment bank in London For five years, he rented a luxury apartment and leased a sports car Enjoying a high salary, Anton lived a luxury lifestyle, anticipating bonus payments and investment gains to pay off his credit cards He bought a collection of rare coins, paying almost £ 50,000 for them Unfortunately, the 2007–08 global financial crisis and subsequent credit crunch hit Anton hard Although he kept his job, it was at a reduced salary and the bonuses he anticipated were no longer paid Too proud to admit to his family 157 PERSONAL CASE STUDIES that his lifestyle had changed, Anton continued to maintain a luxury existence, always paying the minimum possible on multiple credit cards, and often missing loan repayments and lease instalments Anton has recently taken advantage of an opportunity to move to new accommodation and reduce some of his outgoings, but it has not been enough, and one of the credit card companies (still owed £ 15,000) obtained a county court judgment (CCJ) against him Since the CCJ is a matter of public record, Anton’s other creditors soon found out and began to pursue him Anton’s debts total £ 200,000 Required Outline the possible ways in which Anton (and his creditors) might bring an end to this unfortunate situation Personal case studies – Feedback Suggested answers are available from www.gosbrook.com/retailbanking4e or http://keithpond.co.uk/extras.html 158 Index Page references in roman numerals refer to glossary entries Those in italics refer to figures and tables ability, CAMPARI lending mnemonic 120, 155 Access card 110 administration 147, 148 adverse selection xi, 118–19 alternative providers xi, 72 American Express 109, 110, 111 amount, CAMPARI lending mnemonic 121–2, 155 arrangement fees 124, 125 asset and liability management (ALM) xi, 32, 74 asset management xi, 21 asset transformation/aggregation 24, 26 assets, retail banks xi, 32–5 ring-fencing of xvii, 19, 22, 64–5 risk-weighted assets xvii, 56–8 riskiness of 34–5 asymmetric information xi, xiv, 54, 118 Atom Bank 72 Australia 105–6, 108 automated payments 113–14 automated teller machines (ATMs) xi, 93, 95–7, 109 bad debt xi bank action 12, 25, 144–6 implications of bad debt recovery for retail banks 149 reasons for 140 risk management strategies 143–4 written off 9, 10, 117 see also debt recovery balance sheets, universal bank 31–2 assets 32–5 liabilities 35–7 bancassurance xi, 22 bank drafts 114 bank failures 54, 55 bank giro credits xiii, 114 Bank of England Conduct of Business (COB) regulation 61–2 forward guidance strategy 45, 48 FPC 61 MPC xvi, 42, 47–9 bank robberies 93–4 bank statement xi, 92 Banking Conduct of Business Sourcebook (BCOBS) 63–4, 78 banking contract 76–8 Banking Reform Act, 2013 64 banking security xvii advantages and disadvantages of taking 133–4 contract law and 134–5, 141 insurance, CAMPARI lending mnemonic 123, 129–30, 133, 155 key securities 135, 136 legal environment 132–3 MAST test 130–2, 138, 155 procedural steps in perfecting 138, 139 qualities of good security 129–33 valuing security 135–8 see also land, as security bankruptcy xi, 12, 51, 147, 148 Barclays Bank 110, 112 O’Brien v Barclays Bank plc [1993] 134, 135 bargaining power, buyers’ and suppliers’ 71 159 INDEX Basel I 37, 56–8 Basel II 58–60, 91 Basel III 60–1, 63, 91 Basel Accords xii, 7, 51, 55–61, 63 key ratios in 61 Basel Committee on Bank Supervision (BCBS) 6, 55, 60, 63 basic current account 76, 78 ‘Big Bang’ bills of exchange xii, 89 bonds xii, 21, 87, 88, 151 branch managers 12, 92–3, 95 branch networks xii, 39, 92–3, 94–5 commercial bank branches 94 divesting branches 8, 68 British Bankers Association (BBA) 69 broking xii, 85, 87 business borrowing, UK 51–2 business loans 82 business-to-business (B2B) trade debts 143 buyers’ bargaining power 71 call centres 14, 93, 97–8 CAMPARI (character, ability, means, purpose, amount, repayment and insurance) lending mnemonic 116, 119–23, 125–6, 127, 129–30 case studies 153, 155–6 capital definition 56 Tier and Tier 37, 56, 57, 60–1 capital adequacy xii, 34–5, 63 Basel I 56–8 Basel II 59–60, 91 debt recovery and 140, 143 capital ratio requirements 28, 29, 38, 39 card scheme xii, 70, 97, 109 see also plastic cards Carney, Mark 45 case studies Atom Bank 72 160 CAMPARI lending mnemonic 153, 155–6 contract law and bank securities 134 debt recovery 157–8 home mortgage interest rates 70 interchange fees for plastic cards 69 lending 151–7 Libor rigging 69 personal credit scoring 151, 152–3 UK banking contract 77–8 Ukraine currency 43 cash, as payment system 108 cash and balances at central banks, balance sheet 32, 35 central banks xii, 47–50, 55 Centre for Study of Financial Innovation (CSFI) 5–6 certificates of deposit (CDs) 36 character, CAMPARI lending mnemonic 119–20, 155 charges, ICE lending mnemonic 116, 124–5, 156 chattels 130, 131–2 cheques xii, 105–6, 108–9 Clearing House Automated Payment Systems (CHAPS) 114 collateral xii, 130, 132, 136 commercial banking xii, 19–20, 94 commission see fees and commissions company voluntary arrangement (CVA) 147, 148 competition 67 bargaining power of buyers and suppliers 71 and concentration 7, 18, 25, 58, 68–70 new entrants 72 from non-banking institutions 14 payment systems and 114–15 Porter’s ‘five forces’ model 70–1 regulation and 68–9 retail bank strategies 73–4 in retail banking environment 67 INDEX rivalry among existing competitors 73 scope of 70–3 computerization 13–14, 92 conditional purchase xii, 81 Conduct of Business (COB) regulation 61–5 Consumer Price Index (CPI) xii, 47–8 consumer protection 76–8 contactless technology 110 contract law and bank securities 134–5, 141 corporate social responsibility (CSR) 12 cost-income ratios 39 cost–income ratios 135 Countryside Bank plc capital adequacy 56–7, 59–60 liquidity 40 ring-fencing of retail banks 64–5 risk-weighted assets 57 universal bank 19 Zoë Young case study 157 county court judgments (CCJs) 127, 128, 158 credit accounts 81–4 debt recovery see debt recovery credit appraisal 116–17 lending life cycle 117–18 personal credit scoring 126–8, 151, 152–3 principles of lending 118–25 weaknesses of lending formulae 125–6 credit cards xii, 51, 81, 82, 110–12 credit creation 22, 27–30 key issues in 50–2 credit crunch xii Anton Varga case study 157–8 credit card debt and 112 deposit protection schemes and 55 impact of 3, 10, 12 intermediation 23 loss of trust 26–7 mortgage market and 51, 83 property prices and 137 regulation arising from 8, 55 credit reference agencies (CRAs) 101–2, 126, 128 credit transfers xiii, 105, 106 cross-selling 14, 22, 39, 85, 125 customer accounts, balance sheet entry 36 customer spending habits 13 data protection 14 dated and undated loan capital, balance sheet 37 debit cards xiii, 109–10 debt collectors 144 debt recovery Anton Varga case study 157–8 bank action 12, 25, 144–6 causes of non-repayment of loans 140, 142–3 decision tree for debt collection 146 implications of bad debt recovery for retail banks 149 insolvency xiv, 141–2, 147–8, 149 key concepts 141–2 legal environment 146–7 risk mitigation strategies 143–4 see also bad debt debt securities, balance sheet 33, 35 debt securities in issue, balance sheet 36 delivery systems 93–9 demographic changes 11–12 deposit protection schemes xiii, 55, 87–8 deposits by banks, balance sheet 36 deregulation xiii, 8, 58 derivatives xiii, 7, 21, 41, 87 Diners’ Club 110, 111 direct banking xiii, 98, 99, 114 direct debits xiii, 113–14 disintermediation xiii, 25–6, 124 DIVAN considerations, UK land as security 138, 139, 149 161 INDEX Dong Ching Thian Christine, case study 151, 152–3 due diligence 143, 144, 154 economic drivers of retail banking 9–10 economies of scope 25, 39, 85 electronic payment systems 14 environmental audits 12 equity xiii, 28, 35, 37 equity shares, balance sheet 34, 35 European Central Bank (ECB) 42, 48, 50 European Union financial regulation in 2, 6, freedom of movement 11 systematic regulation in 54–5 exchange controls exchange rates xiii, 89–90 exotic securities xiii, 5, 21 extras, ICE lending mnemonic 125 factoring 89, 143 fees and commissions 38, 39, 85, 111 ICE lending mnemonic 124–5, 156 interchange fees for plastic cards xiv, 69, 111 finance company xiii, 130, 147 Financial Conduct Authority (FCA) 7, 61, 63–4 Financial Ombudsman Service (FOS) xiv, 64 Financial Policy Committee (FPC) 61 Financial Services and Markets Act 2000 (FSMA 2000) 64 Financial Services Authority (FSA) 61 First Direct 93, 97, 98 fixed charge 135, 136 fixed interest rate xiv, 84, 125 floating charge xiv, 130, 132, 136, 137, 138 foreign exchange products 90 forward xiv, 90 freehold xiv, 121, 123, 131, 154 futures xiv, 7, 21, 41 162 geographical location, intermediation and 25, 26 Glass–Steagall Act, 1933 20 global financial crisis 2007-08 credit card debt and 112 impact of 3, 10 loss of trust 26 losses arising from 117 market concentration following 68 mortgage market and 83 Northern Rock 10, 20, 33 property prices and 137 quantitative easing 50 regulation arising from 2, 7, 54, 55, 61, 64, 87–8 securitized loans 33, 57–8, 83 goldsmiths 27–8 ‘gone concern’ valuations 137 Great Depression 20 guarantees xiv, 130, 132, 136, 138 hire purchase xii, 121 home mortgage loans xiv, 51, 69, 70, 81, 82–4, 122–3 around the world 83 sub-prime mortgages xviii, 33, 52, 64 housing market, UK 47, 51, 83 HSBC 9, 17, 59, 73, 93, 98 hyperinflation 46–7 ICE (interest, charges and extras) lending mnemonic 116, 124–5, 126, 156 identity theft insurance 27, 87 immigration 11 income multiples, home mortgage loans 83 Independent Commission on Banking (ICB) 64 independent legal advice (ILA) xiv, 134, 138 individual voluntary arrangement (IVA) 147, 148 inflation 46–7 INDEX information asset value of customer information 101 customer spending habits 13 statutory disclosures of 15 information asymmetry xi, xiv, 54, 118 insolvency xiv, 141–2, 147, 148, 149 insurance products 22, 85–7, 125 insurance (security), CAMPARI lending mnemonic 123, 129–30, 155 intangible fixed assets – goodwill, balance sheet 34, 35 intensive care xiv, 145 interchange fees for plastic cards xiv, 69, 111 interest, ICE lending mnemonic 124, 156 interest rates description 84 fixed interest rate xiv, 84, 125 home mortgage loans 70 MPC and xvi, 47–9 sample rates 124 types 84 variable interest rate xvi, 38, 41, 49, 51, 84 interest spread xviii, 38, 39, 76, 84 interests in joint ventures and associated undertakings, balance sheet 34, 35 intermediation benefits of 24–5 description xiv, 22, 23–4, 101 disintermediation xiii, 25–6, 124 lenders and borrowers 23 trust and 26–7 internal ratings-based approach to regulation xiv, 59 international trade products 88–9 internet banking xv, 4, 13–14, 98–9 investment banking xv, 20–1 investment products 87–8 invoice discounting 89, 143 Islamic finance xv, 11–12 items in the course of collection, balance sheet 33, 35, 36 land, as security xv, 130–1, 136, 137 DIVAN mnemonic 138, 139, 149 real estate ownership in various countries 131 leasehold xv, 131 leasing xv, 81, 82, 132, 143 legacy systems 92–3, 99 mid-20th century 93 legal drivers of retail banking 6–8 legal environment banking security 132–3 debt recovery 146–7 legal risk 63, 118 legal systems, around the world 133 legislation banks affected by 6–8 sources of 6–7 see also regulation Lehman Brothers 33 lender of last resort (LOLR) 48, 55 lending case studies 151–7 common mnemonics 119 life cycle 117–18 personal credit scoring 126–8, 151, 152–3 principles of 118–25 weaknesses of lending formulae 125–6 Lending Code 64, 78 lending margins 137, 153 letters of credit xv, 89 liabilities, retail banks xv, 35–7 LIBOR see London inter-bank offered rate life assurance xv, 79, 80, 87, 125, 136, 143 liquid store of value, money as 44 liquidation xv, 137, 147, 148, 149 liquidity xv adequacy 59, 60 management of 40–1 163 INDEX liquidity cont ratio 28, 29 risk 40 spectrum 44 Lloyds Banking Group divesting branches 8, 68 systematic regulation 54 loan-to-value (LTV) ratios xvi, 47, 83, 122–3, 137 loans see credit accounts loans and advances to banks, balance sheet 33, 35 loans and advances to customers, balance sheet 33, 35 London inter-bank offered rate (LIBOR) xv, 20 rigging of 27, 69 London Stock Exchange (LSE) MARG framework 24, 26 market concentration 7, 18, 25, 58, 68–70 market risk 63, 118 marketing strategies 73–4 MAST (marketability,ascertainability of value, simplicity of title and transferability of title) 130–2, 138, 155 MasterCard x, 69, 97, 109, 110, 111 maturity transformation 24, 26 means, CAMPARI lending mnemonic 121, 155 medium of exchange, money as 43 merchant banks xvi, 20 Midland Bank 93, 95, 110 minority interests, balance sheet 37 mis-selling crises 27, 87, 143 mobile phone banking xvi, 99, 109 mobile phone payments 112, 113 Monetary Authority of Singapore (MAS) 7, 42, 61–2 monetary policy 42, 49, 51 Monetary Policy Committee (MPC) xvi, 42, 47–9 164 money aggregates 45–6 definitions 42–5 laundering xvi, 27 supply of xvi, 45–6, 79 moral hazard xvi, 118–19, 133, 134 Mozambique 105–6 negative equity 39 Northern Rock 10, 20, 33, 55 O’Brien v Barclays Bank plc [1993] 134, 135 oligopoly xvi, 7, 8, 68–9, 70 ombudsman xvi, 63, 64 online banking see internet banking operational risk 63, 91 option xvi, 90 Organisation for Economic Cooperation and Development (OECD) 56, 68, 149 other assets, balance sheet 34, 35 other liabilities, balance sheet 37 ‘other people’s money’ 13 outsourcing xvi, 14, 95, 101–2 overdrafts xvi, 81, 82 Overend Gurney and Co 20 PARSERS (person, amount, repayment, security, expediency, remuneration and services) 126 payday loans xvi, 99, 144 payment protection insurance (PPI) xvi, 27, 87, 143 payments and payment systems 104 competition and cooperation in 114–15 environment 105 key domestic systems 107–14 national preferences 106 other domestic mechanisms 114 quality of retail systems 106–7 theory of 104–6 peer-to-peer (P2P) lending xvii, 25–6, 72, 144 INDEX pensions crisis 2, 11 personal credit scoring xiii, 126–8 probabilities 128 Riverside Bank Pte Ltd case study 151, 152–3 personal loans xvii, 81, 121, 122 personal pensions 79–80 PEST (political, economic, social and technological) analysis PESTLE (political, economic, social, technological, lending and ethical/environmental) analysis phone banking 4, 93, 97–8, 99 plastic cards credit cards x, 51, 81, 82, 110–12 debit cards xi, 109–10 interchange fees for xiv, 69, 111 political and legal drivers of retail banking 6–8 Porter’s ‘five forces’ model of competition 70, 71 private banks xvii, 21 profitability, retail banks 27, 37–9, 85 property prices global index 137 UK housing market 47, 51, 83 proprietary trading 21 prudential regulation 55–61, 91 Prudential Regulation Authority (PRA) 61 purpose, CAMPARI lending mnemonic 121, 155 quantitative easing (QE) xvii, 50 real estate ownership in various countries 131 recessions 9–10 regulation competition and 68–9 Conduct of Business (COB) regulation 61–5 deregulation xiii, 8, 58 description xvii evolution of UK banking law 77 ‘free banking’ and 54 global financial crisis and 2, 7, 54, 55, 61, 64, 87–8 growth of need for 53–4 prudential 55–61, 91 reasons for 7–8 risk-based approach to 62–4 sources of 6–7 systematic 54–5 repayment, CAMPARI lending mnemonic 122–3, 155 repo rate xvii, 48, 51 repossession xvii, 149 reputational risk 63, 87, 121, 134, 149 reserve asset ratio (RAR) 32, 57 reserves, balance sheet 37 retail banking channels 91 balanced channel portfolio 100 banking operations, 21st century 100–2 channel preferences 100 delivery systems 93–9 legacy systems 92–3, 99 retail banking environment 2–4 competition in 67 economic drivers 9–10 political and legal drivers 6–8 social drivers 10–12 technological drivers 13–14, 67 retail banking products banking contract and 76–8 credit accounts 81–4 interest-based financial services and products 4, 76, 78–84 non-interest-based financial services and products 4, 39, 76, 85–91 savings accounts 78–80 retail banks balance sheets 32–7 banking contract 76–8 banking risks 5–6, 62–4 business resources 3–4 165 INDEX retail banks cont consolidation and mergers 7, 18, 25, 58, 68–70 credit creation 22, 27–30, 50–2 definitions diversification divesting branches intermediation 22, 23–7, 101 liquidity management 40–1 market share 68 marketing strategies 73–4 new entrants 72 profitability 27, 37–9, 85 regulation see regulation ring-fencing of retail banking assets xvii, 19, 22, 64–5 types of banking 18–22 retail life fund assets attributable to policyholders, balance sheet 34, 37 return on equity (ROE) 38, 100 Revised Capital Framework (Basel II) 58–60, 91 Rhyl Pier Ltd., case study 154–6 ring-fencing of retail banking assets xvii, 19, 22, 64–5 risk banking risks 5–6, 62–4 Basel Accords 55–61, 91 delivery systems 93–4 exchange rate risk management 89–90 insurance and 86, 87 investment products 87, 88 managing in ‘virtual’ banking 102 market 63, 118 personal credit scoring 126–7 reputational 63, 87, 121, 134, 149 riskiness of banking assets 34–5 types of 62–3 risk transformation, intermediation and 25, 26 risk-weighted assets (RWAs) xvii, 56–8 166 Riverside Bank Pte Ltd credit creation 28–9 personal credit scoring 151, 152–3 Royal Bank of Scotland (RBS) Group divesting branches 8, 68 systematic regulation 54 Royal Bank of Scotland v Etridge (No 2) [2001] 134, 135 ‘run on the bank’ 10, 20 Sarbanes–Oxley Act 2002 7–8 saver’s life cycle 80 savings accounts reasons for saving 79–80 types of 78–9 secrecy, customers’ rights to 14–15 securitized loans 33, 41, 57–8, 83 security ATMs 96 bank robberies 93–4 internet banking 13–14 payment systems 108, 109, 111, 114 see also banking security settlement xvii, 13, 20 share capital (called-up), balance sheet 37 Singapore bank branches 95 card fees 111 home mortgage loans 83 interest rates 124 lending case study 151, 152–3 regulation in xviii, 7, 42, 61–2 social drivers of retail banking 10–12 special-purpose vehicles (SPVs) xvii, 57 spot xvii, 90 stakeholders 12, 73 standard of deferred payment, money as 44–5 standing orders 113–14 state pension 11, 79 stocks and shares 44, 136 sub-prime mortgages xviii, 33, 52, 64 INDEX suppliers’ bargaining power 71 swaps xviii, 21, 27 systematic regulation 54–5 tangible fixed assets 34, 35 technological drivers of retail banking 13–14, 67 term, loan repayment 122–3 TESCO (time, expense, security, convenience and other attributes) mnemonic 107 total debt servicing requirement (TDSR), Singapore xviii, 83 tracker interest rate xviii, 84 trade finance xviii, 20 trading securities 21 treasury bills and other eligible bills, balance sheet 33, 35 trust global loss of, in financial institutions 12 intermediation, affecting 26–7 Ukraine, currency supply 43 underwriting 21 unit of account, money as 44 United Kingdom banking contract 77–8 card fees 111 cheques in 105, 108–9 housing market 47, 51, 83 legal systems in 132–3 universal banks xviii, 18–19, 31–2, 59, 85 valuations, banking security 135–8 value loop 4–5 Varga, Anton, debt recovery case study 157–8 variable interest rate xvi, 38, 41, 49, 51, 84 Vickers, Sir John 64 ‘virtual’ banking xvi, 101, 102 Visa x, 69, 97, 109, 110, 111 Wall Street crash, 1929 20 wholesale banking 19, 20 World Bank 104, 148–9 Young, Zoë, lending case study 157 ‘zombie companies’ xvi, 10 167 this fourth edition of Retail Banking is a comprehensive, upto-date introduction to the basic principles of banking in the context of a challenging global economy and the continuing recovery from the global financial crisis, good banking and the capacity of retail banks to anticipate and react to economic, environmental, political, social and technological pressures are more relevant than ever aimed at bank staff and students, the text is packed with international examples and case studies and covers all aspects of banking in the modern financial services industry it clearly explains the regulatory, social, technological and practical environment in which retail banks operate topics covered include: ‘…This text returns to the basics and plots a clear pathway… a worthwhile and enjoyable read – it will be on my students’ Essential Reading list.’ Wendy Chowne, Senior Lecturer, The London Institute of Banking & Finance • banking risks and regulation • payment methods, fund transfers, collecting and paying banks • principles of the banker–customer relationship • the balance between liquidity and profitability • principles of lending and key credit risk tools the text is complemented by online support material and a tutor resource containing dozens of practice tasks for students keith Pond phd fcib sfhea is associate Dean (teaching) at loughborough University School of Business and economics an innovative teacher, and passionate about sharing his experience and knowledge, keith has built on his foundations in banking with Midland Bank and lectures in banking at loughborough and Birmingham Universities, and at the london institute of Banking and Finance G Gosbrook Banking/Finance iSBn 978 912184 03 www.gosbrook.com ... banks work? 31 Retail banks and the economy 42 Retail banking regulation 53 Competition in retail banking 67 PArt II INSIDE THE RETAIL BANK 75 Retail banking products 76 Retail banking... the fourth edition viii Acronyms and abbreviations ix Glossary xi Part I THE RETAIL BANKING ENVIRONMENT 1 The retail banking environment 2 What is retail banking? 17 How retail banks... trends in retail banking, and explain what this book is all about Introduction This opening chapter describes the environment within which retail banks operate It starts by outlining what a retail