Key Activities of Banks
Christine Copland
12166346
137.710 The Theory and Management of Banking Assignment 1
The first recorded history of banking type arrangements came from Mediterranean Europe approx 300 BC. Temples kept the valuables and gold (main medium of exchange) of people as temples were less likely to be invaded and plundered by thieves. This then evolved into lending this wealth out to people who were needed money for consumption of business purposes. This evolved in the 17/18 centuries to transaction type services to facilitate trade payments. Reserve or central banks emerged in the 20 th century to control the supply of money in a country and this enabled rapid expansion of trade due to expansion of the money supply. During the latter part of the 20th century, rapid improvements in technology and communication has dramatically changed banking operations and enabled them to cross borders, grow large in size and become even more crucial in an economy. Banking today is widespread and an important part of the exchange of good, services and wealth in most economies.
However the key activities of banks have changed very little during history. They act as financial intermediaries: “acting as a repository for the savings of those who have surplus funds and as a source of funds for those who want to borrow” (New Zealand Bankers ' Association, 2006). This is a very simple explanation but does not adequately explain reasons why individuals would not just do this without the help of an intermediary, like a bank. I will be using Fama’s theory and his 1980 article ‘Banking in the Theory of Finance’ to expand on these reasons. Fama theorises that banks perform two main functions: a portfolio management and a transaction function.
Portfolio Function Brigham & Ehrhardt describes a portfolio as “a group of individual assets held in combination. An asset that would be relatively risky if held in isolation may have little, or even no, risk if held in a well-diversified portfolio
12166346
137.710 The Theory and Management of Banking Assignment 1
The first recorded history of banking type arrangements came from Mediterranean Europe approx 300 BC. Temples kept the valuables and gold (main medium of exchange) of people as temples were less likely to be invaded and plundered by thieves. This then evolved into lending this wealth out to people who were needed money for consumption of business purposes. This evolved in the 17/18 centuries to transaction type services to facilitate trade payments. Reserve or central banks emerged in the 20 th century to control the supply of money in a country and this enabled rapid expansion of trade due to expansion of the money supply. During the latter part of the 20th century, rapid improvements in technology and communication has dramatically changed banking operations and enabled them to cross borders, grow large in size and become even more crucial in an economy. Banking today is widespread and an important part of the exchange of good, services and wealth in most economies.
However the key activities of banks have changed very little during history. They act as financial intermediaries: “acting as a repository for the savings of those who have surplus funds and as a source of funds for those who want to borrow” (New Zealand Bankers ' Association, 2006). This is a very simple explanation but does not adequately explain reasons why individuals would not just do this without the help of an intermediary, like a bank. I will be using Fama’s theory and his 1980 article ‘Banking in the Theory of Finance’ to expand on these reasons. Fama theorises that banks perform two main functions: a portfolio management and a transaction function.
Portfolio Function Brigham & Ehrhardt describes a portfolio as “a group of individual assets held in combination. An asset that would be relatively risky if held in isolation may have little, or even no, risk if held in a well-diversified portfolio
References: New Zealand Bankers ' Association. (2006). Banking in New Zealand. Wellington: New Zealand Bankers ' Association. Fama, E. F. (1980). Banking in the Theory of Finance. North-Holland Publishing Company. Retrieved from http://www.bu.edu/econ/files/2012/01/Fama1-Banking-in-the-theory-of-finance1.pdf Australia and New Zealand Banking Group Limited. (2012). Annual Report. Retrieved from http://media.corporate-ir.net/media_files/IROL/96/96910/2012AnnualReport.pdf Bhattacharya, S. (1993). Contemporary Banking Theory. Journal of Financial Intermediation 3, 2-50. Retrieved from http://apps.olin.wustl.edu/workingpapers/pdf/2006-06-005.pdf Brgham, E. F. (2008). Financial Management: Theory and Practice 12. Manson, OH: South-West Cengage Learning. Fama, E. F. (1980). Banking in the Theory of Finance. North-Holland Publishing Company. Retrieved from http://www.bu.edu/econ/files/2012/01/Fama1-Banking-in-the-theory-of-finance1.pdf Hoggson, N. F. (1926). Banking Through the Ages. New York: Dodd, Mead & Company. Retrieved from http://ia700603.us.archive.org/9/items/bankingthroughag00hogg/bankingthroughag00hogg .pdf Houston Chronicle. (2013, April 14). Chron. Retrieved from http://smallbusiness.chron.com/rolecommercial-banks-international-business-733.html Levine, R. (June 1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 720. Retrieved from http://web.ebscohost.com.ezproxy.massey.ac.nz/ehost/pdfviewer/pdfviewer?vid=2&sid=7b d931e4-ce58-4d76-a180-29b1c95e44ef%40sessionmgr11&hid=14 New Zealand Bankers ' Association. (2006). Banking in New Zealand. Wellington: New Zealand Bankers ' Association. Payments NZ. (2013, April 13). Retrieved from http://www.paymentsnz.co.nz/home Reserve Bank of New Zealand. (2013, April 14). Retrieved from http://www.rbnz.govt.nz/statistics/banksys/index.html Sinkey, J. F. (1992). Banking and finance theory and models of the banking firm. In J. F. Sinkey, Commercial bank finance management (4th edition) (p. 92). Hoggson, N. F. (1926). Banking Through the Ages. New York: Dodd, Mead & Company. Retrieved from http://ia700603.us.archive.org/9/items/bankingthroughag00hogg/bankingthroughag00hogg .pdf 7 Christine Copland 12166346 Bhattacharya, S. (1993). Contemporary Banking Theory. Journal of Financial Intermediation 3, 2-50. Retrieved from http://apps.olin.wustl.edu/workingpapers/pdf/2006-06-005.pdf Payments NZ. (2013, April 13). Retrieved from http://www.paymentsnz.co.nz/home 8