Ever wondered what it is banks actually do? here it is explained, in a simple and understandable way. Comments welcome

1. The Banking business is segmented by its customers Ordinary people Wealthy people Small businesses Large Companies, Corporations Governments Retail Banking Commercial Banking Investment Banking Wholesale Banking Wealth is a question of definition Private Banking © 2002 Elka Sloan Disney characters by Disney

2. Most customers require the same kinds of banking services, albeit in different degrees of complexity Payment processing Securities processing Account management Financing/ Credits Securities Trading, Brokerage Book Running - Equities - Bonds Transaction Banking Securities/ Capital Markets Customers pay interest Asset Management Customers pay a commission Customers pay a commission Customers pay fees Advisory Services M&A Customers pay a commission Banks make the most profit with services that are paid for by commission i.e. the fee is a percentage of the deal’s value © 2002 Elka Sloan

3. Transaction Banking is strongly technology-driven banks have to interact very closely with one another and with I/T providers In payment processing banks act as intermediaries between their customers and their creditors/debtors and their banks In account management, a bank acts as a virtual strongbox for each individual customer In securities processing banks act as intermediaries between their customers and the capital markets (exchanges) Transaction Banking is a service required by all customer segments Economies of scale are very important here © 2002 Elka Sloan

4. Asset Management requires know- how from all banking sectors This is a service rendered to all customer segments Ordinary people / Small businesses - Savings / Reserves - Consumer / Investment financing - Residential mortgages - Retirement plans Standardized products are used wherever possible in order to realize economies of scale; only large clients will receive customized solutions Wealthy people - Investment strategy - Portfolio Management - Tax planning - Estate planning Large Companies/Corporations, Governments - Financing strategy - Reserves Management - Investment management © 2002 Elka Sloan

5. Financing by credit or loan is also done for all customer segments When issuing a loan banks have to check their customers’ creditworthiness very carefully in order to minimize their risk Over the last 10 years Risk Management has become one of the most important functions in banking In order to avoid bankcrashes and their consequences, banks in industrialized countries are subject to very tight government regulation In the age of globalization government regulators cooperate very closely - their set of common rules for credit risk management is known as “Basel II” © 2002 Elka Sloan

6. Risk Management is also very important in securities trading and other capital markets transactions: Exchange trading At an exchange banks act on behalf of their clients as well as on their own (proprietary trading) The higher the risk, the higher the yield or loss Trading is done with: - Stocks - Bonds - Commodities - Energy - Foreign exchange (Forex, FX) - Derivatives (Futures & Options) of all of the above © 2002 Elka Sloan

7. Securities have to be issued before they can be traded at exchanges: Book Running Usually a consortium of banks acts as book runners for new securities issues Fixed Income securities (bonds) are increasingly issued by unlisted companies; for the bank this means passing on this particular credit risk to the capital market Consortium members sell new issues to their preferred clients; the lead manager has the largest share to distribute The largest part of the book running business are bonds: - Government bonds (75%) - Corporate bonds (25%) © 2002 Elka Sloan

8. M&A In the case of listed companies, a tender offer is made to the share holders of a takeover target - the process is a public one from beginning to end In the case of unlisted companies M&A transactions often overlap with a bank’s regular commercial business For the financing of mergers and acquisitions all instruments of capital markets and of structured finance can be used © 2002 Elka Sloan