Table Of ContentKeith 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 1 912184 00 2 (paperback)
ISBN 978 1 912184 01 9 (hardback)
ISBN 978 1 912184 02 6 (ePub)
ISBN 978 1 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
1 the retail banking environment 2
2 What is retail banking? 17
3 How do retail banks work? 31
4 Retail banks and the economy 42
5 Retail banking regulation 53
6 Competition in retail banking 67
Part II INSIDE tHE rEtaIL BaNK 75
7 Retail banking products 76
8 Retail banking channels 91
9 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 3
1.2 Retail banking at work 5
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 techno-
logical pressures will guarantee further changes in the decades to come. This edi-
tion 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 do. 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 par-
ticular 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 responsi-
bility 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
3 Cs character, capability, capital FOS Financial Ombudsman Service
4 Cs 3 Cs plus connection (UK)
atM automated teller machine FPC Financial Policy Committee
B2B business-to-business (Bank of England)
Basel I 1988 Basel Accord FSa Financial Services Authority
Basel II 2004 Basel Accord (Revised (UK, defunct)
Capital Framework) FSMa 2000 Financial Services and
Basel III 2010–11 Basel Accord Markets Act 2000 (UK)
BBa British Bankers’ Association G10 Group of 10 industrialized
BCBS Basel Committee on Bank nations
Supervision HP hire purchase
BCOBS Banking Conduct of Business IaSs International Accounting
Sourcebook (UK) Standards
CaMParI character, ability, means, ICB Independent Commission on
purpose, amount, repayment and Banking (Vickers Committee, UK)
insurance ICE Intercontinental Exchange;
CCJ county court judgment interest, charges and extras (usually
CD certificate of deposit added to CAMPARI)
CHaPS Clearing House Automated ILa independent legal advice
Payments System IPartS integrity, purpose, amount,
COB conduct of business repayment, terms and security
CPI Consumer Price Index ISa individual savings account
Cra credit reference agency IVa individual voluntary
CrIS character, repayment, incentive arrangement
and security JCCC Joint Credit Card Company
CSFI Centre for Study of Financial (later known as Access)
Innovation Libor London inter-bank offered rate
CSr corporate social responsibility LOLr lender of last resort
CVa company voluntary LSE London Stock Exchange
arrangement LtV loan-to-value
DIVaN deposit, investigation, M&a mergers and acquisitions
valuation, authorization and MarG maturity transformation, asset
notification transformation (or aggregation), risk
ECB European Central Bank (Euro transformation and geographical
area) location
EPOS electronic point of sale MaS Monetary Authority of
Euribor Euro inter-bank offered rate Singapore
FCa Financial Conduct Authority
(UK)
ix
