Guide to the Banking Sector on the Stock Market
Banking - Backbone of the Economy
While the definition of a bank may vary from country to country, it is generally defined as a financial institution engaged in banking activities, including accepting deposits, honoring checks drawn against clients' funds, and offering investment funds and loans (which are channeled from the deposits accepted). Moving with the times and technology, the traditional method of payment by check has largely been replaced by electronic funds transfer (EFT) via auto-teller machines, telephone banking or the internet.
Commercial services offered by banks goes way beyond traditional banking services however, with most major banks offering an extensive range of services including lending of money by means of an installment loan or overdraft on a current account to mention just two borrowing options; providing a currency exchange service; providing off-balance sheet exposures such as letters of credit and performance bonds; safety deposit boxes; and acting as a platform for the brokerage, distribution and sale of unit trusts, insurance and other financial products.
It is said that the first victims of an economic depression are the banks, and this has proved true on more than one occasion with the economic turmoil of 2008/2009 being a prime example. In turn, stock market sentiment is deeply affected by poor financial performance of banks, and even more so if a bank should fail – hence the widespread government aid to prop up, or bailout, financial institutions during this global economic crisis. The fact is that modern society cannot function without the services offered by the banking sector. The Basel Accords were set up primarily to prevent banks from failing, however, it is not possible to enforce compliance with this list of recommendations on banking laws and regulations as set out by the Basel Committee on Banking Supervision. Many are of the opinion that if it had been enforced, much of the recent high drama in the banking sector would have been avoided.