The Moorad Choudhry Anthology, + Website

CHAPTER 1A Primer on Banking, Finance and Financial Instruments

“People still crave explanations even when there is no underlying understanding about what's going on…erratic stock market movements always find a ready explanation in the next day's financial columns: a price rise is attributed to sentiment that ‘pessimism about interest rate increases was exaggerated,’ or to the view that ‘company X had been oversold.’ Of course these explanations are always a posteriori: commentators could offer an equally ready explanation if a stock price had moved the other way.”

—Professor Martin Rees, Our Cosmic Habitat, Phoenix 2003, page 101

This chapter is reference material for newcomers to the market, junior bankers and finance students, or for those that require a refresher course on the core subject matter. The purpose of this primer is to introduce all the essential basics of banking, which is necessary if one is to gain a strategic overview of what banks do, what risk exposures they face and how to manage them properly. We begin with the concept of banking, and follow this with a description of bank cash flows, calculation of return, the risks faced in banking, and organisation and strategy.

Banking is a subset of “finance”. The principles of finance underlay the principles of banking. It would be difficult to become conversant with the principles of banking, and thus be in a position to manage a bank efficiently and effectively to the benefit of all stakeholders, unless one ...