Topic H: Money and Banking
Banks: Functions and Services
Hey everyone! Ever wondered what a bank *really* does with your money after you deposit it? Or why your parents might go to HSBC, but a big corporation might use a different kind of financial institution? This chapter is all about answering those questions!
We'll explore the super important roles that banks play in our economy, from your everyday Octopus top-up to the "big boss" that manages the entire financial system in Hong Kong. Understanding banks is a key part of economics because they are at the heart of how money moves around. Let's dive in!
What are Banks and Why Do They Matter?
At its simplest, a bank is a financial intermediary. That's a fancy term for a 'middleman' for money. Banks connect people who have extra money (savers) with people who need to borrow money (borrowers).
The Core Function: Financial Intermediation
Think of a bank like a bridge for money.
- On one side of the bridge are savers (like you, putting your lai see money into a savings account).
- On the other side are borrowers (like a family wanting to buy a flat, or an entrepreneur starting a new bubble tea shop).
Quick Review: The Main Job of a Bank
Savers deposit money ---> Bank (Intermediary) ---> Borrowers receive loans for investment/consumption.
This flow is called channeling savings to investment.
Commercial Banks: The Banks We Use Every Day
When you think of a "bank," you're probably thinking of a commercial bank. These are the profit-making businesses that provide banking services to the general public and firms.
Examples in Hong Kong: HSBC, Hang Seng Bank, Bank of China (Hong Kong), Standard Chartered Bank.
Main Functions of Commercial Banks
Commercial banks have two primary functions that are like two sides of the same coin:
1. Accepting Deposits: This is when you give the bank your money to keep it safe. In return, the bank usually pays you a small amount of interest. There are different kinds of deposit accounts, like savings accounts and time deposits (fixed deposits).
2. Making Loans: This is the bank's main way of making a profit. They lend out the money that depositors have put in. They charge borrowers a higher interest rate than the rate they pay to depositors. The difference is their income!
Services Provided by Commercial Banks
Besides their main functions, commercial banks offer a huge range of other helpful services:
- Payment Services: Helping you pay for things easily through credit cards, debit cards, cheques, and money transfers like the Faster Payment System (FPS).
- Foreign Currency Exchange: Letting you change your Hong Kong Dollars into other currencies for travel or business.
- Safe Deposit Boxes: Providing a secure place to store your valuables.
- Wealth Management: Offering investment advice and services.
Key Takeaway: Commercial Banks
Commercial banks are businesses that serve the public. Their main job is to accept deposits from savers and make loans to borrowers. They also provide many other financial services that make our daily lives easier.
The Central Bank: The Big Boss of Banking
A central bank is a very special kind of bank. It's the institution that manages a country's currency, money supply, and banking system. Think of it as the government's bank and the "bank for banks." You and I cannot open an account there!
Key Functions of a Central Bank
Central banks have several massive responsibilities. Here are the main ones:
1. Banker to the Government: The central bank manages the government's bank accounts, receives government revenues (like taxes), and makes payments for the government.
2. Banker to Commercial Banks: Commercial banks hold accounts at the central bank. The central bank also acts as a lender of last resort, meaning it can lend money to commercial banks if they are in trouble and cannot get funds from anywhere else. This prevents financial crises.
3. Issuing Currency: The central bank is usually the only institution with the authority to print and issue a country's legal banknotes and coins.
4. Controlling the Banking System: It supervises and regulates commercial banks to ensure they are operating safely and soundly. It also implements monetary policy to control the money supply and keep the economy stable.
Did you know?
Different countries have different names for their central bank. In the USA, it's the "Federal Reserve" (The Fed). In the UK, it's the "Bank of England". In China, it's the "People's Bank of China".
Common Mistake to Avoid!
A common mistake is thinking the central bank serves the public. Remember, the central bank's customers are the government and the commercial banks, NOT individuals or regular businesses.
Banking in Hong Kong: A Unique Structure
Hong Kong's system is special! We don't have a single institution called a "central bank". Instead, the central banking functions are performed by the Hong Kong Monetary Authority (HKMA) and a few selected commercial banks.
How Central Banking Functions are Done in HK
- The HKMA acts as our main financial regulator. It manages our massive foreign currency reserves, supervises the banking sector, and works to maintain the stability of our currency. It performs most of the functions of a central bank.
- Note-Issuing: Uniquely, Hong Kong's banknotes are not issued by the HKMA. They are issued by three commercial banks: The Hongkong and Shanghai Banking Corporation Limited (HSBC), Standard Chartered Bank (Hong Kong) Limited, and Bank of China (Hong Kong) Limited.
Hong Kong's Three-Tier Banking System
In Hong Kong, institutions that can accept deposits from the public are classified into a three-tier system. It's important to know the difference!
1. Licensed Banks (持牌銀行)
- These are what we normally call "banks".
- They can accept deposits of any amount and for any time period.
- They are the only ones that can operate current and savings accounts.
- Examples: HSBC, Hang Seng Bank, Citibank.
2. Restricted Licence Banks (有限制牌照銀行)
- Mainly engage in merchant banking and capital market activities.
- They can only accept large time deposits of HK$500,000 or more.
- There is no restriction on the time period (maturity) of the deposit.
3. Deposit-taking Companies (接受存款公司)
- These are often owned by or associated with licensed banks and focus on consumer finance.
- They can accept deposits of HK$100,000 or more.
- The deposits must be for a fixed period of at least 3 months.
Memory Aid: Comparing the Three Tiers
Here’s a simple way to remember the key features:
Licensed Banks:
- Min. Deposit: $0
- Min. Period: None
Restricted Licence Banks:
- Min. Deposit: $500,000
- Min. Period: None
Deposit-taking Companies:
- Min. Deposit: $100,000
- Min. Period: 3 months
Key Takeaway: Hong Kong Banking
Hong Kong has a unique system where the HKMA performs most central banking functions. The public gets banking services through a three-tier system of Licensed Banks, Restricted Licence Banks, and Deposit-taking Companies, each with different rules about the deposits they can accept.