Money and Banking

This article focuses on the influences of money and banking on a global economy. There is an introduction of internet banking as well as a discussion of how the Basel Committee on Banking Supervision provides an avenue for the banking industry to address banking supervisory issues across the world.

Keywords Automated Teller Machines (ATMs); Bank of International Settlements; Basel Committee on Banking Supervision; Electronic Banking; Electronic Fund Transfers; Market Risk; Operational Risk; Personal Computer Banking

Finance > Money & Banking

Overview

Financial relationships and the manner in which consumers handle their money have changed over the years. "It has become commonplace to argue that the rapid growth in securities transactions during the 1980s, domestically and internationally, is evidence that financial relationships matter less than they used to" (Calomiris & Ramirez, 1996, p. 44). Consumers do not have a need to develop a personal relationship with their bankers. They are comfortable managing their finances via non-traditional media. Calomiris and Ramirez (1996) found evidence that many believe innovation (i.e. new technological breakthroughs such as the use of computers in banking) has led consumers to seek out new ways to find information to resolve issues and manage problems.

Technology has also allowed regulators to relax the restrictions on bank scale and scope. As a result, banks have been able to enter non-traditional banking practices such as security underwriting, derivative sales, mutual fund control, and venture capital financing (Calomiris & Ramirez, 1996). Kaufman and Mote's (1990) work explored how the expansion of banking powers has allowed the relaxation of regulatory policy, which has minimized the use of legislative action in order to get results. These types of actions have assisted the growth of a universal banking system.

Application

E-Banking

Technology has made it possible for financial institutions to offer electronic banking to their customers. In 2013, the IUP Journal of Bank Management reported that 50 percent of banking transactions were electronic-based, and that this share was increasing “at an incredible rate.” (Kaur, 2013) “Electronic banking, also known as electronic fund transfer (EFT), uses technology as a substitute for checks and other forms of paper transactions” (Fullenkamp & Nsouli, 2004, p. 94). Fullenkamp and Nsouli have defined it as "the use of electronic methods to deliver traditional banking services using any kind of payment media" (p. 7).

Benefits of Electronic Funds Transfer

Customers find the service beneficial for several reasons:

• Automated Teller Machines (ATMs) — ATMs are electronic terminals that allow consumers to have access to their funds at any time. Financial institutions will provide their customers with a card which allows them to withdraw money from these machines.
• Direct Deposit — Many employers have mandated that employees have their payroll directly deposited into a checking or savings account. Once the funds reach the bank, the bank processes the transactions so that their customers will have access to the funds on the morning of their pay date.
• Pay-by-Phone Systems — A benefit to consumers is when their banks allow them to pay their bills by calling in the transactions and transferring funds between accounts.
• Personal Computer Banking — Given the use of technology, many consumers will base their banking selection on whether or not they can perform transactions online using their personal computers.
• Point-of Sale Transfers — Consumers may use their ATM cards in many stores to purchase retail items. This process is similar to using a credit card, but the funds come out of a checking account.
• Electronic Check Conversions — There are times when a consumer may write a check at a merchant's business and the transaction will become an electronic payment at the point of sale (HSBC — North America Military Financial Education Center, n.d.).

Concerns: Ensuring Against Fraud

With the rise of electronic banking's popularity, financial institutions and consumers must be cautious and protect information that is considered private and privileged. "Financial institutions are clearly responsible for compromised data in their possession that results in fraud, and account holders have typically been held responsible for guarding against the theft of their banking information as well as any fraud perpetrated as a result of compromised credentials" (Tubin, 2005, p. 3). In order to avoid a compromised situation, financial institutions must develop techniques that will assist in authenticating online banking users.

In the past, many customers used a password to gain access to their accounts. This approach is considered to be an example of single factor authentication. Although allowing users to select an "easy to remember" password can be convenient, it does not assist in the fight against emerging fraud. Unfortunately, there have been many online scams where criminals have tricked customers into providing their user name and password. Many banks have moved toward the practice of creating authentic user names and alphanumeric passwords to minimize the effects of these scams. In addition, there has been secondary criteria added to the log in process. "Adding a second factor, something you have or something you are, as a requirement for authentication increases security well beyond the traditional single-factor approach because it requires the criminal to gain possession of both authentication factors somehow to commit fraud" (Tubin, 2005, p. 10). This approach is called two-factor authentication. This process uses some type of hardware authentication token and the secret password. If the password is compromised, the hardware token will not work. If the hardware token is lost, the password is useless.

The journal Credit Management cites a decline in the incidence of fraud losses which it attributes to the increasing use of new industry technology such as fraud detection software, chip cards, and other chip and Personal Identification Number (PIN) technology. Other reasons cited are increased customer awareness, decreased online banking, and increased use of preventive software. (Card, 2011)

Viewpoint

Basel Committee on Banking Supervision

The Bank of International Settlements is responsible for promoting monetary and financial stability. This organization meets on a bimonthly basis to discuss monetary and financial matters. The organization is composed of four major committees, and they are: The Basel Committee on Banking Supervision, The Committee on the Global Financial System, and The Markets Committee.

Banking Supervision: A Global Necessity

As mentioned in the overview, there has been an increase in the relaxing of regulations in order to promote global banking. With this type of action, a need for supervision of banks around the world is critical. The Basel Committee on Banking Supervision offers an avenue for the banking industry to discuss banking supervisory matters. The overall objective of this entity is to increase knowledge and comprehension of key supervisory problems and increase the efficiency and value of banking supervision across the globe. In order to achieve this objective, the organization seeks to exchange information on national supervisory problems, methods and procedure and advance the common agreement worldwide (Bank for International Settlements, n.d.). The Committee's Secretariat is situated near the Bank for International Settlements in Basel, Switzerland, and the staff includes professional administrators who come from member corporations.

Basel II and Basel III

Basel II, second of the Basel Accords, was introduced in response to the various financial crises of the 1990s. Adopted in 2006, Basel II quickly showed its limitations with the 2007 crisis that “strongly impacted the financial markets and the world economy generally.” Within Basel III, a number of requirements aim at strengthening the resilience of the financial system (Marius, 2013), to be applied to the accord’s three pillars: Minimum capital requirements, supervisory review and market discipline (Riskglossary.com). Basel III criteria entering into force between 2013 and 2018 constitute adjustments aimed to stabilize the world economy and long-term economic performance.

Based on the level of market risk allowed according to the 1996 Amendment, banks have choices when determining how they will evaluate their credit risk and market risk.

• Banks may select a standardized approach for their credit risk. Such a method acts as a foundation for a rating-based method or an advanced rating-based method.
• For operational risk, banks may choose a traditional indicator technique, a standardized approach or an internal measurement method.

Basel Subcommittees

The Committee reorganized in October, 2006, and was operated by four main subcommittees. These subcommittees were the Accord Implementation Group, The Policy Development Group, The Accounting Task Force, and the International Liaison Group (Bank for International Settlements, n.d.).

• The Accord Implementation Group (AIG) — The purpose of this group is to provide information and advance the consistency rates for the implementation of Basel III. Although the AIG offers an outlet with which members can communicate the details of their intentions to implement Basel III, the purpose of the subcommittee is not to require a uniform application of the corrected framework. There are three subgroups in this subcommittee and they share information and consult about the certain issues revolving around Basel III implementation.

The three subgroups are: The Validation Subgroup, the Operational Risk Subgroup, and the Trading Book Subgroup. The Validation Subgroup is charged with exploring problems having to do with the validation systems that help create the ratings and parameters that act as inputs for the internal ratings-based methods of evaluating credit risk. The Operational Risk Subgroup is responsible for addressing problems connected mostly to the banks' incorporation of advanced evaluation methods for operational risk. The final subgroup, Trading Book, develops standards that will provide a treatment for default risk in the trading book.

• The Accounting Task Force The Accounting Task Force has been charged with ensuring that the international accounting and auditing methods and techniques help to further sound risk management at financial institutions, encourage market regimen through clearness, and strengthen the immunity and well-being of the banking system. There are three working groups: The Conceptual Framework Issues Subgroup, The Financial Instruments Practices Subgroup, and the Audit Subgroup.
• The International Liaison Group This subgroup compensates for the former Core Principles Liaison Group and is charged with focusing on the first incorporation and revisions of the 1997 Core Principles for Effective Banking Supervision. In addition, the subgroup offers a way for the Committee to communicate effectively with international supervisors.

Conclusion

Financial relationships and the manner in which consumers handle their money have changed over the years. Financial institutions continue to grow their electronic banking services offered to their customers. Although payment services, for example, are popular among consumers, financial institutions are obligated to provide documentation to their customers explaining their legal rights and responsibilities for their accounts. The documentation that the financial institution provides its customers lists the following information:

• The telephone number and address of the person to be notified if the consumer thinks an unauthorized transfer has been or may be made, a statement of the institution's "business days" (generally days the institution is open to the public for normal business), and the number of days a consumer has to report suspected unauthorized transfers.
• The type of transfers a consumer can make, fees for transfers, and any limits on the frequency and amount of transfers.

• ,,FT.-A summary of the consumer's right to receive documentation of transfers, to stop payment on a pre-authorized transfer, and the procedures to follow in order to stop payment.

• A notice describing the procedures the consumer must follow in order to report an error on a receipt for an EFT periodic statement, to request more information about a transfer listed on a statement and how long the consumer has to file a report.
• A summary of the institution's liability to the consumer if it fails to make or stop certain transactions.
• Circumstances under which the institution will disclose information to third parties (Free Consumer Information, n.d., p. 2).

If an individual elects to use EFT services, the following tips may be helpful in keeping their personal information secure (HSBC — North America Military Financial Education Center, n.d.):

• Always know where one's ATM or debit card is located and file a report if the card is missing.
• Select a PIN number that is not associated with any personal information like addresses, telephone numbers, social security numbers or birth dates.
• Store and evaluate the receipts from all forms of EFT with the help of periodic statements.
• Know and trust merchants before providing bank account numbers and pre-authorized deficiencies in the account.

Terms & Concepts

Automated Teller Machines (ATMs): Electronic terminals that allow consumers to have access to their funds at any time.

Bank of International Settlements: Extends its services to central banks around the world and other official financial corporations and countries. The bank does not serve individuals or private companies.

Basel Committee on Banking Supervision: An institution created by the central bank Governors of the Group of Ten nations. It was created in 1974 and meets regularly four times a year.

Electronic Banking: The use of electronic methods to deliver traditional banking services using any kind of payment media

Electronic Fund Transfers: The use of technology as an alternative for paper transactions like bank statements and checks.

Market Risk: The degree of level of uncertainty involved in the exposure to market values of a portfolio.

Operational Risk: The level of risk and loss involved from poor internal processes, incompetent financiers or systems, or due to unreliable, external events.

Personal Computer Banking: A service offered by financial institutions where their customers are able to perform financial transactions via the internet.

Bibliography

Bank for International Settlements (n.d.). About the Basel Committee. Retrieved September 19, 2007, from http://www.bis.org/bcbs/

Bank for International Settlements (n.d.). Monetary and financial stability. Retrieved September 19, 2007, from http://www.bis.org/stability.htm

Calomiris, C., & Ramirez, Carlos (1996, February). Financing the American corporation: The changing menu of financial relationships. Retrieved on October 16, 2007, from http://ideas.repec.org/p/nbr/nberhi/0079.html

Card, F. (2011). Success against techno fraud. Credit Management, 22-23. Retrieved November 16, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=69632664&site=ehost-live

Free Consumer Information (n.d.). Electronic banking basics. Retrieved October 16, 2007, from http://www.ifg-inc.com/Consumer%5fReports/ElectBank.shtml

Fullenkamp, C., & Nsouli, S. (2004, February). Six puzzles in electronic money and banking. Retrieved October 16, 2007, from www.imf.org/external/pubs/ft/wp/2004/wp0419.pdf

HSBC — North America Military Financial Education Center (n.d.). Electronic banking. Retrieved October 16, 2007, from http://militaryfinance.umuc.edu/planning/check%5felec%5fbank.html

Kaufman, G., & Mote, L. (1990, September/October). Glass-Steagall: Repeal by regulatory and judicial reinterpretation. Banking Law Journal, 98, 225-264.

Kaur, R. (2013). The impact of electronic banking on banking transactions: a cost-benefit analysis. IUP Journal Of Bank Management, 12, 62-71. Retrieved November 16, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88142168&site=ehost-live

Marius, M. M. (2013). The framework resulting from the Basel III regulations. Annals of the University of Oradea, Economic Science Series, 22, 1103-1112. Retrieved November 14, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90545805&site=ehost-live

Riskglossary.com (n.d.). Basel committee on banking supervision. Retrieved on September 19, 2007, from http://www.riskglossary.com/link/basle%5fcommittee.htm

Tubin, G. (2005, April). The sky is falling: The need for stronger consumer online banking authentication. Retrieved October 16, 2007, from http://64.233.169.104/search?q=cache:FHJT8Xa2TlMJ:www-304.ibm.com/jct03004c/businesscenter/fileserve%3Fcontentid%3D82467+tubin%2Bbanking%2Bauthentication&hl=en&ct=clnk&cd=1&gl=us

Suggested Reading

Dheer, S. (2006). Is a FedEx model of money movement in banking's future? U.S. Banker, 116, 72-72. Retrieved October 19, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20579718&site=ehost-live

Fest, G. (2006). Correspondent bankers: How much is enough? Bank Technology News, 19, 12-13. Retrieved October 25, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20726282&site=ehost-live

Material world. (2007). Economist, 385(8551), 99. Retrieved October 25, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=27099167&site=ehost-live