Private Banking vs. Retail Banking vs. Commercial Banking: A Comprehensive Guide

Posted on May 13, 2024 in Economy

Difference in Private Banking, Commercial Banking & Retail Banks

Private Banking:

  • Range of banking & financial services offered to individual clients with high income & relevant financial wealth.
  • Focus on investment advice & asset protection.

Retail banks provide banking services to the general public. Anyone can open a bank account.

Commercial bank provides credits to companies & manages accounts out of which salaries paid & which sales proceeds are received.

Client Segmentation:

Affluent Client

  1. These services will primarily consist of a broader range of (international) investment products.
    A relation manager in this segment normally takes care of several hundred clients.

Private Banking Client

  1. With investable assets of over USD 1 million
    The cooperation with a private bank  managing client’s investable assets through sophisticated investment products,  supporting client with overall financial situation as well.
    A relation manager in this segment normally takes care of seventy-five up to a hundred clients.

Wealth Management Clients

  1. With investable assets of over USD 20 million will often have direct access to financial experts such as Investment Advisors; may even benefit from in-house family office services.
    A relation manager in this segment normally takes care of no more than twenty-five clients.
    Clients of this size often also make use of an independent family office.

Structure of International Private Bank  (Major Areas:

  1. Operaciones/ tema informatico
  2. Product (gestion activos)
  3. Riesgos (riesgo credito, operative)
  4. Asset management

Offshore vs Onshore

  1. ‘offshore’= banks & services located outside country of residence of client.
    Funds are domiciled in different country abroad & regulated by authorities of holding country.
    Banks do it as method to protect their assets (well-regulated financial centres) &wider array of financial services
  2. Onshore= banking services provided by bank in same country where client resides.
    Is  subject to laws as tax law & regulations of country where bank is located.

ETF

  1. Exchange-traded fund (ETF): basket of securities that  trade on an exchange & tracks underlying index (SPDR S&P 500 ETF
    ETFs can contain many types of investments as stocks, bonds.
  2. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes
  3. ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually

Investment Funds:

Portfolio of financial assets, managed by market expert & held collectively by the investors.                   investment funds usually approved by a market authority. Depending on its nature, an investment fund is divided into units or into shares ; do it or for delegate or diversify ( reduce risk) or to enhance security .

Discretionary vs Advisory Investment vs Execution Only

  1. Discretionary investment management: manager makes decisions on behalf of client without consulting them first.
    Client gives manager permission to make investment decisions on their behalf.
    Manager has full discretion over the client’s portfolio and can make changes without consulting the client first.
    This Reserved for high-net-worth individuals/institutional
  1. Advisory investment management: manager provides advice to client but not have discretion over client’s portfolio.
    client makes final decision on which investments to buy / sell
    manager provides recommendations & advice based on their expertise & knowledge of the market.
  1. Execution-only investment: investor makes own investment decision with any advice/guidance from investment;
    manager investor responsible for researching /selecting own investme

What for Lombard Credit for Private Banking  4 Usos

Lombard credit is a type of loan that secured by collateral in the form of securities or other assets.  often used by investors who need to raise cash quickly without selling their securities Instead, they use their securities as collateral for a loan  Uses:

  1. Financing short-term cash needs
  2. Purchasing additional securities
  3. Refinancing existing debt
  4. Funding business operations

Risk if  borrower unable to repay loan, lender can sell collateral to recover their losses.

Margin Call y Credito Lombardo

Private banks manage volatility risk by Margin Call process of “3 ratio” approach. That allow a Commercial approach based on gradual resolution of collateral shortfall so client is not faced  abrupt liquidation of their portfolio.

• Breach of liquidation level brings about immediate liquidation.

• Margin Call Ratios calibrated to provide approximately 10 additional market days before liquidation is necessary.

• Financing Ratios are calibrated to provide approximately 10 additional market days before a Margin Call is necessary

Frontera Eficiente:

Set  optimal portfolios offers highest expected return for defined level of risk / lowest risk for given level of expected return.                                                                             Portfolios that lie below efficient frontier= sub-optimal because not provide enough return for level of risk.                 Portfolios gathering to right of efficient frontier=sub-optimal because have higher level of risk for the defined rate of return. Adding new asset classes to portfolio pushes efficient frontier up & left, optimizing all risk & return combinations for different portfolios.

Diferencia entre Behavioural Finance (Normativo) vs Traditional Finance

Traditional finance: Rational models highlight correlation and diversification “key” for asset allocation and risk control.                                                               Risk 2 components: systematic & specific risk.                             Returns only depend on systematic risk, as specific risk can be diversified

away by investing in several instruments.                           § Specific risk is not rewarded by extra (expected) return

Behavioural finance proposes psychology-based theories to explain stock mrkt anomalies, as severe rises or falls in stock P.             purpose: identify & understand why people make certain financial choices.                                                                                             Within behavioural finance, assumed information structure & characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes behaviours to understand this concept:

        1. mental accounting: tendency people have separate money into different accounts based on subjective criteria                        
        2. herd behaviour: tendency follow&copy what other investor do
        3. anchoring: base decisions on irrelevant figures & statistics
        4. high self-rating: think is investment guru when investment performs optimally but dismiss his contributions to investment performing poorly.

Standard finance normative: states how rational econo agents should behave in taking decisions under uncertainty.

Behavioural finance is descriptive: shows how people actually behave in taking decisions under uncertainty

  1. Financial risk:
  1. Market risk: Major factors directly affect portfolio value.
  2. Credit risk: Credit spread risk, default risk, downgrade risk.
  3. Liquidity risk (financial risk): possibility of sustaining significant losses due inability to take / liquidate position quickly at fair P
  4.  Inflation risk: – value assets/ income due to higher price levels.                                                                                                                         Non- financial risks
  1. Settlement risk: possibility one side on position is paying while other is defaulting 
  2. Operational risk: potential for failure in bank’s operating syst, due to personal, technological, mechanical or other problem
  3.  Regulatory risk, political risk, tax risk, accounting risk, legal
  1. Efficient market definition & functions of good mrkt                      P reflect info; The market is a zero-sum game; good market is one that is efficient, liquid, transparent, and fair. An efficient market is one where prices reflect all available information. A liquid market is one where there are enough buyers and sellers to ensure that transactions can be completed quickly and at a fair price. A transparent market is one where all participants have access to the same information. A fair market is one where all participants are treated equally and have the same opportunities to buy and sell securities ;                     Functions:
  1. Transparency: all investors have access to same information about the securities being traded.
  2. Liquidity: enough buyers and sellers to ensure that trades can be executed quickly and at a fair price.
  3. Efficiency: prices should reflect all available information about the securities being traded.
  4. Stability:  prices should not fluctuate wildly in response to minor changes in supply or demand.
  5. Fairness: have equal opportunity to profit from invest.
  1. Q es el KYC ventajas

KYC stands for Know Your Customer. process that financial institutions use to verify identity of their clients & assess their potential risks. The main objective of KYC is prevent financial institutions from being used for money laundering, terrorist financing, or other illegal activities. The advantages of KYC are:

  • helps financial institutions to identify and verify their clients.
  • It helps to prevent fraud and other illegal activities.
  • It helps to protect the reputation of the financial institution.
  • It helps to comply with regulatory requirements.
  1. Farmer vs hunter private banking

The role of Hunter is to acquire new clients & assets for bank. There is a heavy emphasis on new business development & networking. Hunters usually begin at a bank with the target of building their own portfolio from scratch.

The Farmer focuses on client development, management & retention. Usually given  portfolio when join the bank, with target of increasing revenues from existing clients who may be inactive. Required to retain certain clients who thinking of leaving bank.

2 can overlap & some Private Bankers inherit client accounts but are still mandated to increase the size of the portfolio. Framer is a dedicated and sophisticated service for Ultra-High-Net Worth-Individuals

  1. Front office vs back office

The front office is client-facing part of firm & includes roles which focus on working with & for clients. It is named because traditionally, the client-facing staff would be at front of the business where could be seen, & support staff would be behind them at the back, unseen

Back office is essential &  job title is often classified under ‘Operations’. Back office in charge of completing administrative tasks associated with trades such as settlements, regulatory compliance and position clearing.                                                               back-office positions not located in main buildings due to costs. Certain back office functions also often outsourced to external companies and / or housed in different countries

  1. How to get new client ç
  1. Existing Clients: clients’ friends, families and business associates could be wealthy too
  2. Existing Contacts: As you grow professionally, network grows too
  3. Business Partners: Lawyers, Property Agents, Insurance Agencies, Private Equity Firms
  4. Business Associations: Businessmen and entrepreneurs have the fastest and highest wealth growth rate
  5. Country Clubs / Other Clubs: Private Banking clients are successful & for some clients, strong lifestyle preference
  6. Introducers or finders: Best friend of the rich kids of Billionaires… Private Bankers work hard to get to know the people who knows the wealthiest people
  7. Networking: The modern Private Bankers are rarely gifted a large portfolio of clients
  8. Private Bank’s Organic Acquisition:
  1. Definer : isg esg, sri  diapo 150

• Impact investments: investments made with intention to generate positive, measurable social & environmental impact alongside a financial return.    Can be made in emerging & developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.

• ESG: Environmental, Social & corporate Governance (ESG) Criteria used by investors to assess financial risks & opportunities associated to company practices in these areas.                    Environmental criteria look at how a company performs as a steward of natural environment. Social examine how manages relationships with employees, suppliers, customers & community

• SRI (Sustainable and Responsible Investment): investment  whilst seeking financial performance, aims generate social/ environmental value added.  To attain this objective, analysis, appreciation & selection of assets incorporates traditional economic aspects and social and environmental criteria.