Chapter One
An Overview of the Changing
Financial-Services Sector
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Key Topics
• Powerful Forces Reshaping the Industry
• What Is a Bank?
• The Financial System and Competing FinancialService Institutions
• Old and New Services Offered to the Public
• Key Trends Affecting All Financial-Service Firms
• Appendix: Career Opportunities in Banking and
Financial Services
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Introduction
• Banks are the principal source of credit (loanable funds)
for millions of individuals and families and for many
units of government
• Worldwide banks grant more installment loans to
consumers (individuals and families) than any other
financial-service provider
• The assets held by U.S. banks represent about one-fifth
of the total assets
▫ In other nations banks hold half or more of all assets in the
financial system
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What Is a Bank?
• A bank can be defined in terms of:
1. The economic functions it performs
2. The services it offers its customers
3. The legal basis for its existence
• Historically, banks have been recognized for the great
range of financial services they offer
▫ Bank service menus are expanding rapidly today to include
investment banking, insurance protection, financial planning,
advice for merging companies, the sale of risk-management
services to businesses and consumers, and numerous other
innovative financial products
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EXHIBIT 1-1 The Many Different Kinds of Financial-Service
Firms Calling Themselves Banks
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What Is a Bank? (continued)
• Money-Centered Banks vs. Community Banks
▫ Money-center banks
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Industry leaders
Cover whole regions, nations, and continents
Offer the widest possible menu of financial services
Acquire smaller businesses
Face tough global competition
▫ Community banks
▫ Much smaller
▫ Service local communities and towns
▫ Offer a narrower, but often more personalized, menu of
financial services
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What Is a Bank? (continued)
• The Legal Basis for Banking
▫ A bank is any business offering deposits subject to
withdrawal on demand and making loans of a commercial or
business nature
▫ Congress then defined a bank as any institution that could
qualify for deposit insurance administered by the Federal
Deposit Insurance Corporation (FDIC)
▫ Under federal law in the U.S., a bank had come to be defined,
not so much by its array of service offerings, but by the
government agency insuring its deposits
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The Financial System and Competing
Financial-Service Institutions
• Roles of the Financial System
▫ The primary purpose of the financial system is to encourage
saving and to transfer those savings to individuals and
institutions planning to invest and needing credit to do so
▫ This process of encouraging savings and transforming savings
into investment spending causes the economy to grow, new
jobs to be created, and living standards to rise
▫ The financial system also provides a variety of supporting
services:
▫ Payment services
▫ Risk protection services
▫ Liquidity services
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The Financial System and Competing
Financial-Service Institutions (continued)
• The Competitive Challenge for Banks
▫ Lately, the financial market share that banking comprised has
fallen
▫ Some authorities in the financial-services field fear that this
apparent erosion of market share may imply that traditional
banking is dying
▫ Other experts counter that banking is not dying but changing by
offering new services and changing its form
▫ The banking industry’s largest customers have found ways
around banks to obtain the funds that they need
▫ Borrowing in the open market
▫ Perhaps banking is being “regulated to death”
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The Financial System and Competing
Financial-Service Institutions (continued)
• Leading Competitors with Banks
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Savings Associations
Credit Unions
Fringe Banks
Money Market Funds
Mutual Funds (Investment Companies)
Hedge Funds
Security Brokers and Dealers
Investment Banks
Finance Companies
Financial Holding Companies
Life and Property/Casualty Insurance Companies
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The Financial System and Competing
Financial-Service Institutions (continued)
• Leading Competitors with Banks
▫ Financial-service providers are converging in terms of
the services they offer
▫ The U.S. Financial Services Modernization (GrammLeach-Bliley) Act of 1999 has allowed many different
types of financial firms to offer the public one-stop
shopping for financial services
▫ The challenge of differentiating banks from other
financial-service providers is difficult today
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EXHIBIT 1–2 Comparative Size by Industry of Commercial
Banks and Their Principal Financial-Service Competitors
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Services Banks and Many of Their Closest
Competitors Offer the Public
• Services Banks Have Offered for Centuries
▫ Carrying Out Currency Exchange
▫ Discounting Commercial Notes and Making Business
Loans
▫ Offering Savings Deposits
▫ Safekeeping of Valuables and Certification of Value
▫ Supporting Government Activities with Credit
▫ Offering Checking Accounts (Demand Deposits)
▫ Offering Trust Services
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Services Banks and Many of Their Closest
Competitors Offer the Public (continued)
• Services Banks and Many of Their Financial-Service Competitors
Began Offering in the Past Century
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Granting Consumer Loans
Financial Advising
Managing Cash
Offering Equipment Leasing
Making Venture Capital Loans
Selling Insurance Policies
Selling and Managing Retirement Plans
Dealing in Securities: Offering Security Brokerage and Investment
Banking Services
▫ Offering Mutual Funds, Annuities, and Other Investment Products
▫ Offering Merchant Banking Service
▫ Offering Risk Management and Hedging Services
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TABLE 1–1 The Many Different Roles Banks and Their
Closest Competitors Play in Today’s Economy
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TABLE 1–2 Some of the Leading Financial-Service Firms
around the Globe
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Key Trends Affecting All Financial-Service
Firms – Crisis, Reform, and Change
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Service Proliferation
Rising Competition
Government Deregulation and then Reregulation
Crisis, Reform, and Change in Banking and Financial
Services
An Increasingly Interest-Sensitive Mix of Funds
Technological Change and Automation
Consolidation and Geographic Expansion
Convergence
Globalization
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Quick Quiz
• What is a bank? How does a bank differ from most other financialservice providers?
• Why are some banks reaching out to become one-stop financialservice conglomerates? Is this a good idea?
• Which businesses are banking’s closest and toughest competitors?
What services do they offer that compete directly with banks’
services?
• What is happening to banking’s share of the financial marketplace
and why?
• How have banking and the financial-services market changed in
recent years? What powerful forces are shaping financial markets
and institutions today?
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Appendix: Career Opportunities in Banking
and Financial Services
• What different kinds of professionals work inside
financial firms?
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Loan Officers
Credit Analysts
Managers of Operations
Branch Managers
Systems Analyst
Auditing and Control Personnel
Trust Department Specialist
Tellers
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Appendix: Career Opportunities in Banking
and Financial Services (continued)
• What different kinds of professionals work inside
financial firms?
▫ Security Analysts and Traders
▫ Marketing Personnel
▫ Human Resources Managers
▫ Investment Banking Specialists
▫ Bank Examiners and Regulators
▫ Regulatory Compliance Officers
▫ Risk Management Specialists
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