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
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Economic Function
• Banks are involved in transferring funds from
savers to borrowers (called financial
intermediation) and in paying for goods and
services.
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Services
• Historically, banks have been recognized for the great
range of financial services they offer
• These services include checking and debit accounts, credit
cards, savings plans, and loans
▫ 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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Legal Basis
▫ 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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History of Banks
• Most early banks were Greek or Roman in origin.
▫ Pledged their own money to support early ventures, but
the idea of attracting deposits and lending emerged.
▫ Granted loans to shippers, landowners, and others at
interest rates.
• Spread through Europe.
▫ Encountered religious opposition during the Middle
Ages because loans to poor carried the highest interest
rates.
▫ The Industrial Revolution helped grow banks due to the
need for ways to make payments and obtain credit in
global trade.
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History of Banks (continued)
• Banks in Europe were also used as a safe place for wealth
such as gold and silver for a fee.
▫ In England, blacksmiths’ shops would hold valuables
and issue tokens or certificates indicating the value of
the items deposited. These soon became used as money.
• In America, colonies used banks from the countries in
which they had come, but later the states started
chartering banking companies and the US federal
government became involved in banking during the Civil
War.
• Other banking activities started emerging such as life
insurance companies, saving and loan association, mutual
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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
▫
▫
▫
▫
▫
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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Banks as Financial Intermediaries
• Financial-service providers are often referred to as
financial intermediaries.
• This is a business that interacts with the following two
groups:
1. Deficit-spending individuals and institutions
2. Surplus-spending individuals and institutions
• Act as a bridge between the two groups attracting
surplus funds and distributing these funds to deficit
spending individuals
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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
Credit 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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EXHIBIT 1–2 Comparative Size by Industry of Commercial
Banks and Their Principal Financial-Service Competitors
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The Financial System and Competing
Financial-Service Institutions (continued)
• Leading Competitors with Banks
▫
▫
▫
▫
▫
▫
▫
▫
▫
▫
▫
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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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
▫
▫
▫
▫
▫
▫
▫
▫
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
•
•
•
•
•
•
•
•
•
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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Banking Ethics
• Throughout history, the business of banking has
rested on one fundamental principal- public trust.
▫ Institutions must have public trust or else deposits
and services are sought elsewhere
• Bear Sterns represents lost public trust
▫ Rumors started spreading that Bear Sterns was in
trouble and unable to meet its obligations to other
firms and customers worldwide.
▫ Sources of borrowed funds dried up and other
financial institutions refused to lend to them
▫ The Federal Reserve stepped in and organized a
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buyout
to
prevent
a
“domino
effect”
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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?
▫
▫
▫
▫
▫
▫
▫
▫
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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