AF4322
Lecture 1
Introduction to Banking
&
Financial Services I
Chapter 1 & 2
Rose, P.S. and Hudgins, S.C. (2008) Bank
Management & Financial Services, 7/e,
McGraw Hill.
Part 1
An Overview
of
the Changing
Financial-Services
Sector
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
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Bank Management and Financial Services, 7/e
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P. 3
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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P. 4
Bank
The
need
to
has
Less
restriction
1
NIM
.
bigger
is
3
by gov
restriction
more
FI
on
FI
than
bank
impulse
Bank
Licensed
institution
bank
of service
scope
Gov
financial
of
part
is
Restrict
License
Deposit
taking company
5%
BANK
Household
Borrower
>
1 , 000 , 000
5 %
7
.
p a
.
Deposit
12
3 5 %
months
If
.
HK
deposit insurance
,
Bank
The
.
corrupted ,
bank
In
.
p a
responsible
is
household
will
Investor Isn't
under
impose
Financial
Institution
·
·
·
.
premium
(get back)
scheme
Does
on
not
bank
to
have
protect
depositor
protections
Company
Insurance
·
too
insurance
restriction
more
up
$500K
protection
Regulator
-
pay for
to
covered
be
protect
Don't
take
They
take
deposit
the
fee
Committed
to
Nowadays
provide
after
pay
certain
to
for
provide
in
case
of
...
you
saving plans
years
protection
I
get
higher
return
after
putting
in
money
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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P. 5
EXHIBIT 1-1 The Many Different Kinds of Financial-Service
Firms Calling Themselves Banks
mutually
Not
Just
exclusive ,
e
e
e
.
.,
g
.
.
g.,
.,
g
to
highlight function
HSBC
BrA
UBS
JPMorgan BOC
HangSeng
Citi
HSBC
Bank of East Asia , Dah Sing
-Lis
family
:
Wong's family
minority
shareholder
McGraw-Hill/Irwin
g
Morgan Stanley HSBC
Bank Management and Financial Services, 7/e
e.
.,
full
e
.
g .,
loans
,
suite
IB
mortgage
© 2008 The
McGraw-Hill Companies, Inc., All Rights Reserved.
,
P. 6
Bank
Commercial
Money Center
BankIn
Community
Bank
Universal
Bank
All
But
money
not
center
lice
Virtual
bank
Trying
to
push
bank
are
financial
universal
city
bank
versa
(8
for
in
HK)
financial
inclusion
-
everyone
can
enjoy
the
banking
the availability and equality of opportunities to access financial services.
It refers to processes by which individuals and businesses can access
appropriate, affordable, and timely financial products and services which include banking, loan, equity, and insurance products
services
to
customers
What is a Bank? (cont'd)
• Money-Centered Banks vs. Community Banks
▫ Money-center banks
most
are
universal
bank
▫ 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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P. 7
What is a Bank? (cont'd)
• Money-Centered Banks vs. Community Banks
▫ Money-center banks
1.
JPMorgan Chase & Co.: JPMorgan Chase is one of the largest money-centered banks in the U.S. It
operates on a national and international level, providing a wide range of financial services to
corporations, governments, and individuals. With a significant focus on investment banking, it offers
services such as mergers and acquisitions, underwriting, and trading.
2.
Bank of America: Another prominent money-centered bank, Bank of America offers a comprehensive
suite of financial services, including retail banking, wealth management, investment banking, and
global markets. It has a widespread presence across the country and provides services to both
individuals and businesses on a large scale.
▫ Community banks
1.
First Citizens Bank: First Citizens Bank, based in Raleigh, North Carolina, is an example of a
community bank that primarily operates within a specific local or regional area. These banks often
have a strong connection to the communities they serve. First Citizens Bank may focus on providing
traditional banking services, such as savings accounts, mortgages, and small business loans, to its local
customers.
2.
Eastern Bank: Eastern Bank is a community bank based in Boston, Massachusetts. It has a strong
focus on social responsibility and community engagement. The bank offers a range of personal and
McGraw-Hill/Irwin
business banking services to customers in the New England region.
Bank Management and Financial Services, 7/e
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P. 8
What is a Bank? (cont'd)
• 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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P. 9
The Financial System and
Financial-Service Institutions
Competing
• Roles of the Financial System
Purpose
Outcome
1. 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
2. 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
3. The financial system also provides a variety of supporting
services:
▫ Payment services
▫ Risk protection services
▫ Liquidity services
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P. 10
The Financial System and Competing
Financial-Service Institutions (cont'd)
• 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
change
▫ Borrowing in the open market
Tech
traditional
▫ Perhaps banking is being “regulated to death”
Octopus
Card
not
a
bank
,
also
crucial
McGraw-Hill/Irwin
Fintech
Bank Management and Financial Services, 7/e
is
face
challenge
w/
Wechat
pay
and
Bank
the
company
faces
Platform
banking
challenge
like
Alipay
&
from
WeChat Pay
Alipay
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P. 11
Why
tech
Regulation
*
NFRA
company
reform
in
China
to
is
not
regulate
(reform
subject
tech
to
to
regulation
companies
regulate
tech
bKC
like
bank
they forgot
companies)
has ?
their
function
The Financial System and Competing
Financial-Service Institutions (cont'd)
• Leading Competitors with Banks
▫ Savings Associations
Navy
▫ 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
e
.
Federal
.,
g
Short-term
Not
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
risk
,
Credit Union
low
risk
,
high security
free
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
P. 12
The Financial System and Competing
Financial-Service Institutions (cont'd)
• 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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P. 13
EXHIBIT 1–2 Comparative Size by Industry of Commercial
Banks and Their Principal Financial-Service Competitors
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P. 14
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
-
financial
stores
money exchange
can
do
it
too
Institution
MSO
money
-
Dont
do
D/C
they
Bank
is
service
ante
money
don't
require
to
They requires
operators
to
sources
ask
do
ask
comes
laundering operation
II
for
KYC (know your
for
(AML)
your
ID and
3 OnlysomeMso
,
such
as
in
the
aroa
customers)
where
your
from
money
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P. 15
Services Banks and Many of Their Closest
Competitors Offer the Public (cont'd)
• 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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P. 16
Money
lender
Money lender
This
is
to
something
a re
a re
regulate by
not
under
money
prevent money
over
Money Lender
60 %
are
per
being
lender
arum
ordinance
involve
lender
bi
HUMA
in
of
Illegal
they're
the
not
force
police
activities
and
.
watched under
by
the
bank
police force
.
TABLE 1–1 The Many Different Roles Banks and Their
Closest Competitors Play in Today’s Economy
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P. 17
Insurance
Agent
-
-
Act
Can
like
insurance agents
represent the
insurance provider
that employs them
and help sell policies
from that single
provider.
the
Broker
-
Company
only provide
services
Insurance brokers
represent the
consumers who use
them and can help
them shop for policies
from multiple
providers.
Insurance
offered by their
company
-
-
Act
behalf
of
the
customer
products
that
fits
customer's
on
Sources
scope
of
customer
by
brokers
is
need
better
than
agents
TABLE 1–2 Some of the Leading Financial-Service Firms
around the Globe
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P. 18
Key Trends Affecting All Financial-Service
Firms – Crisis, Reform, and Change
Key Trends Affecting All Financial-Service Firms –
Crisis, Reform, and Change
1.
2.
3.
4.
Service Proliferation
Rising Competition
Government Deregulation and then Reregulation
Crisis, Reform, and Change in Banking and
Financial Services
5. An Increasingly Interest-Sensitive Mix of Funds
6. Technological Change and Automation
7. Consolidation and Geographic Expansion
8. Convergence
9. Globalization
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Part 2
The Impact of
Government Policy &
Regulation on the
Financial-Services
Industry
Key Topics
The Principal Reasons for Banking and FinancialServices Regulation
Major Financial-Services Regulators and Laws
The Riegle-Neal and Gramm-Leach-Bliley (GLB) Acts
The Check 21, FACT, Patriot, Sarbanes-Oxley,
Bankruptcy Abuse, Federal Deposit Insurance
Reform, and Financial-Services Regulatory Relief
Acts
Emergency Economic Stabilization Act and the Global
Credit Crisis
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Key Topics (cont'd)
FINREG is passed into law to avoid severe disruption
in the financial system and deal with systemic rick
Some Key Regulatory Issues Left Unresolved
 The Central Banking System
Organization and Structure of the Federal Reserve
System and Leading Central Banks of Europe and
Asia
Financial-Services Industry Impact of Central Bank
Policy Tools
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P. 22
Introduction
• This chapter is devoted to a study of the complex regulatory
environment that governments around the world have
created for financial-service firms in an effort to:
▫ Safeguard the public’s savings
▫ Bring stability to the financial system
▫ Prevent abuse of financial-service customers
• Financial institutions must contend with some of the heaviest
and most comprehensive rules applied to any industry
• Regulation is an ugly word to many people
▫ Burdensome
▫ Costly
▫ Damaging to innovation and efficiency
Rep-rech-provide financial inclusion
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3
.
the
being
(Counter-territorist face)
time
Hugor
heaven
money
that
accounts
down
It's
difficult
to
,
for
shut
Shut
tightened
gou
CTF
the
At
US
9/11
after
E g
.,
get
those
for
a
new
criticized
was
laundering . Thus
for
bank
suspicious
are
whom
bank
,
got
.
account
their
bark
Therefore ,
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create
financial
exclusion
P. 23
Banking Regulation
• Why are banks closely regulated?
▫ Banks are among the leading repositories of the public’s savings
▫ Banks are closely watched because of their power to create
money in the form of readily spendable deposits by making loans
and investments
▫ Banks have a long history of involvement with federal, state, and
local governments
• In the United States, banks are regulated through a dual
banking system
▫ Both Federal and State Authorities have significant regulatory
powers
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P. 24
TABLE 2–1 Banking’s Principal Regulatory Agencies and
Their Responsibilities
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Banking Regulation (cont'd)
• One of the earliest theories about regulation contends
that firms in regulated industries actually seek out
regulation
▫ It brings benefits in the form of monopolistic rents because
regulations often block entry into the regulated industry
• A more recent theory argues that regulations can
increase customer confidence, which may create greater
customer loyalty toward regulated firms
• There is an ongoing struggle between regulated firms
failure
and the regulators
• Regulatory dialectic
BK)
Bank
can
be
avoided
of
Customers
safety
can
feel
more
.
safe
▫ Financial-service managers will search to find ways around new
rules in order to reduce costs and allow innovation to occur
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Major Banking Laws – Where and When the
Rules Originated
• National Currency and Bank Acts (1863–64)
▫ The first major federal government laws in U.S. banking were the
National Currency and Bank Acts, passed during the Civil War
▫ These laws set up a system for chartering new national banks
through a newly created bureau inside the U.S. Treasury
Department, the Office of the Comptroller of the Currency (OCC)
- The Comptroller not only assesses the need for and charters new
national banks but also regularly examines those institutions
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Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The Federal Reserve Act (1913)
▫ A series of financial panics in the late 19th and early 20th
centuries led to the creation of the Federal Reserve System (the
Fed)
▫ The Fed’s principal roles are to serve as a lender of last resort
and to help stabilize the financial markets and the economy
▫ Their most important job today is to control money and credit
conditions to promote economic stability
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Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The Banking Act of 1933 (Glass-Steagall)
▫ The Glass-Steagall Act defined the boundaries of commercial
banking by providing constraints that were effective for more
than 60 years
▫ This legislation separated commercial banking from investment
banking and insurance
▫ The Federal Deposit Insurance Corporation (FDIC) was created
to guarantee the public’s deposits up to a stipulated maximum
amount in order to enhance public confidence in the banking
system
- Initially US$2,500 and today it is up to US$250,000
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Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The FDIC Improvement Act (1991)
▫ The FDIC was the object of criticism during the 1980s and 1990s
▫ This legislation permitted the FDIC to borrow from the Treasury
to remain solvent, called for risk-based insurance premiums, and
defined the actions to be taken when depository institutions did
not meet capital requirements
▫ Prior to 1993, the FDIC imposed fixed insurance premiums on all
deposits eligible for insurance coverage, regardless of the
riskiness of an individual depository institution’s balance sheet
- This fixed-fee system led to a moral hazard problem
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Major Banking Laws – Where and When the
Rules Originated (cont'd)
• Social Responsibility Laws
▫ Consumer Credit Protection Act (known as Truth in Lending)
- Required that lenders spell out the customer’s rights and
responsibilities under a loan agreement
▫ Dodd-Frank Regulatory Reform Bill
- Emphasized providing consumers with more complete and
understandable language to convey service prices and avoid
misleading information
▫ Equal Credit Opportunity Act
- Individuals and families could not be denied a loan merely
because of their age, sex, race, national origin, or religious
affiliation, or because they were recipients of public welfare
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P. 31
credit
equal
protection
opportunities fair
Major Banking Laws – Where and When the
Rules Originated (cont'd)
• Social Responsibility Laws
▫ Community Reinvestment Act
- Prohibits U.S. banks from discriminating against customers
residing within their trade territories merely on the basis of the
neighborhood in which they lived
▫ Competitive Equality in Banking Act and the Truth in Savings Act
- Require banks to more fully disclose their service policies and
the true rates of return offered on the public’s savings and the
fees associated with credit services
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P. 32
TABLE 2–2 Regulators of U.S. Insured Banks
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Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The Riegle-Neal Interstate Banking Law (1994)
▫ Repealed previous provisions that prevented full-service
interstate banking nationwide
▫ Major provisions of the Riegle-Neal Act included:
-
Adequately capitalized and managed holding companies
can acquire banks anywhere in the United States
-
Interstate holding companies may consolidate their
affiliated banks acquired across state lines into full-service
branch offices
-
No single banking company can control more than 10
percent of nationwide deposits or more than 30 percent of
deposits in a single state (unless a state waives this latter
restriction)
▫ For the first time in U.S. history, American banks could
accept deposits and follow their customers across state
lines
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Signed into law by President Bill Clinton in
September 1994, the law removed several
obstacles to banks opening branches in
other states and provided a uniform set of
rules regarding banking in each state.
https://www.federalreservehistory.org/essays/riegl
e-neal-act-of-1994
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P. 34
Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The Financial Services Modernization Act (The Gramm-Leach-Bliley
Act (1999))
▫ One of the most important U.S. banking statutes signed into law
▫ Overturned long-standing provisions of the Glass-Steagall Act and the
Bank Holding Company Act
▫ Permitted banking companies to affiliate with insurance and securities
firms under common ownership
▫ Securities and insurance companies could form financial holding
companies that control one or more banks
▫ Banks were permitted to sell insurance and security services, provided
they conform to state and federal rules
▫ This law’s purpose was to allow qualified U.S. financial-service
companies to diversify their service offerings and reduce their overall
business risk exposure
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P. 35
Major Banking Laws – Where and When the
Rules Originated (cont'd)
• The USA Patriot Act
▫ Made a series of amendments to the Bank Secrecy Act
- Passed originally in 1970 to combat money laundering
▫ Requires that financial-service providers establish the identity of
customers opening new accounts or holding accounts whose terms are
changed
- Usually accomplished by asking for a driver’s license or other
acceptable picture ID and obtaining the social security number of
the customer
▫ Service providers are required to check the customer’s ID against a
government-supplied list of terrorist organizations and report any
suspicious activity in a customer’s account
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The 21st Century Ushers in an Array of New Laws and
Regulations – FINREG, The Basel Agreement, and Other
Rules Around the Globe
• The FACT Act of 2003
• The Check Clearing for the 21st Century Act (Check 21 Act)
• The Bankruptcy Abuse Prevention and Consumer Protection Act of
2005
• The Federal Deposit Insurance Reform Act of 2005
• The Emergency Economic Stabilization Act of 2008
• The Credit Card Accountability, Responsibility, and Disclosure Act of
2009
• The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2009 (FINREG)
• Basel I and II, and Basel III
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The 21st Century Ushers in an Array of New Laws and
Regulations – FINREG, The Basel Agreement, and Other
Rules Around the Globe (cont'd)
• Unresolved Regulatory Issues
▫ What should we do about the regulatory safety net set up to protect
small depositors from loss, usually through government-sponsored
deposit insurance?
▫ Can we train regulators to be as good as they need to be in a more
complex financial marketplace?
▫ With the financial-services industry consolidating and converging into
fewer, but bigger, firms, can we get by with fewer regulators?
▫ Can we simplify the current regulatory structure and bring greater
efficiency to the task?
▫ As financial firms reach their arms around the globe, what nation or
nations should regulate their activities?
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P. 38
The Regulation of Nonbank Financial-Service
Firms Competing with Banks
• Credit Unions
▫ National Credit Union Administration (NCUA)
• Savings and Loans and Savings Banks (“Thrifts”)
▫ State-chartered associations are supervised and examined by state
boards or commissions
▫ Federally chartered savings associations fall under the jurisdiction of
the Office of Thrift Supervision
- The Dodd-Frank Act merged the Office of Thrift Supervision
with the Office of the Comptroller of the Currency so that thrift
institutions and national banks would have the same regulatory
agency at the federal level
• Money Market Funds
▫ Securities and Exchange Commission (SEC)
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The Regulation of Nonbank Financial-Service
Firms Competing with Banks (cont'd)
• Life and Property/Casualty Insurance Companies
▫ State insurance commissions
▫ Recently the federal government has become somewhat more
involved in insurance
▫ When insurers form holding companies to acquire commercial and
investment banks or other federally regulated financial businesses,
they may come under the Federal Reserve’s review
▫ Under the Dodd-Frank Act, a new federal insurance office was set
up to help reduce the systemic risk caused by innovative, but
sometimes highly risky, activities of the largest insurers (such as
AIG) and prevent disruptive insurance failures
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P. 40
The Regulation of Nonbank Financial-Service
Firms Competing with Banks (cont'd)
• Finance Companies
▫ Regulated at the state government level for many decades
▫ The depth of state regulation varies across the United States
▫ Most states focus upon the types and contents of loan agreements
they offer the public, the interest rates they charge (with some states
setting maximum loan rates), and the methods they use to repossess
property or to recover funds from delinquent borrowers
▫ Relatively light state regulation has led to a recent explosion in the
number of small-loan companies
▫ The passage of the Dodd-Frank Act in 2010 caused many to close as
the maximum interest rates that these entities could charge was
drastically reduced
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P. 41
The Regulation of Nonbank Financial-Service
Firms Competing with Banks (cont'd)
• Mutual Funds
▫ The U.S. Securities and Exchange Commission (SEC) requires these
businesses to register with that agency, submit periodic financial
reports, and provide investors with a prospectus that reveals the
financial condition, recent performance, and objectives of each fund
• Security Brokers and Dealers and Investment Banks
▫ A combination of federal and state supervision applies to these
traders in financial instruments who buy and sell securities,
underwrite new security issues, and give financial advice
▫ The chief federal regulator is the SEC
- Requires these firms to submit periodic reports, limits the volume
of debt they take on, and investigates insider trading practices
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P. 42
The Regulation of Nonbank Financial-Service
Firms Competing with Banks (cont'd)
• Hedge Funds, Private Equity Funds, and Venture Capital
Companies
▫ Some of the most lightly regulated of all financial institutions
▫ The SEC in the United States has broad oversight of the information
these firms provide to the public when they choose to sell securities
in the open market that are accessible to small investors
- Regulation in this sector is virtually invisible, in part because it is
relatively new and because it normally does not seek out many
funds from small investors
▫ The Dodd-Frank Act of 2010 calls for greater separation between
commercial banks and these riskier private investors
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P. 43
The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions
• The central bank of the United States is the Federal Reserve
System (the Fed)
• A central bank’s primary job is monetary policy
▫ Involves making sure the supply and cost of money and credit from
the financial system contribute to the nation’s economic goals
▫ By controlling the growth of money and credit, the Fed and other
central banks around the globe try to ensure that the economy grows
at an adequate rate, unemployment is kept low, and inflation is held
down
• The Fed is free to pursue these goals because it does not depend
on the government for its funding
▫ Passes along most of its earnings to the U.S. Treasury
Fed
increase
Asset
bubble
interest
uplift
rate
to
return
reduce
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,
inflation
.
.
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P. 44
Other
than
Federal
Reserve ,
these
back
a re
dang similar
The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• The European Union also have a central bank – the European
Central Bank (ECB)
▫ It is relatively free and independent of governmental control as it
pursues its main goal of avoiding inflation
• In contrast, the Bank of Japan (BOJ), the People’s Bank of China
(PBC), and central banks in other parts of Asia appear to be under
close control of their governments
▫ Several of these countries have experienced higher inflation rates,
volatile currency prices, and other significant economic problems in
recent years
• Recent research suggests that more independent central banks
have been able to come closer to their nation’s desired level of
economic performance (particularly better control of inflation)
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Organizational Structure of the Federal Reserve System
▫ Board of Governors
- This governing body must contain no more than seven persons, each
selected by the president of the United States and confirmed by the
Senate for terms not exceeding 14 years
- The board chairman and vice chairman are appointed by the
president from among current board members, each for four-year
terms (though these appointments may be renewed)
- The board regulates and supervises the activities of the 12 district
Reserve banks and their branch offices
- It sets reserve requirements, approves all changes in the discount
(loan) rates posted by the 12 Reserve banks, and takes the lead in the
system in determining open market policy
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Organizational Structure of the Federal Reserve System
▫ Federal Open Market Committee (FOMC)
- The Federal Reserve Board members make up a majority of the
voting members of the FOMC
- The other voting members are 5 of the 12 Federal Reserve bank
presidents, who each serve one year in filling the remaining five
official voting seats on the FOMC
▫ Except for the president of the New York Federal Reserve
Bank, who is a permanent voting member
- Primary task is to set policies that guide the conduct of open market
operations
▫ The buying and selling of securities by the Federal Reserve banks
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
▫ Federal Open Market Committee (FOMC)
- Fed Rate Hikes 2022-2023: Taming Inflation
▫ The tables below list the dates of Fed meetings when the FOMC
changed interest rates, the size of each rate change in basis
points—abbreviated as bps—and the resulting federal funds target
rate range.
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https://www.forbes.com/advisor/investing/fed-funds-rate-history/
P. 48
The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Organizational Structure of the Federal Reserve System
▫ There are 12 districts contained in the Federal Reserve System, with a
Federal Reserve Bank chartered in each district
▫ Key services that the Federal Reserve banks offer to depository
institutions in their districts:
1. Issuing wire transfers of funds between depository institutions
2. Safe-keeping securities owned by depository institutions and
their customers
3. Issuing new securities from the U.S. Treasury and selected
other federal agencies
4. Making loans to qualified depository institutions through the
“Discount Window”
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Organizational Structure of the Federal Reserve System
▫ Key services that the Federal Reserve banks offer to depository
institutions in their districts:
5. Dispensing supplies of currency and coin
6. Clearing and collecting checks and other cash items
7. Providing information to keep financial-firm managers and the
public informed about developments affecting the welfare of
their institutions
▫ All banks chartered by the Comptroller of the Currency (national banks)
and those few state banks willing to conform to the Fed’s supervision
and regulation are designated member banks
▫ Member institutions must purchase stock (up to 6 percent of their paidin capital and surplus) in the district Reserve bank and submit to
comprehensive examinations
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P. 50
The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• The Central Bank’s Principal Task: Making and Implementing
Monetary Policy
▫ A central bank’s principal function is to conduct money and credit
policy to promote sustainable growth in the economy and avoid severe
inflation
▫ To pursue these important objectives, most central banks use a variety of
tools to affect the legal reserves of the banking system, the interest rates
charged on loans made in the financial system, and relative currency
values in the global foreign exchange markets
▫ To influence the behavior of legal reserves, interest rates, and currency
values, central banks usually employ one or more of three main tools:
open market operations, the discount rate on loans to qualified financial
institutions, and legal reserve requirements on various bank liabilities
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P. 51
Negative
It's
Bank
a
Interest
way
of
to
Japan
rate
is
a
stimulate
wa s
the
way to
encourage
people
spend
money
and
the economy
last
one
to
hold
the
negative
interest
rate
investment
The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• The Open Market Policy Tool of Central Banking
▫ Open market operations (OMO) have become the principal tool of
central bank monetary policy
- In the United States, OMO involves the buying and selling of U.S.
Treasury bills, bonds, and notes and selected federal agency
securities
▫ These transactions are conducted between the Fed’s trading desk and
selected primary dealers who meet the Fed’s qualifications
▫ OMO is considered to be the most important policy tool for many
central banks because it can be used every day and, if a mistake is made
or conditions change, its effects can be quickly reversed
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• The Open Market Policy Tool of Central Banking
▫ Central bank sales of securities tend to decrease the growth of deposits
and loans within the financial system
- Interest rates tend to rise
▫ In contrast, central bank purchases of securities tend to increase the
growth of deposits and loans
- Interest rates tend to fall
▫ The FOMC targets the federal funds rate attached to overnight loans of
reserves between depository institutions in order to achieve the Fed’s
monetary policy goals
- In the hope that changes in the federal funds rate will spread to other
interest rates in the economy
PBOC
also
do
the
same
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P. 53
EXHIBIT 2–1 Leading Primary Dealers Authorized to Trade
Securities with the Federal Reserve in order to Assist with
Monetary Policy (April 2010)
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P. 54
EXHIBIT 2–2 Example of a Federal Open Market Committee
(FOMC) Statement, Setting a Target for the Federal Funds Rate
to Be Achieved through Open Market Operations
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Other Central Bank Policy Tools
▫ Many central banks are an important source of short-term loans for
depository institutions
Bank
▫ When the Fed loans reserves, the supply of legal reserves expands
temporarily, which may cause loans and deposits to expand
-
When these discount window loans are repaid, the borrowing
institutions lose reserves and may be forced to curtail the growth of
their deposits and loans
▫ The loan rate charged by the Fed, the discount rate, is set by each
Reserve bank’s board of directors and must be approved by the Federal
Reserve Board
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
• Other Central Bank Policy Tools
▫ Central banks also occasionally use changes in reserve requirements as
a monetary policy tool
▫ Institutions must place a small percentage of each dollar of deposits in
reserve, either in the form of vault cash or in a deposit at the central
bank
▫ Raising reserve requirements means that financial firms must set aside
more of each incoming dollar of deposits into required reserves, and less
money is available to support making new loans
- On the other hand, lowering reserve requirements releases reserves
for additional lending
▫ Central banks rarely change reserve requirements
- Powerful impact, cannot easily be reversed and because banks are
less dependent on deposits as a source of funds
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The Central Banking System: Its Impact on the
Decisions and Policies of Financial Institutions (cont'd)
economy
undesirable
-
decrease
interest rate
to
encourage
• Other Central Bank Policy Tools
▫ One other important policy tool – moral suasion
- Through this policy tool, the central bank tries to bring
psychological pressure to bear on individuals and institutions to
conform to its policies
impactful figures
public
bank
Provide
more
Some
Increase
to
funds
will
pressure
on
do
speech
to
bank.
▫ Examples of moral suasion
- Central bank officials testifying before legislative committees to
explain what the bank is doing and what its objectives are
- Letters and phone calls sent to those institutions that seem to be
straying from central bank policies
- Press releases urging the public to cooperate with central bank
efforts to strengthen the economy
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P. 58
Leading Central Banks in Europe:
1. European Central Bank (ECB):
▫ The ECB is the central bank for the Eurozone, consisting of 19 of the 27
European Union (EU) member states that have adopted the euro as their
currency. It is responsible for monetary policy, currency issuance, and
finance.
2. Bank of England (BoE):
▫ The Bank of England is the central bank of the United Kingdom. It
manages monetary policy, issues the British pound (GBP), and regulates
financial institutions in the UK.
3. Deutsche Bundesbank:
▫ The Deutsche Bundesbank is the central bank of Germany and a key
institution within the Eurosystem (the group of central banks that use the
euro). It plays a significant role in shaping monetary policy within the
Eurozone.
4. Banque de France:
▫ The Banque de France is the central bank of France and also an integral
part of the Eurosystem. It conducts monetary policy operations and
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Bank Management
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Services, institutions.
7/e
supervises
financial
P. 59
Leading Central Banks in Asia:
1. People's Bank of China (PBOC):
▫ The People's Bank of China is China's central bank. It oversees
monetary policy, currency issuance, and financial stability in China. It is
one of the most influential central banks in Asia and the world due to
China's economic size.
2. Bank of Japan (BoJ):
▫ The Bank of Japan is the central bank of Japan. It manages monetary
policy, regulates financial institutions, and issues the Japanese yen (JPY).
The BoJ is known for its unique monetary policies, including
unconventional measures like quantitative and qualitative monetary
easing.
3. Reserve Bank of India (RBI):
▫ The Reserve Bank of India is the central bank of India. It is responsible
for managing monetary policy, issuing the Indian rupee (INR), and
supervising the Indian financial system.
These central banks play essential roles in their respective regions, influencing economic
conditions, currency values, and financial stability. They often collaborate and coordinate policies
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Bank
and Financial
Services,
7/e
on Management
a regional and
global scale
to address
international economic challenges.
P. 60
Products of U.S. Financial Institutions
Functions
Lending
Institutions
in 1950
Payment
Services
Savings
Products
Fiduciary
Services
Business
Consumer
Underwriting
Issuance of
Equity
Debt
Insurance &
Risk
Management
Products
Depository
Institutions
Insurance
Companies
Finance
Companies
Securities
Firms
Pension
Funds
Mutual
Funds
Minor involvement
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Products of U.S. Financial Institutions
Functions
Lending
Institutions
in 2021
Payment
Services
Savings
Products
Fiduciary
Services
Business
Consumer
Underwriting
Issuance of
Equity
Debt
Insurance&
Risk
Management
Products
Depository
Institutions
Insurance
Companies
Finance
Companies
Securities
Firms
Pension
Funds
Mutual
Funds
McGraw-Hill/Irwin
Minor involvement
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P. 62
Learning Outcome Check
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Powerful Forces Reshaping the Industry
What is a Bank?
The Financial System and Competing Financial-Service Institutions
Old and New Services Offered to the Public
Key Trends Affecting All Financial-Service Firms
The Principal Reasons for Banking and Financial-Services Regulation
Major Financial-Services Regulators and Laws
The Riegle-Neal and Gramm-Leach-Bliley (GLB) Acts
The Check 21, FACT, Patriot, Sarbanes-Oxley, Bankruptcy Abuse, Federal
Deposit Insurance Reform, and Financial-Services Regulatory Relief Acts
Emergency Economic Stabilization Act and the Global Credit Crisis
FINREG is passed into law to avoid severe disruption in the financial system
and deal with systemic rick
Some Key Regulatory Issues Left Unresolved
The Central Banking System
Organization and Structure of the Federal Reserve System and Leading
Central Banks of Europe and Asia
Financial-Services Industry Impact of Central Bank Policy Tools
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P. 63
The End
Thanks for listening!
Any questions?
You can contact me at
sk-derek.chung@polyu.edu.hk
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Inc., All Rights Reserved.
P. 64