Chapter One
An Overview of the
Changing FinancialServices 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
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The Different Kinds of Financial Service Firms Calling
Themselves Banks
• Commercial Banks
• Savings Banks
• Cooperative Banks
• Mortgage Banks
• Community Banks
• Money Center Banks
• Investment Banks
• Merchant Banks
• International Banks
• Wholesale Banks
• Retail Banks
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• Limited Purpose Banks
• Bankers’ Banks
• Minority Banks
• National Banks
• State Banks
• Insured Banks
• Member Banks
• Affiliated Banks
• Virtual Banks
• Fringe Banks
• Universal Banks
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The Financial System and Competing
Financial Service Institutions
The primary purpose of the financial system is:
• To encourage individual and institutions to save
and transfer those savings to those individuals
and institutional planning to invest in new
projects.
• This process the economy to grow, new jobs to
be created, and living standards to rise.
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The Financial Service Competitors of Banks
• Savings Associations (selling savings deposits and granting home loans)
• Credit Unions (Collect deposits from and make loans to their members)
• Money Market Funds (collect S.T., liquid funds and invest them in quality securities
of S.T. durations)
• Mutual Funds (Investment Companies) (sell shares to the public
representing an interest in a professionally managed pool of stocks, bonds, etc.)
• Hedge Funds (sell shares to upscale (classy) investors– nontraditional investments in
commodities, real estate, loans to new companies, and other risky assets)
• Security Brokers and Dealers (buy and sell securities on behalf of their
customers and for their own accounts)
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The Financial Service Competitors of
Banks-Cont’d
• Investment Banks (provide advice, raise funds, business acquisition, trade securities)
• Finance Companies (offer loans to commercial enterprises using funds borrowed in
open markets)
• Financial Holding Companies (often include credit card companies,
insurance and finance companies, and security broker/dealer firms operating under one
corporate umbrella)
• Life and Property-Casualty Insurance Companies (protect
against risks and manage the pension plans of business and retirement funds of individuals)
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Quick Quiz
• What is a bank? How does a bank differ from most
other financial-service providers?
• Under current U.S. federal law what must a corporation
do to qualify and be regulated as a commercial bank?
• What is happening to banking’s share of the financial
marketplace and why?
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Traditional Services Offered By Banks
• Carrying Out Currency Exchange
• Discounting Commercial Notes and Making Business
Loans (making loans to local merchants who sold their debts (A/R) they held against their
customers to a bank to raise cash quickly)
• Offering Savings Deposits (interest bearing funds left with depository institutions
for a period of time)
• Safekeeping of Valuables (holding of gold and other valuables owned by their
customers)
• Supporting Government Activities with Credit (banking system
agreeing to charter national banks provided these institutions purchased government bonds)
• Offering Checking Accounts (demand deposits)
• Offering Trust Services (manage pensions plans for businesses and act as agents for
corporations issuing stocks and bonds)
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More Recent Services Offered by Banks
(services banks and many of their financial competitors began offering in the past century)
• Granting Consumer Loans
• Providing Financial Advice (helping to prepare financial plans for
individuals to consulting about marketing opportunities at home or abroad for businesses)
• Managing Cash (cash collections and disbursements for a business firm and to
invest any temporary cash surpluses)
• Offering Equipment Leasing (The option to purchase equipment
through lease arrangements)
• Making Venture Capital Loans (financing the start-up costs of new
companies)
• Selling Insurance Policies (banking companies can acquire control of
insurance companies and vise versa)
• Selling and Managing Retirement Plans (investing incoming
funds and dispensing payments to qualified recipients who have reached retirement or become
disable)
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Dealing in Securities: Offering Security
Brokerage and Investment Banking Services
• Underwriting Securities (Investment Banking) (banks were permitted by the
Gramm-leach-Bliley act to affiliate with securities firms)
• Offering Mutual Funds and Annuities (long term savings
plans that promise the payments of a stream of income to the annuity holder; pensions)
• Offering Merchant Banking Services (temporary purchase of
corporate stock to aid the launching of a new business venture or to support the expansion of an
existing company)
• Offering Risk Management and Hedging Services
(provide with financial tools to combat risk exposure in return for substantial fees, growth in
swaps, options, and future contracts)
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Trends Affecting Banks and Other Financial
Service Firms Today
• Service Proliferation (Increase) (rapidly expanding the menu of services to
customers)
• Rising Competition (from other banks, thrift institutions, securities firms, finance and
insurance companies)
• Government Deregulation (a loosening of government control)
• Increased Interest Rate Sensitivity (banks should be more sensitive to the
public preferences with regard to how savings are allocated)
• Technological Change and Automation (ATMs)(banks are facing
higher operating costs these years)
• Consolidation (merging) and Geographic Expansion (to
increase sales volume)
• E-Banking and E-Commerce
• Convergence (Merging) (offering one or two product line ventures into
other product lines to broaden sales base)
• Globalization
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Quick Quiz
• Why do banks and other financial intermediaries exist in
modern society, according to the theory of finance?
• How have banking and the financial services market
changed in recent years?
• What powerful forces are shaping financial markets and
institutions today? Which of these forces do you think
will continue into the future?
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Web Links
• Federal Deposit Insurance Company www.fdic.gov
• Federal Financial Institutions Examination Council
www.ffiec.gov
• Office of Thrift Supervision www.ots.treas.gov
• Credit Union National Association www.cuna.org
• Morningstar, Inc. http://www.morningstar.com
• Security and Exchange Commission www.sec.gov
• Careers in Finance www.careers-in-finance.com
• Bank Job Search www.bankjobsearch.com
• Bank Jobs www.bankjobs.com
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