Chapter One

1. Chapter One An Overview of the Changing Financial-Services Sector

2. Key Topics • 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 • Appendix: Career Opportunities in Banking and Financial Services

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

4. What Is a Bank? • A bank can be defined in terms of: • The economic functions it performs • The services it offers its customers • 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

5. EXHIBIT 1-1 The Many Different Kinds of Financial-Service Firms Calling Themselves Banks

6. 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

7. 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

8. 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

9. 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”

10. 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

11. 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 (Gramm-Leach-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

12. EXHIBIT 1–2 Comparative Size by Industry of Commercial Banks and Their Principal Financial-Service Competitors

13. 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

14. 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

15. TABLE 1–1 The Many Different Roles Banks and Their Closest Competitors Play in Today’s Economy

16. TABLE 1–2 Some of the Leading Financial-Service Firms around the Globe

17. 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

18. Quick Quiz • What is a bank? How does a bank differ from most other financial-service providers? • Why are some banks reaching out to become one-stop financial-service 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?

19. 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

20. 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