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Chapter One

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

  2. What is a Bank In history a bank has been defined in terms of the: • Economic functions it serves • Banks are involved in transferring funds from savers to borrowers ( Financial Intermediation) • Services it offers to its customers • demand deposit and loan activities • Legal basis for its existence • Any institution that can qualify for FDIC insurance

  3. What is a bank today • Today banks are generally those financial institutions that offer the widest range of financial services. • Other financial service providers provide some of the services provided by a banks but not all of them within one institution. • Under US law commercial banks must offer two services to qualify as a bank. They are – demand deposits and commercial loans

  4. Why are banks special • Banks have a profound effect on our lives, influencing the availability of jobs, the cost of living, the adequacy of our savings, and the quality of our existence. • Hence the need for close government regulation of bank activities – to be discussed in chapter 2

  5. Powerful forces reshaping Banking and the financial services industry • Bank and non-bank financial firms are declining in numbers, consolidating into fewer but also much larger companies • Banks and other financial services companies are converging towards each other, each proliferating the number of services they offer

  6. Powerful forces reshaping Banking and the financial services industry • The result is that the boundaries between banking, insurance companies, security firms finance companies and other financial services companies is narrowing • Banks are becoming one stop financial service conglomerates due to competition and deregulation.

  7. Commercial Banks Savings Banks Cooperative Banks Mortgage Banks Community Banks Money Center Banks Investment Banks Merchant Banks International Banks Wholesale Banks Retail Banks Limited Purpose Banks Bankers’ Banks Minority Banks National Banks State Banks Insured Banks Member Banks Affiliated Banks Virtual Banks Fringe Banks Universal Banks The Different Kinds of Financial Service Firms Calling Themselves Banks

  8. The Financial Service Competitors of Banks • Credit Unions • 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 These financial service providers are converging as a result of deregulation and competition

  9. The Roles of Commercial Banks and Their Closest Competitors • Intermediation Role • Payment Role • Guarantor Role • Risk Management Role • The Investment Banking Role • Savings/Investment Advisor Role • Safekeeping • Agency Role

  10. Traditional Services Offered By Banks • Carrying Out Currency Exchange • Discounting Commercial Notes and Making Business Loans (credit services) • Offering Savings Deposits • Safekeeping of Valuables • Supporting Government Activities with Credit • Offering Checking Accounts • Offering Trust Services

  11. More Recent Services Offered by Banks • Granting Consumer Loans • Providing Financial Advice • Managing Cash (cash management) • Offering Equipment Leasing • Making Venture Capital Loans • Selling Insurance Policies • Selling Retirement Plans

  12. Offering Security Brokerage and Investment Banking Services • Underwriting Securities • Offering Mutual Funds and Annuities • Offering Merchant Banking Services • Offering Risk Management and Hedging Services

  13. Trends Affecting Banks and Other Financial Service Firms Today • Service Proliferation • Rising Competition • Government Deregulation • Increased Interest Rate Sensitivity • Technological Change and Automation • Consolidation and Geographic Expansion • E-Banking and E-Commerce • Convergence • Globalization • Consolidation • Increased branches • Fewer but larger banks