CHAPTER 1
AN OVERVIEW OF BANKS AND THE FINANCIAL-SERVICES SECTOR
Goal of This Chapter: In this chapter you will learn about the many roles financial service providers play in the economy today. You will examine how and why the banking industry and the financial services marketplace as a whole is rapidly
changing, becoming new and different as we move forward into the future. You will also learn about new and old services offered to the public.
Key Topics in This Chapter
? 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 Financial Services
Chapter Outline I. Introduction: Powerful Forces Reshaping the Industry II. What Is a Bank?
A. Defined by the Functions It Serves and the Roles It Play: B. Banks and their Principal Competitors C. Legal Basis of a Bank D. Defined by the Government Agency That Insures Its Deposits III.The Financial System and Competing Financial-Service Institutions
A. Savings Associations B. Credit Unions
C. Money Market Funds D. Mutual Funds E. Hedge Funds
F. Security Brokers and Dealers G. Investment Bankers H. Finance Companies
I. Financial Holding Companies
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J. Life and Property/Casualty Insurance Companies
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IV. The Services Banks and Many of Their Closest Competitors Offer the Public
A. Services Banks Have Offered Throughout History
1.Carrying Out Currency Exchanges
2.Discounting Commercial Notes and Making Business Loans 3.Offering Savings Deposits
4.Safekeeping of Valuables and Certification of Value 5.Supporting Government Activities with Credit 6.Offering Checking Accounts (Demand Deposits) 7.Offering Trust Services B. Services Banks and Many of Their Financial-Service Competitors Have Offered More Recently
1.Granting Consumer Loans 2.Financial Advising 3.Managing Cash
4.Offering Equipment Leasing 5.Making Venture Capital Loans 6.Selling Insurance Policies 7.Selling Retirement Plans
C. Dealing in Securities: Offering Security Brokerage and Investment Banking Services
1. Offering Security Underwriting
2. Offering Mutual Funds and Annuities 3. Offering Merchant Banking Services
4. Offering Risk Management and Hedging Services V. Key Trends Affecting All Financial-Service Firms
A. Service Proliferation B. Rising Competition C. Government Deregulation D. An Increasingly Interest-Sensitive Mix of Funds E. Technological Change and Automation F. Consolidation and Geographic Expansion G. Convergence H. Globalization VI. The Plan of This Book VII. Summary
Concept Checks
1-1. What is a bank? How does a bank differ from most other financial-service
providers?
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A bank should be defined by what it does; in this case, banks are generally those financial institutions offering the widest range of financial services. Other financial service providers offer some of the financial services offered by a bank, but not all of them within one institution.
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1-2. Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?
Under U.S. law, commercial banks must offer two essential services to qualify as banks for purposes of regulation and taxation, demand (checkable) deposits and commercial loans. More recently, Congress defined a bank as any institution that could qualify for deposit insurance administered by the FDIC.
1-3. Why are some banks reaching out to become one-stop financial service conglomerates? Is this a good idea in your opinion?
There are two reasons that banks are increasingly becoming one-stop financial service conglomerates. The first reason is the increased competition from other types of financial institutions and the erosion of banks’ traditional service areas. The second reason is the Financial Services Modernization Act which has allowed banks to expand their role to be full service providers.
1-4. Which businesses are banking’s closest and toughest competitors? What services do they offer that compete directly with banks’ services?
Among a bank’s closest competitors are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies, and life and
property-casualty insurance companies. All of these financial service providers are converging and embracing each other’s innovations. The Financial Services
Modernization Act has allowed many of these financial service providers to offer the public one-stop shopping for financial services.
1-5. What is happening to banking’s share of the financial marketplace and why? What kind of banking and financial system do you foresee for the future if present trends continue?
The Financial Services Modernization Act of 1999 allowed many of the banks’ closest competitors to offer a wide array of financial services thereby taking away market share from “traditional” banks. Banks and their closest competitors are converging into one-stop shopping for financial services and this trend should continue in the future
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