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CHAPTER 1: AN OVERVIEW OF THE CHANGING FINANCIAL-SERVICES SECTOR
Three ways a bank can be defined:
- 1. The economic functions it serves
- 2. The services it offers it customers
- 3. The legal basis for its existence
Traditional services that bank offered:
- -Checking and debit accounts
- -Credit cards
- -Savings plans
- -Loans for businesses, consumers and governments
More recent services:
- -Investment banking (security underwriting)
- -Insurance protection
- -Financial planning
- -Advice for merging companies
- -The sale of risk-management services to businesses and consumers
More recent services:
Banks no longer limit their services offerings to traditional services but have increasingly become general financial-service providers.
Roles that banks play in the economy:
- The intermediation role-Transforming savings received primarily from households into credit (loans) for business firms and others in order to make investments in new buildings, equipment, and other goods
- The payments role-Carrying out payments for goods and services on behalf of customers
- The guarantor role-Standing behind thier customers to pay off customer debts when those customers are unable to pay
- The risk management role-Assisting customers in preparing financially for the risk of loss to property, persons, and financial assets.
- The investment banking role-Assisting corporations and governments in marketing securities and raising new funds
- The savings/investment advisor role-Aiding customers in fulfilling their long-range goals for a better life by building and investing savings
- The safekeeping/certification of value role-Safeguarding a customer's valuables and certifying thier true value.
- The agency role-Acting on behalf of customers to manage and protect thier property
- The policy role-Serving as a conduit for government policy in attempting to regulate the growth of the economy and pursue social goals.
Why do banks exists:
- -Imperfections in the market
- -Risky arbitrage
- -Information Asymmetry
- -Delegated Monitoring
Key trends in banking
- Service Proliferation-has accelerated in more recent years under the pressure of increasing competition from other financial firms, more knowledgeable and demanding customers, and shiftin technology.
- Rising Competition-acted as a spur to develop still more services for the future and to reduce operating costs.
- Government Deregulation(loosening of government control)-rising competition and the proliferation of financial services have been spurred on by government deregulation. Began with the lifitn of government imposed interest rate ceilings on savings deposits in an effort to give the public a fairer return on their savings.
- Technological change and automation-facing higher operating costs, banks and their competitors have turned increasingly to automation and the installation of sophisticated electronic systems to replace older, labor-based producation and delivery systems.
- --Examples of technological innovations in financial services include ATM's, cell phones, point of sales (POS) terminals and debit cards.
- Conslidation and geographic expansion-due to automation and othe technological innovations financial service providers have had to expand their customer base through geographic expansion.
- Convergence- the movement of businesses across industry lines so that a firm formerly offering perhaps one or two product line ventures into other product lines to broaden its sales base. Has been evident among larger banks, insurance companies, and security firms
Career opportunities in banking:
- -Loan officers
- -Credit analysts
- -Loan workout specialists
- -Manager of operations
- -Branch manager
- -Systme analysts
- -Audit and control personnel
- -Trust department specialist
- -Security analysts and traders
- -Marketing personnel
- -Huamn Resources managers
- -Investment banking specialists
- -Bank examiners and regulators
- -Training specialists
A breif history of banking and other financial services
Orginally a commerical bank was any company offering deposits subject to withdrawal on demand and making commercial loans.
CHAPTER 2: THE IMPACT OF GOVERNMENT POLICY AND REGULATION ON THE FINANICAL-SERVICES INDUSTRY
Why regulate at all?
- Safeguard the public's money-Because most ppl who use banks to save up their money do not have the expertise of evaulting the riskiness of the financial insitution regualtory agencies are charged with the responsiblity of gathering and evaluating the information needed to asses the true condition of banks and other finanical insitiutions
- Banks are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments.
- Bring stability to the financial system-to help eliminate certain things such as discrimination in when providng credit to individuals
- Prevent abuse of customers
- Promote public confidence in the financial system
- Avoid concentration of power in the hands of a few
- Provide government with bank services
- Helop sectors of the economy with special needs
Dual Banking System
-Both federal and state authorities have significant regulatory powers. This system is designed to give the states closer control over industries operating within their borders, but also, through federal regulation, to ensure that banks would be treated fairly by individual states and agencies within the U.S government and the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corp. The Department of Justice and the SEC also have important federal regulatory roles, while state banking commissions are the primary regulators of American banks at the state level.
Six supervisory agencies:
- 1. Federal Reserve System- created after a series of finanicial panics in the late 19th and early 20th century. Its prinicipal roles are to serve as a lender of last resort-providing temp. loans to depository instiutions facing financial emergencies-and to help stabilize the financial markets and the enconomy in order to preserve public confidence. Also established to provide services such as: establishment of nationwide network to clear and collect checks. Most important role is to control money and credit conditions to promote economic stability.
- 2. Comptroller of Currency-issues charters for new national banks, supervises and regularly examines all national banks, must approve all national bank applications for branch offices, trust powers, and acquisitions.
- 3. Federal Deposit Insurance Corp.(FDIC)- insures deposits of federally upervised depository institutions conforming to its rgulations, must apporve all applications of insured depositories to establish branches, merge or exercise trust powers, requires all insured depository institutions to submit reports on their financial condition
- 4. Department of Justice- must review and approve proposed mergers and holding company acquisitions for their effects on competition and file suit if competition would be significantly damaged by these proposed organizational changes.
- 5. Securities and Exchange Commission-must approve public offerings of debt and equity securities by banking and thrift companies and oversee the acitivites of bank securites affiliates.
- 6. State Boards of Commissions-issues charters for new depository institutions. Supervise and regularly examine all state-charted banks and thrifts.
Major legislation that has shaped banking:
1863 National Currency and Bank Act. Established the Comptroller of the Currency and began chartering new national banks.
1913 The Federal Reserve Act. Provide temporary loans to banks and established a clearing system for checks.
1933 Glass Steagall. Separated different kinds of banks and provided for stricter controls. Established the FDIC.
1977 Community Reinvestment Act. Made “red-lining” illegal
- 1980 Depository Institutions Deregulation and Monetary Control Act.
- Lifted interest rate ceilings. Interest-bearing checking accounts are made legal.
1982 Garn-St. Germain. Legalized money market accounts.
1989 FIRREA. Financial Institutions Reform, Recovery, and Enforcement Act. To resolve the savings and loan problems and rescue the FDIC.
1991 The FDIC Improvement Act. Makes fees for FDIC insurance more closely related to risk exposure and established the Truth in Lending Act.
1994 Riegle Neal Permits interstate banking.
1999 Gramm-Leach-Bliley Allowed banks to engage in security and insurance activities.
2001 Patriot Act. Requires banks to collect information about customers and to report suspicious activity.
- 2002 Sarbannes-Oxley
- Strengthen auditing practices and makes it illegal to publish incorrect information.
2004 Check 21 Act. allows for electronic “substitute” checks
The Federal Reserve's Primary Job
Serve as a lender of last resort-providing temporary loans to depository institutions facing financial emergencies-and to help stablilize the financial markets and the economy in order to preserve public confidence. Most important job today is to control money and credit conditions to promote economic stability.
CHAPTER 3: THE ORGANIZATION AND STRUCTURE OF BANKING AND THE FINANCIAL-SERVICES INDUSTRY
What determines how banks are organized?
- Law and regulation
- Changing demand for services
- Increase in competition
- Changing rules of the game
- Known as "retail banks" because they cater to households and small businesses.--devoted principally to the markets for smaller, locally based deposits and loans.
- There generally are VP's of lending, operations, marketing and trust
- The service operations of a community bank are usually monitored by a cashier and auditor working in the accounting department and by the vice presidents heading the loan, fund-raising, marketing, and trust departments.
- Usually significantly impacted by changes in the health of the local economy.
Larger Money Center Banks
- Located in a large city and wholesale or wholesale plus retail in its focus.
- Owned and controlled by a holding company whose stockholders elect a board of directors to oversee the bank and nonbank businesses allied with the same holding company.
- Key problem in such an organization is often the span of control.
- Better diversified compared to community banks
- Rarely dependent on the economic fortunes of a single industry or a single nation.
- Bank with one location
- One of the oldest kinds, offer all of their services from one office
- Still common today
- One reason for the comparatively large number of unit banks is the rapid formation of new banks
- Many new banks start out as unit organizations
- Having a head office and then one or more other locations which offer full or amost full service
- Branches can be stand alone buliding, in shopping centers, on campuses, and in lobbies of businesses
- Reaons behind branching growth:
- 1. population moving from cities to suburbs
- 2. bank failures. Healthy banks put a branch there in stead of tearing down a bank building
- 3. business growth in outlying areas
- Examples include: Internet banking services, ATM's, POS terminals
- virtual banks- provide their services exclusively through the Web.
Bank Holding Companies
- A corporation chartered for the purpose of holding the stock (equity shares) of at least one bank, often along with other businesses.
- If a bank holding company holds more than 25% of the stock of a bank or can elect at least two directors, its seen as having "control" of that bank. It has to register, recieve approval and be examined.
- Why holding companies have grown:
- 1. access to capital funds
- 2. higher leverage
- 3. tax advantages
Why did we need Riegle Neal?
- Alllows holding companies to acquire banks throughout the United States without needing any state's permissin to do so and to establish branch offices across state lines in every state(except Montana)
- 1. The need to bring in new capital to revive struggling local economies
- 2. The expansion of fiancial-services offerings by nonbank financial institiutions that face few restrictions on their ability to expand nationwide
- 3. Large banks wanted to geographically diversify
- 4. It is possible that large banks are more efficient
- 5. Technological advances allow banks to serve customers well even from long distances.
Agency Problem in banking
Even though bankers are the agents for the stockholders and are supposed to be acting in the interests of the stockholders and working to enhance the value of owner’s equity, personal agendas do sometimes get in the way.
It is called “expense preference behavior” and includes spending the company’s money on fringe items such as lavish offices, country club memberships, and expensive entertainment. Although these expenses can be legitimate to a certain degree, they can also be overdone to the detriment of stockholders.
Corporate governance or overseeing expenses is important to keep this problem from occurring. Stock Options are another way to tie management to the goal of enhancing the value of owner’s equity.
Management is given options to buy shares at a certain price by a certain date. If the share price rises before that date, then the person can buy the shares one day and sell them on the open market the next day, thereby making a personal profit.
CHAPTER 4: ESTABLISHING NEW BANKS, BRANCHES, ATMS, TELEPHONE SERVICES, AND WEB SITES
Requirements for chartering a new bank
- 1. Need for a bank in that location
- 2. Honesty and competence of organizers and managers
- 3. Protecton against failure (equity)
- 4. Show that it will achieve levels of profitablilty
Benefits of a Federal Charter
- Added prestige
- Better quailty of technical assistance
- Federal laws can preempt state laws
Benefits of a state charter
- Easier and cheaper
- Need not join the Fed
- Higher lending limits in some states
- Some sevices that Fed cannot offer (some states)
Factors that Impact Success of a New Bank
- A. External Factors:
- 1. Level of economic activity
- 2. Growth of economic acitivity
- 3. Need for a new bank
- 4. Competition with new bank
- B. Internal Factors:
- 1. Qualifications and contats of organizers
- 2. Management quality
- 3. Capital available
- A desirable site is extremely important
- 1. Heavy traffic (30,000-40,00 per day)
- 2. Large number of retail shops
- 3. Above average population age (45 and above)
- 4. Business owners, professionals and managers
- 5. Declining number of banks
- 6. Above average population growth
- 7. Above average poplulation density
- 8. Relatively high target ratio of population per branch
- 9. Above average level of household income