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1、CHAPTER 1AN OVERVIEW OF BANKS AND THE FINANCIAL-SERVICES SECTORGoal 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 rapid
2、ly 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
3、 New Services Offered to the Public Key Trends Affecting All Financial-Service Firms Appendix: Career Opportunities in Financial ServicesChapter OutlineI.I ntroduction: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 th
4、eir Principal CompetitorsC. Legal Basis of a BankD. Defined by the Government Agency That Insures Its Deposits III.The Financial System and Competing Financial-Service InstitutionsA. Savings AssociationsB. Credit UnionsC. Money Market FundsD. Mutual FundsE. Hedge FundsF. Security Brokers and Dealers
5、G. Investment BankersH. Finance CompaniesI. Financial Holding CompaniesJ. Life and Property/Casualty Insurance Companies10IV. The Services Banks and Many of Their Closest Competitors Offer the Public A.Services Banks Have Offered Throughout History1. Carrying Out Currency Exchanges2. Discounting Com
6、mercial Notes and Making Business Loans 3.Offering Savings Deposits4.Safekeeping of Valuables and Certification of Value 5.Supporting Government Activities with Credit 6.Offering Checking Accounts (Demand Deposits) 7.Offering Trust ServicesB. Services Banks and Many of Their Financial-Service Compet
7、itors Have Offered More Recently1. Granting Consumer Loans 2.Financial Advising 3.Managing Cash4.Offering Equipment Leasing 5.Making Venture Capital Loans 6.Selling Insurance Policies 7.Selling Retirement PlansC. Dealing in Securities: Offering Security Brokerage and Investment Banking Services1. Of
8、fering Security Underwriting2. Offering Mutual Funds and Annuities3. Offering Merchant Banking Services4. Offering Risk Management and Hedging ServicesV. Key Trends Affecting All Financial-Service Firms A.Service ProliferationB.Rising Competition C.Government DeregulationD. An Increasingly Interest-
9、Sensitive Mix of Funds E.Technological Change and Automation F.Consolidation and Geographic Expansion G.ConvergenceH.Globalization VI.The Plan of This Book VII.SummaryConcept Checks1-1.What is a bank? How does a bank differ from most other financial-service providers?A bank should be defined by what
10、 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.1-2.Under U.S. law what must a corporation do
11、 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 qua
12、lify 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
13、 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 bankings closest and
14、toughest competitors? What services do theyoffer that compete directly with banks services?Among a banks closest competitors are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding co
15、mpanies, and life and property-casualty insurance companies. All of these financial service providers are converging and embracing each others innovations. The Financial Services Modernization Act has allowed many of these financial service providers to offer the public one-stop shopping for financi
16、al services.1-5.What is happening to bankings 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
17、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 future1-6.What different kinds of services do banks offer the public today? Wh
18、at services do their closest competitors offer?Banks offer the widest range of services of any financial institution. They offer thrift deposits to encourage saving and checkable (demand) deposits to provide a means of payment for purchases of goods and services. They also provide credit through dir
19、ect loans, by discounting the notes that business customers hold, and by issuing credit guarantees. Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and for home improvements, etc. Banks also manage the property of customers under trust agreements and m
20、anage the cash positions of their business customers. They purchase and lease equipment to customers as an alternative to direct loans. Many banks also assist their customers with buying and selling securities through discount brokerage subsidiaries, the acquisition and sale of foreign currencies, t
21、he supplying of venture capital to start new businesses, and the purchase of annuities to supply future funding at retirement or for other long-term projects such as supporting a college education. All of these services are also offered by their closest competitors. Banks and their closest competito
22、rs are converging and becoming the financial department stores of the modern era.1-7.What is a financial department store? A universal bank? Why do you think these institutions have become so important in the modern financial system?Financial department store and universal bank refer to the same con
23、cept. A financial department store is an institution where banking, fiduciary, insurance, and security brokerage services are unified under one roof. A bank that offers all these services is normally referred to as a universal bank. These have become important because of convergence and changes in r
24、egulations that have allowed financial service providers to offer all services under one roof1-8.Why do banks and other financial intermediaries exist in modern society, according to the theory of finance?There are multiple approaches to answering this question. The traditional view of banks as fina
25、ncial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers (deficit-spending units), providing both a supply ofcredit and a supply of liquid assets. A newer view sees banks as delegated monitors who assess and evaluate bor
26、rowers on behalf of their depositors and earn fees for supplying monitoring services.Banks also have been viewed in recent theory as suppliers of liquidity and transactions services that reduce costs for their customers and, through diversification, reduce risk. Banks are also critical in the paymen
27、t system for goods and services and have played an increasingly important role as a guarantor and a risk management role for customers.1-9.How have banking and the financial services market changed in recent years? What powerful forces are shaping financial markets and institutions today? Which of t
28、hese forces do you think will continue into the future?Banking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the full force of the financial marketplace. At the same time the number and variety of banking services has increased greatly due
29、 to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services. Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter countries overseas and attract a
30、way profitable domestic business and household accounts.1-10. Can you explain why many of the forces you named in the answer to the previous question have led to significant problems for the management of banks and other financial firms and their stockholders?The net result of recent changes in bank
31、ing and the financial services market has been to put greater pressure upon their earnings, resulting in more volatile returns to stockholders and an increased bank failure rates. Some experts see banks role and market share shrinking due to restrictive government regulations and intensifying compet
32、ition. Institutions have also become more innovative in their service offerings and in finding new sources of funding, such asoff-balance-sheet transactions. The increased risk faced by institutions today, therefore, has forced managers to more aggressively utilize a wide array of tools and techniqu
33、es to improve and stabilize their earnings streams and manage the various risks they face.1-11. What do you think the financial services industry will look like 20 years from now? What are the implications of your projections for its management today?There appears to be a trend toward continuing con
34、solidation and convergence. There are likely to be fewer financial service providers in the future and many of these will be very large and provide a broad range of financial services under one roof. In addition, global expansion will continue and will be critical to the survival of many financial s
35、ervice providers. Management of financial service providers will have to be more technologically astute and be able to make a more diverse set of decisions including decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.Problems and Projects1. You have
36、 just been hired as the marketing officer for the new First National Bank of Vincent, a suburban banking institution that will soon be serving a local community of 120,000 people. The town is adjacent to a major metropolitan area with a total population of well over 1 million. Opening day for the ne
37、wly chartered bank is just two months away, and the president and the board of directors are concerned that the new bank may not be able to attract enough depositors andgood-quality loan customers to meet its growth and profit projections. There are 18 other financial-service competitors in town, in
38、cluding two credit unions, three finance companies, four insurance agencies, and two security broker offices. Your task is to recommend the various services the bank should offer initially to build up an adequate customer base. You are asked to do the following:a. Make a list of all the services the
39、 new bank could offer, according to current regulations.b. List the type of information you will need about the local community to help you decide which of the possible services are likely to have sufficient demand to make them profitable.c. Divide the possible services into two groups-those you thi
40、nk are essential to customers and should be offered beginning with opening day, and those that can be offered later as the bank grows.d. Briefly describe the kind of advertising campaign you would like to run to help the public see how your bank is different from all the other financial service prov
41、iders in the local area. Which services offered by the nonblank service providers would be of most concern to the new banks management?Banks can offer, if they choose, a wide variety of financial services today. These services are listed below. However, unless they are affiliated with a larger bank
42、holding company and can offer some of these services through that company, it may be more limited in what it can offer.Regular Checking AccountsManagement Consulting ServicesNOW AccountsLetters of CreditPassbook Savings DepositsBusiness Inventory LoansCertificates of DepositAsset-Based Commercial Lo
43、ansMoney Market DepositsDiscounting of Commercial PaperAutomobile LoansPlant and Equipment LoansRetirement Savings PlansVenture Capital LoansNonauto Installment Loans to IndividualsLeasing Plans for Business Property Residential Real Estate Loansand EquipmentHome Improvement LoansSecurity Dealing an
44、d Underwriting Personal Trust Management ServicesDiscount Security Brokerage Commercial Trust ServicesForeign Currency Trading and Institutional Trust ServicesExchangePersonal Financial AdvisingPersonal Cash-Management Services Insurance Policy Sales (Mainly Credit-Life)Standby Credit Guarantees Ins
45、urance Today (Except in Some States)Acceptance FinancingTo help the new bank decide which services to offer it would be helpful to gather information about some of the following items in the local community:School Enrollments and Growth in School Enrollments Estimated Value of Residential and Commer
46、cial Property Retail SalesPercentage of Home Ownership Among Residents in the AreaNumber and Size (in Sales and Work Force) of Local Business EstablishmentsMajor Population Locations (i.e., Major Subdivisions, etc.) and Any Projected Growth Areas Population Demographics (i.e., Age Distribution of th
47、e Area)Projected Growth Areas of Industries in the AreaEssential services the bank would probably want to offer right from the beginning includes: Regular Checking AccountsHome Improvement LoansAutomobile and other Consumer-typeMoney Market Deposit AccountsInstallment LoansRetirement Savings PlansNO
48、W AccountsBusiness Inventory LoansPassbook Savings DepositsDiscounting of High-Quality Commercial NotesResidential Real Estate Loans Certificates of DepositAs the bank grows, opportunities for the profitable sale of additional services usually increase, especially for trust services for individuals and smaller businesses and personal financial advising as well as some commercial (plant and equipment) loans and leases. Further growth may result in the expansion of commercial trust services as well as a widening variety of commercial loans and