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IMChap1

IMChap1

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Published by: babar zahoor on Jun 21, 2009
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05/14/2010

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CHAPTER 1AN OVERVIEW OF BANKS AND THEIR SERVICES
Goal of This Chapter: To help the reader discover the many roles banks play in the economytoday and to highlight the powerful trends sweeping through the banking industry that areredefining the roles banks will play in the future. It is important to understand how recent trendsin banking can affect a bank manager's decision making and why these decision makers musttake these trends into account if their banks are to survive and prosper.Key Terms Presented in This Chapter BankFinancial Advisory Services Nonbank BanksCash-Management ServicesCurrency ExchangeEquipment Leasing ServiceDiscounting Commercial NotesInsurance PoliciesRetirement PlansSavings DepositsSecurity BrokerageDemand DepositDelegated MonitoringTrust (fiduciary) ServicesIntermediation RolePayment RoleAgency RolePolicy RoleGuarantor RoleChapter OutlineI.Introduction:Sectors of the Economy Impacted by BanksII.What Is a Bank?A.Defined by the Functions It Serves and the Roles It Play:B.Nonbank BanksC.Defined by the Government Agency That Insures Its DepositsD.The Financial Firm Offering the Widest Range of Financial ServicesIll.The Services Banks Offer the PublicA.Services Banks Have Offered Throughout History1.Carrying Out Exchanges of Currency2.Discounting Commercial Notes and Making Business Loans3.Offering Savings Deposits4.The Safekeeping of Valuables and Certification of Value5.Supporting Government Activities With Credit6.Offering Checking Accounts (Demand Deposits)7.Offering Trust ServicesB.Services Bankers Have Developed More Recently1.Granting Consumer Loans2.Financial Advising3.Cash Management
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4.Offering Equipment Leasing5.Making Venture Capital Loans6.Selling Insurance Services7.Selling Retirement Plans8.Offering Security Brokerage Investment Services9.Offering Mutual Funds and Annuities10.Offering Merchant Banking Services11.Convenience -- The Sum Total of all Bank ServicesIV.Trends Affecting All BanksA.Service ProliferationB.Rising CompetitionC.DeregulationD.Rising Funding CostsE.An Increasingly Interest-Sensitive Mix of FundsF.A Technological RevolutionG.Consolidation and Geographic ExpansionH.Globalization of BankingI.Increased Risk of Failure and the Weakening of Government Deposit InsuranceSystemsV.Are Banks Dying?VI.The Plan of This Book VII.SummaryConcept Checks1-1.What is a bank?A bank should be defined by what it does, in this case, banks are generally those financialinstitutions offering the widest range of financial services.1-2.Under current U.S. federal law
 
what must a corporation do to qualify as a commercial bank?Under U.S. law at the federal level, commercial banks must offer two essential services toqualify as banks for purposes of regulation and taxation, demand (checkable) deposits andcommercial loans. Alternatively, U.S. financial institutions whose deposits are insured by theFOIC may be classified as banks.1.3.Why are banks increasingly reaching out to become one-stop financial serviceconglomerates? Is this a good idea in your opinion?There are two reasons that banks are increasingly becoming one-stop financial serviceconglomerates. The first reason is the increased competition from other types of financialinstitutions and the erosion of banks’ traditional service areas. The second reason is theFinancial Services Modernization Act which has allowed banks to expand their role to be fullservice providers.
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1-4.What different kinds of services do banks offer the public?Banks offer the widest range of services of any financial institution. They offer thrift deposits toencourage saving and checkable (demand) deposits to provide a means of payment for purchasesof goods and services. They also provide credit through direct loans, by discounting the notesthat business customers hold, and by issuing credit guarantees. Additionally, they make loans toconsumers for purchases of durable goods, such as automobiles, and for home improvements,etc. Banks also manage the property of customers under trust agreements and manage the cash positions of their business customers. They purchase and lease equipment to customers as analternative to direct loans. Many banks also assist their customers with buying and sellingsecurities through discount brokerage subsidiaries, the acquisition and sale of foreign currencies,the supplying of venture capital to start new businesses, and the purchase of annuities to supplyfuture funding at retirement or for other long-term projects such as supporting a collegeeducation.1-5.Why do banks exist in modern society, according to the theory of finance?There are multiple approaches to answering this question. The traditional view of banks asfinancial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers (deficit-spending units), providing both a supplyof credit and a supply of liquid assets. A newer view sees banks as delegated monitors whoassess and evaluate borrowers on behalf of their depositors and earn fees for supplyingmonitoring services. Banks also have been viewed in recent theory as suppliers of liquidity andtransactions services that reduce costs for their customers and, through diversification, reducerisk.1-6. How has banking changed in recent years?Banking is becoming a more volatile industry due, in part, to deregulation which has opened upindividual banks to the full force of the financial marketplace. At the same time the number andvariety of banking services has increased greatly due to the pressure of intensifying competitionfrom nonbank financial-service providers and changing public demand for more convenientlyand reliably provided services. Adding to the intensity of competition, foreign banks haveenjoyed success in their efforts to enter countries overseas and attract away profitable domestic business and household accounts.1-7Can you explain why many of these changes have led to significant problems for bank managers and stockholders?The net result of recent changes in banking has been to put greater pressure upon bank earnings,resulting in more volatile returns to bank stockholders and an increased bank failure rate. Someexperts see banks' role and market share shrinking due to restrictive government regulations andintensifying competition. Banks have also become more innovative in their service offerings andin finding new sources of funding, such as off-balance-sheet transactions. The increased risk faced by banks today, therefore, has forced bank managers to more aggressively utilize a widearray of tools and techniques to improve and stabilize their earnings streams and manage the
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