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HBR Case Study

Ghanshyam Gupta 109 Balagopal Padmakumar 301 Harbir Singh Banga 302 Rishi Bajaj 402 Anirwan Bhattacharya 503

Rishi Bajaj 402

A financial institution that provides banking and financial services to Commercial institues, organizations, bodies, companies and entities.
The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs.

The term Commercial Bank used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

The largest commercial banks

Bank of America Corp, JP Morgan Chase & Co, HSBC Bank, Citigroup, and Goldman Sachs Group (96 percent of all exposures and had the largest share of derivative exposures of the commercial banking sector)

Some commercial banks, also have investment banking divisions, while others, such as Ally, operate strictly on the commercial side of the business.

Processing of payments by way of telegraphic transfer, internet banking, or other means Issuing bank drafts and bank cheques Accepting money on term deposit Lending money by overdraft, installment loan, or other means Providing documentary and standby LC, Guarantees, Performance Bonds, Security underwriting and other forms of off balance sheet exposure

Safekeeping of documents and other items in safe deposit boxes Sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a financial supermarket Cash management and treasury Merchant Banking & PE Financing Traditionally, large commercial banks also underwrite bonds, make markets in currency, interest rates and credit related securities (usually handled by IB now) Broader role towards economy, government.

Primary Function
Accepting Deposits

Making Advances

Credit creation

Secondary Function
Agency Functions

General Utility Functions

To collect and clear cheque, dividends and interest warrant. To make payment of rent, insurance premium, etc. To deal in foreign exchange transactions. To purchase and sell securities. To act as trusty, attorney, correspondent and executor. To accept tax proceeds and tax returns.

To provide safety locker facility to customers. To provide money transfer facility. To issue traveller's cheque. To accept various bills for payment e.g phone bills, gas bills, water bills, etc. To provide merchant banking facility. To provide various cards such as credit cards, debit cards, Smart cards, etc.

Ghanshyam Gupta 109

The two main roles played by banks in US are Operate payment system of credit cards, checks etc

Channelizing credit to business and households, investing money into the economy

Traditionally, banks funded their loan portfolios by issuance of deposit/insurance & pension liabilities to the investors. Credit Market in 1950 Primary Asset Held: U.S. Treasury Securities, C&I loans, Business & Home mortgages, Consumer Credit Sources of Funding: Zero interest bearing checking accounts, saving accounts There has been a shift in how banks lend: from short term lending of funds unsecured by real estate to collateralized loans.

Asset securitization of home mortgages as well as consumer credit have resulted in an reduction in the extent to which commercial banks fund these loans directly to the client. There has been a change in the composition of bank loan portfolio as well as the bank customers. Small time deposits have been increasing as a percentage of total assets. Demand deposits continued to fall.

There has been a change in the maturity structure of banks assets, average maturity of banks loans and earning assets has risen since 1988.
Providing several services through separate business units e.g. US Bancorp

The Gramm-Leach-Bliley Act, allows banks again to merge with investment and insurance houses. Banks have expanded the use of risk-based pricing from business lending to consumer lending Third, banks have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards.

Anirwan Bhattacharya 503

Held loans and securities as assets, which in turn were primarily funded by issuance of deposit liabilities By 1989, loans accounted for over 61% of total assets held by US commercial banks

Strong growth in real estate loans, steady growth in consumer

loans Due to high perceived risk in commercial sector, banks real estate portfolio has seen a shift from commercial to residential mortgages

$11 billion consumer receivables mostly credit card debt and automobile loans were securitized in 1989 Securitization helped banks to remove underlying loans from banks balance sheet thus lowering the regulatory capital

required to support actual level of banks lending activity

It also enabled banks to earn free income from originating and servicing the loans Non-interest income has seen an increase

In 1989, Net income for banking industry was down due to provisions for losses on non-performing loans Interest cost of deposits and purchased funds increased resulting lower net interest margin Small banks continued to book relatively high profits, larger

banks, particularly the money center institutions, reported

weak earnings. This was due to losses for commercial real estate and domestic business loans

Harbir Singh Banga 302 Balagopal Padmakumar 301