Chapter One: An Overview of The Changing Financial-Services Sector

Chapter One
An Overview of the Changing

Financial- Services Sector
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
1-2
Key Topics
• What Is a Bank?
• The Financial System and Competing Financial-
Service Institutions
• Bank regulations
• Bank functions
• Old and New Services Offered to the Public
• Bank organization
• Key Trends Affecting All Financial-Service Firms
McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
1-3
Introduction
• Banks are the principal source of credit (loanable funds)
for millions of individuals and families and for many
units of government
• Worldwide banks grant more installment loans to

consumers (individuals and families) than any other
financial-service provider
• The assets held by U.S. banks represent about one-fifth

of the total assets
▫ In other nations banks hold half or more of all assets in the
financial system
McGraw-Hill/Irwin
1-4
What Is a Bank?
• A bank can be defined in terms of:
1. The economic functions it performs
2. The services it offers its customers
3. The legal basis for its existence
• Historically, banks have been recognized for the great

range of financial services they offer
▫ Bank service menus are expanding rapidly today to include
investment banking, insurance protection, financial
planning, advice for merging companies, the sale of risk-
management services to businesses and consumers, and
numerous other innovative financial products
McGraw-Hill/Irwin
1-5
EXHIBIT 1-1 The Many Different Kinds of Financial-Service

Firms Calling Themselves Banks
McGraw-Hill/Irwin
What is a bank?
 Definition by functions it serves
 Institutions involve in transferring funds from savers
to borrowers (financial intermediation) & in paying for
goods and services
 Definition by services it offers to customers
 Accept deposits, make commercial loans, offer
trust services, manage cash, etc
McGraw-Hill/Irwin
1-7
What Is a Bank? (continued)

• The Legal Basis for Banking
▫ A bank is any business offering deposits subject to
withdrawal on demand and making loans of a commercial or
business nature
▫ Congress then defined a bank as any institution that could

qualify for deposit insurance administered by the Federal
Deposit Insurance Corporation (FDIC)
▫ Under federal law in the U.S., a bank had come to be defined,
not so much by its array of service offerings, but by the
government agency insuring its deposits
McGraw-Hill/Irwin
1-8
What Is a Bank? (continued)

• The Legal Basis for Banking in Vietnam
▫ In Vietnam, a bank is a credit institution permitted to
conduct all banking activities and other related
business operations.
▫ "Banking activities" are monetary business activities
and banking services, the regular operation of which is
the receipt of deposits and use of that to extend credits,
provide payment services;
▫ "Non-bank credit institution" is a credit institution
permitted to engage in some banking activities as its
regular business, but not permitted to receive individual
deposits and to provide payment services.
McGraw-Hill/Irwin
1-9
The Financial System and Competing

Financial-Service Institutions
• Roles of the Financial System
▫ The primary purpose of the financial system is to encourage
saving and to transfer those savings to individuals and
institutions planning to invest and needing credit to do so
▫ This process of encouraging savings and transforming savings

into investment spending causes the economy to grow, new
jobs to be created, and living standards to rise
▫ The financial system also provides a variety of supporting

services:
▫ Payment services
▫ Risk protection services
▫ Liquidity services
McGraw-Hill/Irwin
1-10
The Financial System and Competing

Financial-Service Institutions (continued)
• Leading Competitors with Banks
▫ Savings Associations
▫ Credit Unions
▫ Fringe Banks
▫ Money Market Funds
▫ Mutual Funds (Investment Companies)
▫ Hedge Funds
▫ Security Brokers and Dealers
▫ Investment Banks
▫ Finance Companies
▫ Financial Holding Companies
▫ Life and Property/Casualty Insurance Companies
McGraw-Hill/Irwin
1-11
EXHIBIT 1–2 Comparative Size by Industry of Commercial

Banks and Their Principal Financial-Service Competitors
McGraw-Hill/Irwin
Goals of bank regulation
 Ensure safety and soundness of banks protecting
public’s savings and confidence
 Provide an efficient and competitive financial
system
 Provide monetary stability to achieve national broad
economic goals
 Maintain the integrity of the payments system
 Ensure equal opportunity and fairness in the
public’s access to financial services
 Provide government with credit, tax revenues and
other services
 Help sectors that have© 2008
McGraw-Hill/Irwin special credit needs
The McGraw-Hill Companies, Inc., All Rights Reserved.
Banking principal regulatory agencies (US)
 Federal Reserve System (FED)
 Comptroller of the Currency (OCC)
 Federal Deposit Insurance Corporation

(FDIC)
 Department of Justice
 Securities and Exchange Commission (SEC)
 State Boards of Commissions

McGraw-Hill/Irwin
Banking’s Principal Regulatory Agencies and Their
Responsibilities
McGraw-Hill/Irwin
Banking principal regulatory agencies (VN)
 State Bank of Vietnam (SBV)
 Deposit Insurance of Vietnam (DIV)
 Ministry of Finance (MOF)
 State Securities Commission of Vietnam

(SSC)
McGraw-Hill/Irwin
Why banks are closely regulated?
 Banks are among leading repositories of
public’s savings
 Bank’s power of creating money in form of
readily spendable deposits
 Banks provide individuals and businesses with
loans for consumption and investment, which
should be equally and adequately supplied.
 Government rely upon banks in conducting
economic policies, collecting taxes and
dispensing government payment.
McGraw-Hill/Irwin
What is Regulated?
• Initial creation of depository institutions
 Initial licensing and chartering
 Location and number of physical branches, offices
 Initial board of directors and officers
 Minimum cash and capital requirements to open
• On-going operations
 Mergers and acquisitions
 Opening or closing of offices, branches
 Many operations procedures
 What financial services/products may be offered
• Assets
 Diversification of assets
 Quality of assets
 Liquidity of assets
McGraw-Hill/Irwin  Level of cash reserves
What is Regulated? –Cont.
• Liabilities & equity
 Types of liabilities created
 Distribution of financing of assets
 Quality of liability and equity accounts
 Minimum capital requirements
• Others
 Community involvement
 Degree of market share in each market area
 Non-discriminatory operating policies
• Regulatory Process
 Examinations
 Reports
 CAMELS Rating: C apital adequacy; A sset Quality; M anagement
Quality; E arnings – amount & stability; L iquidity; S ensitivity to
market risk
McGraw-Hill/Irwin
The Federal Reserve System
 The Federal Reserve System
 Fundamental Functions
 Conduct monetary policy
 Provide and maintain the payments
system
 Supervise and regulate banking
operations
 Organization
 Board of Governors
 12 Federal Reserve District Banks
McGraw-Hill/Irwin
Federal Reserve System
Source: Federal Reserve Bulletin.

McGraw-Hill/Irwin
The Federal Reserve System
 Monetary Policy Tools
 Open Market Operations
 Open market purchases (sales) increase
(decrease) reserves & the money supply
 Discount Rate
 Decreasing (Increasing) the discount rate makes

bank borrowing less (more) expensive, which leads
to an increase (decrease) in the money supply
Reserve Requirements
 Decreasing (Increasing) reserve requirements
McGraw-Hill/Irwin
increases (decreases) the money 16
supply © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

State Bank of Vietnam
McGraw-Hill/Irwin
Bank functions
 Banks are the primary conduit for monetary
policy
 Banks are the primary source of credit for most

small businesses and many individuals
 Banks are the major repository of public savings
 Banks are the principal operator of payment

system.
McGraw-Hill/Irwin
1-24
Services Banks and Many of Their Closest

Competitors Offer the Public
• Services Banks Have Offered for Centuries
▫ Carrying Out Currency Exchange
▫ Discounting Commercial Notes and Making Business
Loans
▫ Offering Savings Deposits
▫ Safekeeping of Valuables and Certification of Value
▫ Supporting Government Activities with Credit
▫ Offering Checking Accounts (Demand Deposits)
▫ Offering Trust Services
McGraw-Hill/Irwin
Carrying out currency exchange
 Bank trade one form of currency to another

in return for fee
 Start from early days of banks
 Become more complicated in the global
financial market
 Be provided by large and well-experienced
banks
McGraw-Hill/Irwin
Discounting commercial notes and
making business loans
 Discounting commercial notes/making loans
to merchants based on accounts receivable
 Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)
 Be provided by banks and many other
financial- service competitors
 Be the core and main revenue-earning service
of many banks
McGraw-Hill/Irwin
Offering savings deposits
 Be the earliest and major source of fund for

making loan
 Compose of many types different in
maturity, form of currency, interest, etc.
 Be the most stable funding source
 Deposit is subject to reserve requirement
and insurance
McGraw-Hill/Irwin
Safekeeping of valuables
 Keep gold and other valuables of customers
in
secure vaults in return for fee
 Start since the old days of banks in the
Middle Ages
 Question: which banks are famous for this

service? Why?
McGraw-Hill/Irwin
22
Supporting government with credit
 Banks in Europe during the Industrial
Revolution and in America during the

Revolutionary War had to purchase
government bonds with a portion of deposits.
 The custom continues in the modern world
 Banks use government bond as a shelter of
liquidity risk and a source of revenue

McGraw-Hill/Irwin
Offering checking accounts
 Demand deposits permit depositors to write
draft/cheque for payment of goods and
services
 Be one of the most important offerings of the
industry
 Service is provided by not only banks but also
credit unions, savings associations, etc.
 Today the service is extended to the internet
with the use of smart cards
 Provide banks with©cheap
McGraw-Hill/Irwin
source
2008 The McGraw-Hill
Bank Management and Financial Services, 7/e ofInc.,fund.
Companies, All Rights Reserved.
Offering trust
services
 Banks manage financial affairs and property of
individuals and firms in return for fee
 In property management, banks acts as a
trustee for wills, managing the deceased
customer’s estate,…
 In commercial trust department, bank
manages pension plan for businesses and acts
as an agent issuing stocks and bonds.
McGraw-Hill/Irwin
1-32
Services Banks and Many of Their Closest

Competitors Offer the Public (continued)
• Services Banks and Many of Their Financial-Service Competitors
Began Offering in the Past Century
▫ Granting Consumer Loans
▫ Financial Advising
▫ Managing Cash
▫ Offering Equipment Leasing
▫ Making Venture Capital Loans
▫ Selling Insurance Policies
▫ Selling and Managing Retirement Plans
▫ Dealing in Securities: Offering Security Brokerage and Investment
Banking Services
▫ Offering Mutual Funds, Annuities, and Other Investment Products
▫ Offering Merchant Banking Service
▫ Offering Risk Management and Hedging Services
McGraw-Hill/Irwin
Granting consumer loans
 By early 20th century, banks started lending
consumers given the heavy competition for
business deposits and loans
 The trend has increased rapidly after the
World War 2
 Other current competitors for the consumer
credit accounts are credit unions and credit
card companies.
 The service bears high risk but returns high
earnings.
McGraw-Hill/Irwin
Providing financial advice
 Banks gains good reputation for

understanding and experience in the financial
market
 Customers ask for advice, particularly in credit
utilization, saving or investing funds
 Services provided are plentiful including
financial plan preparation, marketing
opportunity consultation, fund seeking,
investment options, etc.
McGraw-Hill/Irwin
Managing cash
 Bank handle cash collection and

disbursement for firms, invest temporary cash
surpluses
 Service is expanded to individuals and firms
 Bank earns not only fee, but also low-cost
fund in demand deposit accounts
McGraw-Hill/Irwin
Offering equipment leasing
Bank/
Lessor
Firm/ Equipment Equipment

Lessee installation Vendor
McGraw-Hill/Irwin
Making venture capital loans
 Finance the start-up cost of new

companies
 Implement through a venture capital firm
because added risk
 The venture capital firm raise fund from
investors looking for high profit
McGraw-Hill/Irwin
Selling insurance policies
 Bank sell insurance policies through acquiring
control of insurance companies
 Bank can gain high earning in the high-risk
insurance industry
 Bank possess privileges over independent
insurer in terms of customers, branches,
system, etc.
 Insurance agencies are affiliates or BHC or
FHC
McGraw-Hill/Irwin
Selling retirement
plans
 Bank actively involves in managing retirement
plan of businesses make available to
employees
 Incoming fund is invested to wisely selected
securities ensuring acceptable risk and return
 Bank also is in charge of dispensing payment
to retired or disabled employees.
McGraw-Hill/Irwin
Dealing in securities
 Bank provides security brokerage service and
security underwriting/investment banking services
 Bank offer mutual funds, annuities and other
investment products with clear consultation to
customers regarding higher expected yields and risk
 Bank temporarily buy stocks of large corporation
aiding new business launching or company expansion
by offering merchant banking services
 Bank acts as risk intermediation providing customer
with risk hedging tools (e.g. swap, option, future
contract) offered by themselves or from third party
 Services are provided through affiliated securities
firms or insurance companies.
McGraw-Hill/Irwin
34
1-41
TABLE 1–1 The Many Different Roles Banks and Their

Closest Competitors Play in Today’s Economy
McGraw-Hill/Irwin
1-42
TABLE 1–2 Some of the Leading Financial-Service Firms

around the Globe
McGraw-Hill/Irwin
3-43
Bank Organizations
Unit Banks
• Offer All Services From One Office

• One of the Oldest Kinds of Banks
• New Banks are Generally Unit Banks Until
Can Grow and Attract More Resources
McGraw-Hill/Irwin
3-44
Branch Banks
• Offer Full Range of Services from Several
Locations
• Senior Management at the Home Office
• Each Branch has its Own Management Team
with Limited Decision Making Ability
• Some Functions are Highly Centralized,
While Others are Decentralized
McGraw-Hill/Irwin
3-45
Reasons for Growth of Branching
• Exodus of Population to Suburban

Communities
• Increased Bank Failures in Recent Years
• Business Growth
McGraw-Hill/Irwin
3-46
What Trend in Branch Banking Has Been

Prominent in the U.S. in Recent Years?
Year # of Bank # of Total of Ave # of
Main Branch U.S. Bank Branches/
Offices Offices Offices U.S. Bank
1934 14,146 2,985 17,131 0.21
1970 13,511 21,810 35,321 1.61
1982 14,451 39,784 54,235 1.75
2007 7,241 77,947 85,188 10.76
From Table 3-2; Source: FDIC

McGraw-Hill/Irwin
Bank branch policy in
Vietnam
New branch set up – Circular No. 21/2013/TT-NHNN
VND 300 billion x N1 + VND 50 billion x N2 < C
Of which:
 C: the real value of the charter capital of commercial bank till
the time of request (VND billion).
 N1: quantity of branches which have been established and
requested for establishment at Hanoi and Ho Chi Minh urban
area.
 N2: quantity of branches which have been established and
requested for establishment at Hanoi suburban, Ho Chi Minh
suburban; and other provinces and centrally-run cities.
McGraw-Hill/Irwin
3-48
Electronic Branches
• Internet Banking Services
• Automated Teller Machines (ATMs)
• Point of Sale (POS) Terminals
McGraw-Hill/Irwin
3-49
Virtual Banks
• Provide their Services Exclusively Through

the Web
• Can Generate Cost Savings Over Traditional
Brick-and-Mortar Banks
• Have Not Yet Demonstrated They Can Be
Consistently Profitable
McGraw-Hill/Irwin
3-50
Bank Holding Companies (BHC)
• A Corporation Chartered for the Purpose of

Holding the Stock of One or More Banks
• Control of a bank is Assumed When 25% or
More of the Stock is Owned
• Must Get Approval from Federal Reserve
Board to Control a Bank
• One-Bank Holding Companies vs. Multibank
Holding Companies
McGraw-Hill/Irwin
3-51
Organizational Structure of a BHC

Single Ba nk Holding Com pa ny
Boa rd of Dire c t ors
Pa re nt Com pa ny
E a c h s ubs idia ry ha s a
Ba nk S ubs idia ry Nonba nk Subsidia rie s
pre s ide nt a nd line offic e rs
Ba nk Bra nc he s
The bottom four le ve ls ha ve the sa m e orga niza tiona l form a s the inde pe nde nt ba nk.
Mult iba nk Holding Com pa ny
Boa rd of Dire c t ors
Pa re nt Com pa ny
Ba nk S ubs idia ry Nonba nk Subsidia rie s Ba nk S ubs idia ry

McGraw-Hill/Irwin
Ba nk Bra nc he s Ba nk Bra nc he s
Bank Organizations
 Bank subsidiaries
 Bank controls one or more subsidiaries
 Subsidiaries offer other services such as
insurance and security brokerage services
 Profits and losses of each subsidiary impact
parent Bank
 Parent company’s net income is typically
derived from dividends, interest, management fees
from equity in subsidiaries, and interest paid on
holding company debt.
McGraw-Hill/Irwin
3-53
Nonbank Businesses of BHCs

• Finance Companies • Investment Banking
• Mortgage Companies Firms
• Data Processing • Trust Companies
Companies • Credit Card
• Factoring Companies Companies
• Security Brokerage • Leasing Companies
Firms • Insurance Companies
• Financial Advising and Agencies
• Credit Insurance • Real Estate Services
Underwriters • Savings Associations
• Merchant Banking
McGraw-Hill/Irwin
3-54
Reasons for the Growth of BHCs
• Geographic Diversification
• Product Line Diversification
• Tax Sheltering
• Double Leveraging
• Source of Strength
• A Way Around Regulatory Restrictions
McGraw-Hill/Irwin
3-55
Reasons for Full-Service Interstate

Banking
• Need to Bring New Capital to Revive
Struggling Local Economies
• The Expansion by Non Bank Financial
Institutions with Fewer Restrictions
• A Strong Desire by Large Banks to Expand
Geographically
• Belief Among Regulators that Large Banks
are More Efficient and Less Prone to Failure
• Advances in Technology
McGraw-Hill/Irwin
1-56
Key Trends Affecting All Financial-Service

Firms – Crisis, Reform, and Change
• Service Proliferation
• Rising Competition
• Government Deregulation and then Reregulation
• Crisis, Reform, and Change in Banking and Financial
Services
• An Increasingly Interest-Sensitive Mix of Funds
• Technological Change and Automation
• Consolidation and Geographic Expansion
• Convergence
• Globalization
McGraw-Hill/Irwin
1-57
Quick Quiz
• What is a bank? How does a bank differ from most other financial-
service providers?
• Why are some banks reaching out to become one-stop financial-
service conglomerates? Is this a good idea?
• Which businesses are banking’s closest and toughest competitors?
What services do they offer that compete directly with banks’
services?
• What is happening to banking’s share of the financial marketplace
and why?
• How have banking and the financial-services market changed in
recent years? What powerful forces are shaping financial markets
and institutions today?
McGraw-Hill/Irwin
1-58
Appendix: Career Opportunities in Banking

and Financial Services
• What different kinds of professionals work inside
financial firms?
▫ Loan Officers
▫ Credit Analysts
▫ Managers of Operations
▫ Branch Managers
▫ Systems Analyst
▫ Auditing and Control Personnel
▫ Trust Department Specialist
▫ Tellers
McGraw-Hill/Irwin
1-59
Appendix: Career Opportunities in Banking

and Financial Services (continued)
• What different kinds of professionals work inside
financial firms?
▫ Security Analysts and Traders
▫ Marketing Personnel
▫ Human Resources Managers
▫ Investment Banking Specialists
▫ Bank Examiners and Regulators
▫ Regulatory Compliance Officers
▫ Risk Management Specialists
McGraw-Hill/Irwin

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Chapter One: An Overview of The Changing Financial-Services Sector

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Chapter One

An Overview of the Changing

• Worldwide banks grant more installment loans to

• The assets held by U.S. banks represent about one-fifth

• Historically, banks have been recognized for the great

EXHIBIT 1-1 The Many Different Kinds of Financial-Service

What Is a Bank? (continued)

▫ Congress then defined a bank as any institution that could

What Is a Bank? (continued)

The Financial System and Competing

▫ This process of encouraging savings and transforming savings

▫ The financial system also provides a variety of supporting

The Financial System and Competing

EXHIBIT 1–2 Comparative Size by Industry of Commercial

 Comptroller of the Currency (OCC)

 Federal Deposit Insurance Corporation

 Securities and Exchange Commission (SEC)

 State Boards of Commissions

 State Bank of Vietnam (SBV)

 Deposit Insurance of Vietnam (DIV)

 Ministry of Finance (MOF)

 State Securities Commission of Vietnam

Source: Federal Reserve Bulletin.

 Decreasing (Increasing) the discount rate makes

supply © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Banks are the primary source of credit for most

 Banks are the major repository of public savings

 Banks are the principal operator of payment

Services Banks and Many of Their Closest

 Bank trade one form of currency to another

 Be the earliest and major source of fund for

 Compose of many types different in

maturity, form of currency, interest, etc.

 Be the most stable funding source

 Deposit is subject to reserve requirement

secure vaults in return for fee

 Start since the old days of banks in the

 Question: which banks are famous for this

 Banks in Europe during the Industrial

Revolution and in America during the

 The custom continues in the modern world

 Banks use government bond as a shelter of

liquidity risk and a source of revenue

Services Banks and Many of Their Closest

 Banks gains good reputation for

 Bank handle cash collection and

 Service is expanded to individuals and firms

 Bank earns not only fee, but also low-cost

fund in demand deposit accounts

Firm/ Equipment Equipment

 Finance the start-up cost of new

TABLE 1–1 The Many Different Roles Banks and Their

TABLE 1–2 Some of the Leading Financial-Service Firms

• Offer All Services From One Office

Reasons for Growth of Branching

• Exodus of Population to Suburban

What Trend in Branch Banking Has Been

1934 14,146 2,985 17,131 0.21

1970 13,511 21,810 35,321 1.61

1982 14,451 39,784 54,235 1.75

2007 7,241 77,947 85,188 10.76

From Table 3-2; Source: FDIC

VND 300 billion x N1 + VND 50 billion x N2 < C