FIN4324 Exam 1 Review Chapters 1 5 Glass Steagall Act 1933 law that separated commercial and investment banks imposed interest rate ceilings on bank deposits authorized FDIC and granted federally chartered banks the power to branch throughout the state FOMC composed of the members of the Federal Reserve board and presidents the FOMC sets money and credit policies for the Federal Reserve System and oversees the conduct of open market operations the chief policy tool Member bank a commercial bank that has joined the Federal Reserve system and is subject to its riles and regulations includes all national banks as well as state chartered banks that elect to join the Federal Reserve System Quantitative Easing unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective Banks need a charter to get started that is overseen by the Board of Directors Wholesale Bank large metropolitan banks that offer financial services mainly to corporations and other large institutions Retail Bank consumer oriented banks that sell the majority of their products and services to households and smaller businesses There are more state banks than federal banks Holding Company corporations that control one or more financial institutions and perhaps other businesses as well under the terms of Gramm Bliley Act of 1999 banks insurance companies security dealers and other financial firms may be acquired and brought under common ownership through a holding company Germany has largest bank Unit banks banks that offer the full range of their services from one office though a small number of services taking deposits may be offered from limited service facilities such as ATMs and drive thrus Riegle Neal Interstate Banking Act Federal law passed in 1994 that permits bank holding companies to acquire banks nationwide and authorized interstate branching and mergers Gramm Leach Bliley Financial Services Modernization Act law that permitted common ownership of banks securities firms and insurers through financial holding companies or subsidiaries if well capitalized and well managed and granted regulatory approval USA Patriot Act federal law passed in the Untied States requiring selected financial institutions to verify the identity of customers opening new accounts and to report any suspicious activities to a division of the U S Treasury Department Sarbanes Oxley Accounting Standards Act federal law passed in 2002 to prohibit public companies from publishing false or misleading financial reported and creating an accounting standards board to oversee the practices of the accounting and auditing professions Office of Comptroller of the Currency the federal government agency that award charters for new national banks in the US and supervises and regularly examines all existing national banks oldest regulator State banking commissioner boards or commissions appointed by governors or legislators in each of the 50 states that are responsible for issuing new bank charters and supervising and examining state chartered banks Benefits of a Federal Charter 1 Prestige 2 Technical assistance by national authorities 3 Federal rules can pre empt state laws Benefits of a State Charter 1 Easier and less costly 2 Don t have to join Federal Reserve System 3 Can lend a higher percentage of its capital to single borrower 4 May be able to offer services that national banks can not real estate brokerage Goal of a bank is to make a profit but has to be reasonable based on costs and risk Desirable Sites for new Branches Large number of retail stores present Heavy traffic count Populations that are above average age 45yrs Above average population growth and density High target ratio of population per branch Substantial number of owners managers and professionals Steady or declining number of service of financial facilities Expected Rate of Return capital budgeting decision tool to judge if a project is economically viable The return depends upon the demand for its services the quality of management and the cost in capital to operate the branch Must consider return AND risk Variants due to fluctuations in economic conditions in the area served by the branch and the covariance of expected returns from proposed projects E RT W X E RB 1 W X E ROA Geographic diversification spreading out credit accounts and deposits among customers located in different communities regions or countries in order to reduce the overall risk of loss to banks or other financial institution Net Present Value PV investment Cost use I Y N PV FV PMT PMT cost to install ATM not actual ATM cost Time value of money is extremely important in banking What you can do with phone banking Submission of loan and deposit requests Investments Checkbook orders Address changes Inquiries card replacement bill pay and straightforward requests Authentication factors PIN or password smart card fingerprint looks Something a customer KNOWS HAS IS Bank liabilities Deposits Non deposit borrowing and equity capital D NDB EC Bank assets Loans securities cash miscellaneous assets C S L MA Largest asset is loans and leases Bank balance sheet known as the Report of Condition A L EC Liabilities and equity represent accumulated source of funds which provides spending power Accumulated use of funds are made to generate income for its stockholders pay interest to depositors and pay salaries Examples of bank expenses interest expense noninterest expense Interest paid on deposits Interest paid on non deposit borrowings Salaries and wages Overhead Provision for loan loss and allocation for loan loss Miscellaneous expenses Non deposit borrowing in the money markets or from other banks which include fed funds and repurchase agreements usually short term Interest rates are highly volatile Gains Losses from Trading on Securities the net total realized and unrealized gain loss included in earnings for the period as a result of selling or holding marketable securities categorized as trading available for sale or held to maturity Borrowed funds gives leverage which is the ratio between debt and equity Used to boost earnings and remain competitive majority of banks assets is debt Investment securities Liquid portion used to meet demands for cash secondary reserves and include short term holdings of securities occupy middle ground between cash assets and loans Income generating portion held to maturity bonds notes and others held for expected rate of