Exam 1 Fin4324 On the Test Structural banking trends Roles of a bank Bank geographic consolidation Convergence Letter of credit Components Bank asset size classifications Types of bank charters requirements issues Foreign central banks Capital requirement accords Bank regulating hierarchy Offerings of a commercial bank Wholesale banks Types of bank service roles Major bank legal authority Types of bank agencies Bank holding company characteristics Bank management and roles Member banks Calculate standard deviation Bank establishment risk consideration Calculate NPV Authentication factors Bad debt reserve Bank reserve bank spreads Calculate net interest income and non net interest income European bank hierarchy Calculate weighted return Services offered by a bank Types of bank assets Components of report condition Non interest income Interstate banking Chapter 1 Introduction pg 1 Banks are the principal source of credit loanable funds for millions of individuals and families and for many units of government school districts cities countries Worldwide banks grant more installment loans to consumers individuals and families than any other financial service provider o They are among the leading buyers of bonds and notes governments issue to finance public facilities 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 What is a Bank Pg 2 A bank can be defined in terms of The economic functions it performs The services it offers its customers 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 Banks no longer limit their service offerings to traditional services but have increasingly become general financial service providers Financial Services Modernization Act of 1999 allows US banks to enter the securities and insurance industries and permitting nonbank financial holding companies to control banking firms Commercial bank serves both business and household customers with deposits and loans all over the world Money centered banks vs community banks pg 3 Money centered banks Industry leaders Cover whole regions nations and continents Offer the widest possible menu of financial services Acquire smaller businesses Face tough global competition Community banks Much smaller Service local communities and towns Offer a narrower but often more personalized menu of financial services Know this pg 3 wholesale banks larger commercial banks serving corporations and governments The legal basis for banking pg 5 Federal governments definition of banking a bank is any business offering deposits subject to withdrawal on demand such as by writing a check swiping a plastic card through a card reader or completing an electronic transfer of funds and making loans of a commercial or business nature Most recent definition defined by Congress a bank as any institution that could qualify for deposit insurance administered by the Federal Deposit Insurance Corporation FDIC A bank is defined by the government agency insuring its deposits The Financial System and Competing Financial Service Institutions pg 5 Roles of the financial system o 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 o 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 o The financial system also provides a variety of supporting services websites contracts Payment services checks credit debit cards and interactive Risk protection services insurance policies and derivative Liquidity services making it possible to convert property into immediately available spending power Credit services for those who need loans to supplement their The competitive challenge for banks income o Lately the financial market share that banking comprised has fallen o Banks account for one quarter of the assets of the US financial marketplace Leading Competitors with Banks pg 6 o Leading Competitors with Banks o Savings Associations o Credit Unions o Fringe Banks o Money Market Funds o Mutual Funds Investment Companies o Hedge Funds o Security Brokers and Dealers o Investment Banks o Finance Companies o Financial Holding Companies o Life and Property Casualty Insurance Companies Financial service providers are converging in terms of the services they offer The U S Financial Services Modernization Gramm Leach Bliley Act of 1999 has allowed many different types of financial firms to offer the public one stop shopping for financial services The challenge of differentiating banks from other financial service providers is difficult today Service Banks and Many of Their Closest Competitors offer the Public pg 8 Services Banks have offered for centuries o Carrying out currency exchange currency exchange was one of the first services that banks historically offered o Know letter of credit pg 9 know that the guarantor role stands behind their customers to pay off debts when those customers are unable to pay like an example is letter of credit Know Roles of Bank pg 9 o Discounting Commercial Notes and making Business loans Discounting commercial notes making loans to local merchants who sold the debts accounts receivable they held against their customers to a bank in order to raise cash quickly o Offering savings debts interest bearing funds left with depository institutions for specific period of time o Safekeeping of valuables and certification of value certified if values were worth what other people claimed European banks were used for safekeeping because savings were lost due to theft war and expropriation by governments Know this European bank hierarchy o Offering checking accounts demand deposits a checking account that permitted depositors to write drafts in payment for goods and services that the bank or other service provider had to honor immediately o Trust services Service Banks and Many of their Financial Service competitors began Offering in the Past Century Know this offerings of a bank pg 11 o