CHAPTER 1 1 What is a bank a Assets held by US banks represent about 1 5 of the total assets and an even larger proportion of the earnings of all US based financial service institutions b Bank transfer funds from saver to borrowers financial intermediation i Any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature 1 Added that a bank is any institution that could qualify for deposit insurance administered by the federal deposit insurance corporation FDIC c Congress passed the Financial services modernization act of 1999 aka Gramm Leach Bliley or GLB Act allowed banks to enter the securities and insurance industries and allowed nonbank financial holding companies to acquire and control banking firms 2 Community banks vs Money centered banks a Money centered banks are giant industry leaders spanning whole regions nations continents Offer all financial services kill small businesses and face tough competition from other giant financial firms b Commercial banks are small and service local communities towns and cities Offer slightly less but more personalized financial services Declining in numbers 3 Financial system encourages people to transfer savings into investments and provide a Payment services that make commerce and markets possible credit debit checking b Risk protection services insurance policies and derivative contracts c d Credit services loans Liquidity services 4 Key competitors with banks a Savings associations mortgage loans and household credit to families ex Atlas Savings b Credit unions collect deposits from and make loans to their members as nonprofit association of individuals sharing a common bond like the same employer ex American credit Union c Money market funds collect short term liquid funds from individuals institutions and invest them in quality securities of short duration ex Franklin Templeton tax free money fund d Mutual funds investment companies sell shares to the public representing an interest in a professionally managed pool of stock bonds and other securities ex Fidelity e Hedge funds risky assets high wealth investors f Security brokers and dealers buy and sell securities on behalf of their customers and fir their own accounts ex Charles Schwab Have online accounts with higher interest rates than banks are willing to pay Investment banks provide professional advice to corporations and governments raise funds seek to make business acquisitions and trade securities ex Raymond James h Finance companies offer loans to commercial enterprises and to individuals families using funds borrowed in the open market or from other financial institutions ex Household Finance Financial holding companies FHCs credit card companies insurance finance companies security broker dealer firms ex GE Capital Life and property casualty insurance companies protect against risks to persons or property and manage the pension plans of businesses retirement funds of individuals ex Prudential Insurance g i j 5 What services banks have offered for centuries a Currency exchange b Discounting commercial notes buying a firm s A R and making business loans c Savings deposits d Safekeeping of valuables and certification of value e Supporting government activities with credit f Offering checking accounts demand deposits g Offering trust services managing financial affairs and property of individuals and business firms wills claims against payments pension plans for businesses agents for corporations issuing stocks bonds 6 What services banks and competitors began offering in the past century a Granting consumer loans b Financial advising c Managing cash d Equipment leasing e Making venture capital loans f g Selling and managing retirement plans h Dealing in securities offering security brokerage and investment banking services security Selling insurance policies underwriting marketing new securities for corporations i Mutual funds annuities and other investment products riskier j Merchant banking services temporary purchase of corporate stock to encourage expansion of the company k Risk management and hedging services l Convenience the sum of all financial services 7 Key trends affecting all financial service firms a Service proliferation b Rising competition FDIC reported banks held 90 of Americans spending money in 1980 now c Government deregulation lifting interest rate ceilings on savings deposits increased regulation in mortgage related assets bc of financial crisis d An increasingly interest sensitive mix of funds public more educated may turn to competitors e Technological change and automation f Consolidation and geographic expansion decline of small banks increase in mergers with larger 45 ones g Convergence moving across industry lines increasingly similar competitors h Globalization 8 Even with all the competition larger banks offer the widest range of services of any financial service firm today 9 Principle functions offering by financial services today Lending and investing money credit a b Making payments on behalf of customers to facilitate their purchases of goods and services payment c Managing and protecting customers cash and other forms of property Cash management risk d Assisting customers in raising new funds and investing funds profitable brokerage investment management trust banking savings CHAPTER 2 1 Why are banks so heavily regulated Leading repositories of public s savings a b Power to create money in form of loans and investments c Provide individuals with credit Discrimination is an issue Should promote competition and vigorous enforcement of antitrust laws instead of regulation d Government relies on banks for loans 2 Banks are regulated through a dual banking system both federal and state authorities have significant regulatory powers 3 Key bank regulatory agencies a Comptroller of the Currency b The Federal Reserve System c d The Department of Justice e Securities and Exchange Commission Federal Deposit Insurance Corporation 4 Theories on regulation a George Stigler firms in regulated industries actually seek out regulation bc it brings monopolistic benefits by blocking entry into the regulated industry b Samuel Peltzman regulation shelters a firm from changes in demand and cost lowering its risk c Edward Kane regulations increase customer confidence and customer loyalty i Regulatory dialect ongoing struggle between regulators and regulated firms 5 Legislation that created regulation a