Chapter Fourteen Investment Banking, Insurance, and Other Sources of Fee Income

14-2 Traditional Sources of Fee Income Service Charges on Deposit Accounts Credit Card Service Fees Commitment Fees for Making Credit Available Fees for Use of Safe Deposit Boxes Rental of Bank Property to Individuals and Businesses

14-3 Newer Sources of Fee Income Commissions and Fees From Investment Banking Services Brokerage Commissions for Aiding in the Purchase of Securities Fiduciary Income – Trust Services Commissions for the Sake of Insurance Servicing Fees from Securitization and Sales of Loans

14-4 Reasons for the Drive for More Service Fees A Desire to Supplement Traditional Sources of Funds An Effort to Offset Higher Production Costs A desire to Reduce Overall Risk A goal to Promote Cross-Selling of Traditional and New Services

14-5 Investment Banking Services Under The Authority Of The Gramm- Leach-Bliley-Act Many Banking Firms Have Either Acquired Or Formed Their Own Investment Banking Affiliates. The Primary Role Of Investment Bankers Is to Serve As Financial Advisers To Corporations, Governments, And Other Large Institutions.

14-6 Principal Types of Securities Underwritten by Investment Bankers Government and Federal Agency Securities Investment Grade Corporate Bonds Convertible Corporate Bonds and Stock Common and Preferred Stock Corporate Junk Bonds Asset Backed Securities

14-7 Additional Sources of Revenue for Investment Bankers Advising Clients Regarding Acquisitions and Mergers Creating and Trading Derivatives Brokering Loan Sales Setting Up Special Purpose Entities Stock and Bond Trading Currency and Commodity Trading Issuing Credit and Liquidity Enhancements Developing Business Plans

14-8 Mutual Funds Companies that Offer Shares in a Pool of Securities and Flow Through Any Earnings Generated to Shareholding Customers

14-9 Two Popular Mutual Funds Exchange Traded Funds (ETFs) – Behave Like Index-Tracking Mutual Funds but Trade All Day on Stock Exchanges Hedge Funds – Private Partnerships Whose Shares are Offered Primarily to Wealthy Clients that Often Make High- Stakes Bets on the Direction of the Market

14-10 Two Different Ways of Being Involved with Mutual Funds Proprietary Funds Offered Through One of Their Affiliated Companies –Offer Investment Advice –Serve as Transfer Agents –Execute the Transactions of the Fund Nonproprietary Funds – The Offering Institution Acts as a Broker for an Unaffiliated Mutual Fund

14-11 Annuities A Savings Instrument in Which the Customer Makes Cash Payments to an Investment Manager Who Places Them Into Earning Assets and Where Later the Purchaser Receives a Stream of Income From Those Assets

14-12 Types of Annuities Fixed Annuities – Promise a Customer Who Contributes a Lump Sum a Fixed Rate of Return Over the Life of the Contract Variable Rate Annuities – A Lump Sum of Money is Invested Into a Basket of Stocks, Mutual Funds or Other Investments Return for a Customer But is Not Promised a Fixed Equity-Index Annuity – Combines Features of Both Fixed and Variable Annuities

14-13 Regulations Regarding Investment Products Customers Must be Informed that Investment Products are: –Not Insured by the FDIC –Not a Deposit or Other Obligation of a Depository Institution –Subject to Investment Risks

14-14 Trust Services These Services are Centered on the Management of Property Owned By a Bank’s Customers, Such as Securities, Land, Buildings and Other Investments

14-15 Types of Trusts Living Trusts – Allows Trust Officers to Act on Behalf of a Living Customer without a Court Order Testamentary Trusts – Arise Under a Probated Will and Used to Save on Estate Taxes Irrevocable Trusts – Allows Wealth to be Passed Free of Gift and Estate Taxes Charitable Trusts – Used to Support Worthwhile Causes Indenture Trusts – Used Collect, Hold and Manage Assets to Back an Issue of Securities by a Corporation Dynasty Trusts – Set Up to Avoid Paying Federal Estate Taxes and Generation-Skipping Taxes

14-16 Offerings of Insurance Related Products Life Insurance Policies Life Insurance Underwriters Property-Casualty Insurance Policies Property-Casualty Insurance Underwriting

14-17 Insurance Products Disclosure Rules An Insurance Product is not a Deposit or Other Obligation of a Depository Institution An Insurance Product is not Insured by the FDIC Insurance Products May Involve Investment Risk and Possible Loss of Value Depository Institutions Cannot Base Granting Loans Based on the Purchase of Insurance

14-18 Product-Line Diversification Effect Offering More Than One Product or Service Through the Same Company in Order to Reduce the Overall Risk of the Revenues Flows Through the Individual Firm

14-19 Risk and Return With Traditional and Nontraditional Services Where: NT is Nontraditional Services and T is Traditional Services and r is the Correlation Between Them

14-20 Customer Privacy Protecting the Personal Information That Customers Supply to Their Financial-Service Providers So That Customers are Not Damaged By the Release of Their Private Data to Outside Parties