SPECIALIZED BANK SERVICES Banking 6/7/2018 SPECIALIZED BANK SERVICES 9 9.1 International Banking 9.2 Insurance and Brokerage 9.3 Cash Management 9.4 Trusts Chapter 1

9.1 INTERNATIONAL BANKING 6/7/2018 9.1 INTERNATIONAL BANKING GOALS Identify financial entities involved in international banking. Describe international services offered by banks. Chapter 1

TERMS Sovereign wealth fund Edge corporations Correspondent bank Currency risk Country risk Money laundering Letter of credit Foreign exchange rate

STRUCTURE OF INTERNATIONAL SERVICES International lending World bank Single Euro Payments Area (SEPA) Other services

FOREIGN BANKS The responsibility for supervising the branches and agencies of foreign banks operating within the United States belongs primarily to the Federal Reserve. ROCA Risk management Operations Compliance Asset quality

U.S.-BASED INTERNATIONAL BANKING Office of the Comptroller of the Currency (OCC) Charters and supervises U.S. national banks that do international business

SOVEREIGN WEALTH FUNDS The excess cash of a country that is put into a separate fund Separate from the country’s official currency reserves Can be used to make investments on behalf of the country

OTHER TYPES OF INTERNATIONAL OPERATIONS Edge corporations Financial corporations that are federally chartered and allowed to engage only in international banking or other financial transactions related to international business Correspondent banks Act as points of contact for other banks that do not have a branch, agency, subsidiary, or corporation in the host country Subject to the banking regulations of the host country

SPECIAL CONSIDERATIONS Financial risk Currency risk The risk posed by variations in exchange rates between countries Country risk The entire range of political, legal, social, and economic conditions that may put international business at risk

Money laundering Intentionally depositing, investing, or exchanging money in such a way as to conceal its illegal source

checkpoint What is an edge corporation? Name three types of risk for international banking.

INTERNATIONAL SERVICES Trade financing Letter of credit An instrument given by a bank on behalf of a buyer (applicant) to pay the bank of the seller (beneficiary) a given sum in a given time Drafts and wires International collections Foreign exchange rate The value of one currency in terms of another

TRADE CONSULTING U.S. export-import (Ex-Im) bank Overseas private investment corporation (OPIC)

checkpoint What is a letter of credit?

9.2 INSURANCE AND BROKERAGE Banking 6/7/2018 9.2 INSURANCE AND BROKERAGE GOALS Explain the effects of the Gramm-Leach-Bliley Act of 1999. List typical insurance and brokerage products available from financial institutions. Chapter 1

TERMS Stock Bond Mutual fund Annuity

A NEW ERA The old world: Glass-Steagall Act The new world: Gramm-Leach-Bliley Act (GLBA) Limits and regulation

checkpoint Why did the Glass-Steagall Act limit the participation of banks in a wide range of financial businesses? What was the major result of the Gramm-Leach-Bliley Act?

The workings of insurance INSURANCE PRODUCTS The workings of insurance The primary goal of insurance is to Allocate the risks of loss from the individual to a great number of people Protect holders against financial disaster

PERSONAL INSURANCE PRODUCTS Auto insurance Credit insurance Disability insurance Life insurance

Homeowner’s insurance Mortgage disability insurance Title insurance Health insurance Traditional HMO PPO Homeowner’s insurance Mortgage disability insurance Title insurance

BUSINESS INSURANCE Commercial liability Disability―short-term Disability―long-term Health insurance Officers’ liability insurance Property insurance Workers’ compensation insurance

checkpoint What is an HMO?

A broker charges a fee to execute the transaction. BROKERAGE SERVICES Brokerage Bringing together parties interested in making a transaction A broker charges a fee to execute the transaction.

STOCKS Stock Common stock Preferred stock The capital raised by a corporation through the issuance of shares entitling holders to an ownership interest, or equity, in the corporation Common stock Preferred stock

BONDS Bond A debt instrument issued for a period of more than one year with the purpose of raising capital through borrowing

MUTUAL FUNDS Mutual funds Diversification Investment companies that pool money from many savers who have small amounts to invest Diversification The distribution of assets in a portfolio among different types of securities and maturity dates instead of putting “all your eggs in one basket”

ANNUITIES Annuity A series of payments, often to a retired person, of a set amount from a capital investment Paid at a specified frequency and for a set number of years or until the annuitant’s death

checkpoint What is a diversified portfolio?

Banking 6/7/2018 9.3 CASH MANAGEMENT GOALS Explain why banks are in a good position to offer cash management services. List several cash management services banks perform for businesses. Chapter 1

TERMS Outsourcing Factoring

SYSTEMS IN PLACE FOR CASH MANAGEMENT Banks are in a good position to provide cash management services to businesses for several reasons. Experience Business knowledge Technology Industry expertise

checkpoint Why is a bank in a good position to offer cash management services?

Frequently outsourced accounting services include CASH MANAGEMENT Outsourcing Having an outside party supply a product or service that the firm had been producing or performing itself Frequently outsourced accounting services include Payroll Accounts payable Accounts receivable

Bank collection services enable banks to collect funds and integrate information easily and cost effectively. Deposit services Lockbox service Zero-balance accounts (ZBAs) Automated Clearing House (ACH) Network

Electronic Data Interchange (EDI) INFORMATION SERVICES Electronic Data Interchange (EDI) The computer-to-computer exchange of business information through standard interfaces

CAPITAL SERVICES Capital investments Financing Factoring The practice of buying debt at a discount

checkpoint Explain how a zero-balance account works.

GOALS Explain what trust services are. Banking 9.4 TRUSTS 6/7/2018 GOALS Explain what trust services are. Identify important types of trust services banks provide. Chapter 1

TERMS Trust Donor Beneficiary Corpus IRA 401(k) plan

TERMS Variable annuity Estate Will Probate Executor Living trust

WHAT ARE TRUST SERVICES? An arrangement by which one party holds property on behalf of another party for certain defined purposes Donor The person who creates a trust Beneficiary The person for whose benefit the property is held Corpus Refers to the property that is held

checkpoint What is a trust?

TRUST SERVICE PRODUCTS Retirement planning IRA (individual retirement account) Traditional Funds are invested on a before-tax basis Taxed upon withdrawal Roth Funds use after-tax dollars As long as the assets have remained inside the account for five years, all earnings and principal can be withdrawn totally tax-free after age 59½.

401 (k) plan Variable annuity Allows employees to make tax-deferred contributions to a trust and direct their funds to be invested among a variety of choices Money can be retrieved at departure or retirement Variable annuity Combines the opportunity for tax-deferral with a choice of portfolios and the flexibility to vary annual contributions according to the investors’ needs or market conditions

ESTATE PLANNING Estate Will The total property, real (real estate) and personal (all other possessions, such as automobiles, jewelry, and bank accounts) that an individual owns Will A document by which the individual gives instructions as to what is to happen upon his or her death in regard to property and remains

Probate A court proceeding that settles an estate’s final debts and formally passes legal title to property from the decedent to his or her heirs

Identifying and valuing the estate assets ESTATE SETTLEMENT Identifying and valuing the estate assets Executor The person named in the will to administer the estate Paying creditors, estate expenses, and taxes Preparing and filing the necessary tax documents with Federal and/or state authorities Distributing assets to beneficiaries

TESTAMENTARY TRUSTS Testamentary trusts Established by a will and take effect at the donor’s death Receive the assets of the estate to hold and manage for the benefit of the heirs

CHARITABLE REMAINDER TRUSTS Charitable remainder trust (CRT) An irrevocable trust designed to convert the highly appreciated assets of a trust into a lifetime income stream without generating estate and capital gains taxes Trustor The person who sets up the trust

LIVING TRUSTS Living trust A legal document that provides an expedient way to transfer property at a person’s death

checkpoint What are the responsibilities of an estate executor?