Trust Services as a Source of Fee Income

Slides:



Advertisements
Similar presentations
CHAPTER ONE An Overview of Banks and the Financial Services Sector
Advertisements

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter One An Overview of Banks and the Financial-Services Sector.
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Three The Organization and Structure of Banking and the Financial-Services.
Guaranteed Investment Contracts Chapter 9 Tools & Techniques of Investment Planning Copyright 2007, The National Underwriter Company1 What is it? Traditional.
Chapter 15 Conflicts of Interest in the Financial Industry.
Investment Banking, Insurance, and Other Sources of Fee Income
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 14 Investing in Mutual Funds Copyright © 2012 Pearson Canada Inc
Chapter Eight Risk Management: Financial Futures, Options, and Other Hedging Tools Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Portfolio risk and return measurement Module 5.2.
An Overview of the Changing Financial- Services Sector
Chapter Fourteen Investment Banking, Insurance, and Other Sources of Fee Income Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Financial Institutions Accounting Dr. Salah Hammad Chapter 1 An Overview of the Changing Financial-Services Sector 2.
Securities Firms, Mutual Funds, and Financial Conglomerates Chapter 20 © 2003 South-Western/Thomson Learning.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Fourteen Investment Banking, Insurance, and Other Sources of Fee Income.
CHAPTER SEVEN Risk, Return, and Portfolio Theory J.D. Han.
Chapter Nineteen Acquisitions and Mergers in Financial-Services Management Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter Twelve Investment Banking, Insurance, and Other Sources of Fee Income.
AN OVERVIEW OF BANKS AND THE FINANCIAL- SERVICES SECTOR.
Chapter Ten The Investment Function in Financial- Services Management Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Mutual funds are investments in securities – such as bonds, stocks, etc. – that pool money from multiple investors. The investments are controlled by.
CHAPTER18 Financial Statement Analysis.
Chapter Fourteen Investment Banking, Insurance, and Other Sources of Fee Income.
Investment Banking, Insurance, and Other Sources of Fee Income
Steps in the Lending Process
Alternative Nondeposit Sources of Funds (continued)
Liquidity and Reserves Management: Strategies and Policies
The Balance Sheet (Report of Condition) (continued)
The Investment Function in Financial-Services Management
3-1 TABLE 3–2 Growth of Commercial Bank Branch Offices in the United States Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction.
EXHIBIT 8–3 Trade-Off Diagrams for Financial Futures Contracts
Conflicts of Interest in the Financial Industry
6-1 TABLE 6–1 Components of Return on Equity (ROE) for All FDIC-Insured Institutions ( ) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission.
Investment Banking, Insurance, and Other Sources of Fee Income
Factors Affecting Choice of Investment Securities (continued)
7-1 Interest Rate Risk: One of the Greatest Management Challenges (continued) Yield Curves Graphical picture of the relationship between yields and maturities.
4-1 EXHIBIT 4–1 Number of Insured Commercial Bank and Branch Offices, (as of Year-End) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission.
Chapter Eight Risk Management: Financial Futures,
Estimating Liquidity Needs (continued)
Commercial bank vs Investment Bank
Overview of Market Participants and Financial Innovation
Financial Institutions
Chapter Bank Trust Services, Nondeposit Investment Products, and the Selling of Information Services 14 This chapter is designed to explore several of.
CHAPTER THIRTEEN Sources Of Fee Income: Investment Banking, Security Trading, Insurance, Trust, And Other Revenue-Producing Services This chapter is designed.
7-1 One of the Goals of Interest Rate Hedging: Protect the Net Interest Margin (continued) We calculate a firm’s net interest income to see how it will.
The Investment Function in Financial-Services Management
1-1 The Financial System and Competing Financial-Service Institutions (continued) Leading Competitors with Banks Financial-service providers are converging.
Sales of Loans to Raise Funds and Reduce Risk (continued)
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
Chapter 18 Asset Allocation
Chapter Three The Organization and Structure of Banking and the Financial-Services Industry Copyright © 2013 The McGraw-Hill Companies, Inc. Permission.
Commercial Bank Operations
CHAPTER ONE An Overview of Banks and the Financial Services Sector
Investment Banking, Insurance, and Other Sources of Fee Income
Managing Nondeposit Liabilities
Financial Accounting: Tools for Business Decision Making
Copyright © The McGraw-Hill Companies, Inc
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Fundamentals of Investing
Business and Personal Finance
Managing Non-Interest Income & Non-Interest Expense
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
An Overview of the Changing Financial-Services Sector
Copyright © 2002 Pearson Education, Inc.
Chapter Sixteen Securities Firms and Investment Banks Learning Goals
Chapter 17 The Financial System.
Financial Institutions
Accessing Resources for Growth from External Sources
Copyright © The McGraw-Hill Companies, Inc
Presentation transcript:

Trust Services as a Source of Fee Income 14-1 Trust Services as a Source of Fee Income Trust services is the management of property owned by customers, such as securities, land, buildings, and other assets Among the oldest nondeposit services that banks and some of their closest competitors offer parts of the financial firm Trust departments often generate large deposits because they manage property for their customers Deposits placed in a bank by a trust department must be fully secured Popular kinds of trusts: Living trusts Testamentary trusts Irrevocable trusts Charitable trusts Indenture trusts Establishment of fiduciary relationship is critical Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Sales of Insurance-Related Products 14-2 Sales of Insurance-Related Products Banks can use their branches to sell insurance Over 100 banks today sell their own insurance products in the United States Types of insurance products sold today: Life insurance policies Property/casualty insurance policies Life insurance underwriters and property/casualty insurance underwriters manage their respective risks Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Sales of Insurance-Related Products (continued) 14-3 Sales of Insurance-Related Products (continued) There are mandatory public disclosures on the part of depository institutions selling insurance products that stipulate: An insurance product or annuity is not a deposit or other obligation of a depository institution or its affiliate An insurance product or annuity sold by a depository institution in the United States is not insured by the FDIC, any other agency of the U.S. government, the depository institution itself, or its affiliates Insurance products or annuities may involve investment risk and possible loss of value U.S. depository institutions cannot base granting loans on the customer’s purchase of an insurance product or annuity from a depository institution or any of its affiliates or on the customer’s agreement not to obtain an insurance product or annuity from an unaffiliated entity These disclosures must be made both orally and in writing before completion of the sale of an insurance product Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification 14-4 The Alleged Benefits of Financial-Services Diversification When two or more different industry types merge with each other, this strategic move is called convergence One possible benefit is the relatively low correlation that may exist between cash flows or revenues generated by the sale of traditional industry products versus the sale of nontraditional products But because streams of revenue from different product lines may move in different directions at different times, the overall impact of combining these different industries and products under one roof may be to stabilize combined cash flows and profitability The risk of failure might also be reduced This potential consequence of the convergence of two or more financial-service industries is called the product-line diversification effect Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification (continued) 14-5 The Alleged Benefits of Financial-Services Diversification (continued) Example of what could happen to overall institutional risk by combining traditional and nontraditional financial services Suppose a banking company decides to add insurance services to its existing product menu It expects to earn a 12 percent average return from sales of its traditional banking products and a 20 percent return from selling or underwriting insurance services These two service lines are equally risky in the variance of their cash flows (with a standard deviation of about 5 percent each) The banking firm expects to receive 20 percent of its revenues from insurance sales and 80 percent from sales of traditional banking products The cash flows from the two sets of services are negatively correlated over time with a correlation coefficient of -0.50 Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification (continued) 14-6 The Alleged Benefits of Financial-Services Diversification (continued) What would happen to the bank’s overall return from sales of traditional and nontraditional products in this case? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification (continued) 14-7 The Alleged Benefits of Financial-Services Diversification (continued) And what happens to the risk of return for this bank? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification (continued) 14-8 The Alleged Benefits of Financial-Services Diversification (continued) And what happens to the risk of return for this bank? Offering both traditional and nontraditional banking services lowers the bank’s standard deviation of its overall return Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Alleged Benefits of Financial-Services Diversification (continued) 14-9 The Alleged Benefits of Financial-Services Diversification (continued) Other potential benefits from offering multiple services include economies of scale and economies of scope Economies of scope refer to a situation in which the joint costs of producing two or more services in one firm are less than the combined cost of producing each of these services through separate firms For example, if a single financial firm produces two services (S1 and S2), instead of producing only one service (S1), using the same resources, its cost of production (C) may be lower as follows As a result, expanding the number of financial services offered may result in more intensive use of resources, reducing overall costs and widening a multiservice firm’s profit margin Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Information Flows within the Financial Firm 14-10 Information Flows within the Financial Firm Financial firms have become more and more like pure information-gathering, information-processing, and information-dispersing businesses The Gramm-Leach-Bliley Act of 1999 allowed financial- service companies to share customer information among their affiliated firms and also with independently owned third parties provided customers did not expressly say “no” to (or “opt out” of) having their personal data distributed to others Protecting customer privacy became increasingly more important Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

14-11 EXHIBIT 14–1 Key Items That Must Be Included in a Financial Firm’s Privacy Policy and Be Sent to Its Customers at Least Once a Year Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

14-12 Quick Quiz What services are provided by investment banks? Who are their principal clients? What advantages do commercial banks with investment banking affiliates appear to have over competitors that do not offer investment banking services? Possible disadvantages? What are investment products? What advantages might they bring to an institution choosing to offer these services? How do trust services generate fee income and often deposits as well for banks and other financial institutions offering this service? What is convergence? Product-line diversification? Economies of scale and scope? Why might they be of considerable importance for banks and other financial-service firms? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.