An Overview of the Changing Financial-Services Sector Chapter One An Overview of the Changing Financial-Services Sector

Powerful Forces Changing the Industry What Is a Bank? Key Topics Powerful Forces Changing the Industry What Is a Bank? The Financial System and Competing Financial-Service Institutions Old and New Services Offered to the Public Key Trends Affecting All Financial- Service Firms

Introduction Banks are the main source of credit (loans) for millions of households and for many units of government World-wide banks grant more loans to consumers (households) than any other financial-service companies 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? A bank can be defined in terms of: The economic functions it performs The services it offers its customers The legal basis for why it exists. Historically, banks have been recognized for the many different financial services they offer, such as: Investment Banking Insurance Financial planning Advice for merging companies Risk-management services to businesses and consumers ……And many other services

EXHIBIT 1-1 The Many Different Kinds of Financial-Service Firms Calling Themselves Banks

What Is a Bank? (continued) Money-Centered Banks vs. Community Banks Money-center banks 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 less financial services

What Is a Bank? (continued) The Legal Basis for Banking A bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature Congress then defined a bank as any institution that could qualify for deposit insurance administered by the Federal Deposit Insurance Corporation (FDIC) Under federal law in the U.S., a bank is not defined so much by its many products, but by the government agency insuring its deposits

The Financial System and Competing Financial-Service Institutions Roles of the Financial System The primary purpose of the financial system is to encourage saving and to transfer those savings from savers and lenders to borrowers and spenders. 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 The financial system also provides a variety of supporting services: Payment services Risk protection services Liquidity services

The Financial System and Competing Financial-Service Institutions (continued) The Competitive Challenge for Banks Lately, the financial market share that banking comprised has fallen Some fear that this downward trend in market share may mean that traditional banking is dying Other experts say that banking is not dying but changing by offering new services and changing its form The banking industry’s largest customers have found ways around banks to obtain the funds that they need Borrowing in the open market Perhaps banking is being “regulated to death”

The Financial System and Competing Financial-Service Institutions (continued) Leading Competitors with Banks Savings Associations Credit Unions Fringe Banks Money Market Funds Mutual Funds (Investment Companies) Hedge Funds Security Brokers and Dealers Investment Banks Finance Companies Financial Holding Companies Life and Property/Casualty Insurance Companies

The Financial System and Competing Financial-Service Institutions (continued) Leading Competitors with Banks Financial-service providers are converging or coming together 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 today is seeing the difference banks & other financial-service providers.

EXHIBIT 1–2 Comparative Size by Industry of Commercial Banks and Their Principal Financial-Service Competitors

Services Banks and Many of Their Closest Competitors Offer the Public Services Banks Have Offered for Centuries Currency Exchange Discounting Commercial Notes and Making Business Loans Offering Savings Deposits Safekeeping of Valuables Supporting Government Activities with Credit Offering Checking Accounts (Demand Deposits) Offering Trust Services – managing the accounts of wealthy individuals.

Services Banks and Many of Their Closest Competitors Offer the Public (continued) Services Banks and Many of Their Financial-Service Competitors Began Offering in the Past Century Granting Consumer Loans Financial Advising Managing Cash Offering Equipment Leasing Making Venture Capital Loans – new business loans Selling Insurance Policies Selling and Managing Retirement Plans Dealing in Securities: Offering Security Brokerage and Investment Banking Services Offering Mutual Funds, Annuities, and Other Investment Products Offering Merchant Banking Service Offering Risk Management and Hedging Services

TABLE 1–1 The Many Different Roles Banks and Their Closest Competitors Play in Today’s Economy

TABLE 1–2 Some of the Leading Financial-Service Firms around the Globe

INDUSTRY OVERVIEW (cont) Below is a list of the largest commercial/investment banks in the world and where they are located. Bank Headquarters Bank of America Merrill Lynch New York City, US Barclays London, UK Citigroup New York City Credit Suisse Zurich, Switzerland Deutsche Bank Franfurt, Germany Goldman Sachs New York City J.P. Morgan New York City Morgan Stanley New York City UBS Zurich, Switzerland

Key Trends Affecting All Financial-Service Firms – Crisis, Reform, and Change More and more services and Rising Competition Government Deregulation and then Reregulation Crisis, Reform, and Change in Banking and Financial Services An Interest-Sensitive Mix of Funds Technological Change & Automation Consolidation (getting bigger through mergers and acquisitions) and Geographic Expansion – economies of scale. Convergence – economies of scope, more products Globalization

Concept Check – Homework assignment for next week Concept Check – Homework assignment for next week. One from each group to share in class. What is a bank? How does a bank differ from most other financial- service providers? Why are some banks reaching out to become one-stop financial-service conglomerates? Is this a good idea? Which businesses are banking’s closest and toughest competitors? What services do they offer that compete directly with banks’ services? What is happening to banking’s share of the financial marketplace and why? How have banking and the financial-services market changed in recent years? What powerful forces are shaping financial markets and institutions today?

Appendix: Career Opportunities in Banking and Financial Services What different kinds of professionals work inside financial firms? Loan Officers Credit Analysts Managers of Operations Tellers Branch Managers Systems Analyst Auditing and Control Personnel Trust Department Specialists

Appendix: Career Opportunities in Banking and Financial Services (continued) What different kinds of professionals work inside financial firms? Security Analysts and Traders Marketing Personnel Human Resources Managers Investment Banking Specialists Bank Examiners and Regulators Regulatory Compliance Officers Risk Management Specialists

SUMMARY This first chapter explored the many roles played by modern banks and their financial- service competitors. We can also see how rapidly the financial world is changing. The following represent the most important points in the chapter: Banking has changed from money changers and money issuers to being a complex giver of information and products. Banks are pressured on all sides by many key financial-service competitors.

SUMMARY continued 3. Banks and non-bank businesses are hard to separate from one another. Yet, the large banks still offer the widest range of products and services. 4. The main functions offered by many financial- service firms include: (a) lending & investing money (credit function); (b) making payments of goods and services for customers (payment function); (c) managing and protecting customer’s cash and property (cash, risk and trust management functions); (d) assisting customers in raising funds and saving (brokerage, investment banking, savings function)

SUMMARY continued 5. Major trends affecting performance of financial firms today include: (a) wide range of products; (b) globalization; (c) government regulation and de-regulation; (d) the intense competition between financial service firms; (e) convergence – the fact that so many financial firms look the same and offer many of the same services; (f) consolidation – many more mergers and acquisitions as smaller banks and financial service providers fail; (g) the increase of innovation and automation.