2. Financial Institutions Accounting Dr. Salah Hammad Chapter 1 An Overview of the Changing Financial-Services Sector 2

3. Introduction Banks are the principal source of credit (loanable funds) for millions of individuals and families and for many units of government Worldwide banks grant more installment loans to consumers (individuals and families) than any other financial-service provider 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 3

4. What Is a Bank? A bank can be defined in terms of: 1.The economic functions it performs 2.The services it offers its customers 3.The legal basis for its existence Historically, banks have been recognized for the great range of financial services they offer ▫ Bank service menus are expanding rapidly today to include investment banking, insurance protection, financial planning, advice for merging companies, the sale of risk-management services to businesses and consumers, and numerous other innovative financial products 4

5. EXHIBIT 1-1 The Many Different Kinds of Financial-Service Firms Calling Themselves Banks 5

6. What Is a Bank? (continued) Money-Centered Banks vs. Community Banks ▫ Money-center banks ▫ Industry leaders ▫ 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 a narrower, but often more personalized, menu of financial services 6

7. 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 had come to be defined, not so much by its array of service offerings, but by the government agency insuring its deposits 7

8. 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 to individuals and institutions planning to invest and needing credit to do so ▫ 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 8

9. 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 authorities in the financial-services field fear that this apparent erosion of market share may imply that traditional banking is dying ▫ Other experts counter 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” 9

10. 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 10

11. Services Banks and Many of Their Closest Competitors Offer the Public Services Banks Have Offered for Centuries ▫ Carrying Out Currency Exchange ▫ Discounting Commercial Notes and Making Business Loans ▫ Offering Savings Deposits ▫ Safekeeping of Valuables and Certification of Value ▫ Supporting Government Activities with Credit ▫ Offering Checking Accounts (Demand Deposits) ▫ Offering Trust Services 11

12. 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 ▫ 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 12

13. TABLE 1–1 The Many Different Roles Banks and Their Closest Competitors Play in Today’s Economy 13