Banking Chapter 1

How can banks be defined?

1. Economic functions it performs. 2. Services it offers. 3. Legal Basis for its existence.

Legal Basis

Any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature. An institution that could qualify for deposit insurance up to 250,000 from FDIC

U.S. Financial Services Modernization: Gramm-Leach-Bliley Act of 1999

Allowed many different types of financial firms to offer the public one-stop shopping for financial services

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, offering trust funds.

FDIC

Federal Deposit Insurance Corporation

How have banking and financial services market changed in recent years? What powerful faces are shaping financial markets and institutions today?

Government regulation has a huge role on what banks are allowed to do and how closely they are regulated. Financial services have diversified and banks are constantly looking for more ways to attract and retain customers based on the financial services those customers need.

Services banks have begun offering:

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 banking services, merchant banking services, risk management and hedging services

Money-Centered Banks

Industry leaders Cover whole regions, nations, continents Offer the widest possible menu of financial services Acquire smaller businesses Face tough global competition. Very influential and set the rates: Wells Fargo for example

What is happening to banking's share of the financial marketplace and why?

It was reduced from 2/3 to 1/5. This is because of Gramm-Leach-Bliley Act 1999 because it allowed different types of financial firms to offer one-stop financial services.

Gov't Deregulation

Lifting interest rate ceiling on savings deposits

Service Proliferation

New services = new source of revenue. Constantly looking for services

Shadow Banking **

Non bank entities offering banking services: Not FDIC insured.

Roles of Financial System

To encourage saving and to transfer those savings to individuals and institutions planning to invest and needing credit to do so. This causes the economy to grow, new jobs to be created, and living standards to rise.

An increasingly interest-sensitive Mix ofunds

regulation

Convergence

Movement of business across industry lines

Crisis, Reform, and change in Banking and Financial Services

See chapter 2

Total assets held by U.S banks?

1/5

What is a bank? How does a bank differ from most other financial-service providers?

A bank is a principal source of credit (loanable funds). Different because FDIC insured.

What are banks?

Banks are the principal source of credit (loanable funds) for millions or individuals and families and for many units of government.

Why are some banks reaching out to become one-stop financial service conglomerates? Good idea?

Because it's convenient and what people are looking for. Always looking for more services to provide, in order to increase revenue. Not necessarily because this gives other non bank entities (like shadow banks), a chance to get a financial share of the market. This takes loanable money away from the banks.

Technological change and Automation

Example: Check 21 Act: can now use electronic images instead of paper checks. This was made to shorten/get rid of flotation period.

Competitive Challenges for Banks

Financial market share has fallen "regulated to death"

consolidation and geographic expanision

Many banks became branch

Community Banks

Much smaller Service local communities and towns Offer narrower, but often more personalized, menu of financial services

Financial Services:

Payment, Risk Protection, Liquidity Services

Gov't Regulation (2007-2009)

Restricted taking on new financial services. Worked on tacking systematic risk (market risk) Nationalization was a thought (didn't happen), but shareholder value would've been 0!

Competing financial service institutions:

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

Which businesses are banking's closest and toughest competitor? What services do they offer that computer directly with banks' services?

Shadow banks that offer loans.

Rising competition

Spur to develop more services

Regional Banks

Very community oriented, but much broader than community banks

Globalization

What it sounds like.