MGF 401 Chapter 1 Solutions

Which businesses are banking's closest and toughest competitors?

savings associations, credit unions, fringe banks, money market funds, mutual funds, hedge funds, security brokers & dealers, investment banks, finance companies, financial holding companies, and life and property/casualty insurance companies.

What services do banks competitors offer the compete directly with banks services?

All financial service providers are converging and embracing each others innovations

What services do banks closest competitors offer?

All of the services banks offer are also offered by their financial-service competitors. Banks and their closest competitors are converging and becoming the financial department stores of the modern era.

You recently graduated from college with a business degree and accepted a position at a major corporation earning more than you could have ever dreamed. You want to: (1) open a checking account for transaction purposes (2) open a savings account for emergencies (3) invest in an equity mutual fund for that far-off future called retirement (4) see if you can find more affordable auto insurance (5) borrow funds to buy a condo, helped along by your uncle who said he was so proud of your grades that he wanted to give you $20,000 towards a down payment. (Is life good or what?) Make five lists of the financial service firms that could provide you each of these services.

(1) Financial service firms that provide checking account services include banks, fringe banks, credit unions, and savings and loan associations. Even securities brokers allow you to open checking accounts. Recently brokers such as Schwab have become more aggressive in offering interest-bearing online checkable accounts that often post higher interest rates than many banks are willing to pay. (2) To open a savings account, one could approach traditional commercial banks, savings associations, credit unions, online brokerages, and credit unions. (3) For a retirement fund, one could choose from a plethora of defined benefit and defined contribution schemes from private pension funds. Banks, trust departments, mutual funds, and insurance firms offer a variety of retirement investment options including equity mutual funds. (4) For affordable auto insurance, one could use a traditional insurer such as Prudential Insurance, State Farm, financial holding companies, or approach some of the newer discount insurers including Geico and Progressive. Alternatively, one could use a reverse auction service such as Esurance to get the best rate. (5) To borrow funds to buy a condo one could approach a traditional bank, savings associations that specialize in granting home mortgage loans, or financial companies such as GMAC. A reverse-auction site such as LendingTree might also be useful in this exercise. The borrower is not limited to a mortgage loan for financing the purchase of a condo. Other lending mechanisms are available to finance such purchases. Using a search engine can help identify top financial institutions in each of these areas.

How has banking and the financial-services market changed in recent years?

Banking is becoming a more volatile industry due to deregulation that has opened up individual banks to the full force of the financial marketplace.

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

Increased competition from other types of financial institutions and the erosion of the banks market share for providing traditional services. banks demanded a relief from traditional rules and lobbying for expanded authority to reach new markets globally.

How does a bank differ from other financial service providers?

Other financial service providers offer some similar financial services offered by banks, but not within one institution.

What is happening to bankings share of the financial market place and why?

The Financial Services Modernization Act of 1999 allowed many of the banks' closest competitors to offer a wide array of financial services, taking away market share from "traditional" banks. .

Why have financial department stores and universal banks become so important in the financial system?

The array of services offered and the service delivery channels used by modern financial institutions have added up to greater convenience for their customers, meeting all financial-service needs at one institution.

Can you explain why many of the forces you named in the answer to the previous question have led to significant problems for the management of banks and other financial firms and for their stockholders?

The recent changes in banking and financial services market has been to put greater pressure upon earnings, resulting in a more volatile return to stockholders and an increased bank failure in providing those rates. Increase competition has led to a fluctuation in the bank's share of the financial service market place. Technological advances have significantly lowered per-unit costs associated with high volume transactions, but have also depersonalized financial services. Due to consolidation of financial institutions there has been a decline in employment in the financial-service sector. Due to the powerful trend of convergence, weaker firms fail or get edged into companies that are larger with more services. The increased risk faced by institutions today has forced managers to more aggressively utilize a wide array of tools and techniques to improve and stabilize their earnings streams and manage various risks.

According to the theory of finance, why do banks and other financial intermediaries exist in modern society?

The traditional view of banks as financial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers (deficit-spending units), providing both a supply of credit and a supply of liquid assets. A newer view sees banks as delegated monitors who assess and evaluate borrowers on behalf of their depositors and earn fees for supplying monitoring services. Banks also provide a service of dividing up financial instruments into smaller units which would be readily affordable to millions of people. Banks accept risky loans from borrowers while issuing low risk securities to their depositors. Banks have been viewed in recent theory as suppliers of liquidity and transactions services that reduce costs for their customers and, through diversification, reduce risk. Banks are also critical in the payment system for goods and services and have played an increasingly important role as a guarantor and a risk management role for customers.

Which forces will continue into the future?

The trends of convergence, consolidation, geographic expansion, and technological change will continue to proliferate in the future years.

What powerful forces are shaping financial markets and institutions today?

Under the new regulatory trend-reregulation, the government tightened the financial-services sector due to crises and market collapse in the previous few years. At the same time, the number and variety of banking services has increased greatly due to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services and increase in returns on their money invested. There has been service proliferation and greater competitive rivalry among financial firms that has led to a powerful trend— convergence. Convergence refers to the movement of businesses across industry lines so that a firm formerly offering perhaps one or two product line ventures into other product lines to broaden its sales base. Apart from these changes, there has also been a considerable improvement in the technological automation leading banking and financial services to comprise of a more capital-intensive, fixed-cost industry and a less labor-intensive, variable-cost industry than in the past.

What is a bank

a bank can be defined by the economic function it performs, the services it offers its customers, or the legal basis for its existence. They offer a range of financial services such as checking and debit accounts, credit cards, and savings plans.

Financial Services Modernization Act of 1999

allowed banks to expand their role to be full-service providers. It is a beneficial step that has led the U.S. banks to stay in competition and increase the market share by entering into various new industries like securities and insurance industries. It allowed many financial service providers to offer the public one-stop shopping for financial services.

What is a financial department store?

an institution where banking, insurance, and security brokerage services are unified under one institution.

What is a universal bank?

offer virtually all financial services available in todays marketplace

What do you think financial-services industry will look like 20 years from now?

there is an upward trend continuing consolidation and convergence. There are likely to be fewer financial service providers in the future, and many of these will be very large and provide a broad range of financial services under one institution. Global expansion will continue and will be critical to the survival of many financial service providers. Management of financial service providers will have to be technologically advanced and be able to make a diverse set of decisions including decisions about mergers, acquisitions, and global expansion as well as new services to add to the firm.

What different kinds of services do banks offer the public today?

Banks offer the widest range of services of any financial institution. They offer thrift deposits to encourage saving and checkable (demand) deposits to provide a means of payment for purchases of goods and services. They also provide credit through direct loans, by discounting the notes that business customers hold, and by issuing credit guarantees. Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and for home improvements, etc. Banks also manage the property of customers under trust agreements and manage the cash positions of their business customers. They purchase and lease equipment to customers as an alternative to direct loans. Many banks also assist their customers with selling insurance policies and also buying and selling securities through security brokerage services, the acquisition and sale of foreign currencies, the supplying of venture capital to start new businesses, and the purchase of annuities to supply future funding at retirement or for other long-term savings plans like annuities or mutual funds. They also offer merchant banking services to large corporations and risk management and hedging services to help their customers combat risk exposure.

Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?

Commercial banks must offer two essential services to qualify as banks for purposes of regulation and taxation, demand (checkable) deposits, and grant commercial loans. Congress defined a bank as any institution that could qualify for deposit insurance administered by the Federal Deposit Insurance Corporation (FDIC).