Chapter One

An Overview of the Changing

Financial-Services Sector

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

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 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
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Service local communities and towns
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 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
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 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
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 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 industrys largest customers have found ways

around banks to obtain the funds that they need
Borrowing in the open market
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 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
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 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

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 EXHIBIT 12 Comparative Size by Industry of Commercial
Banks and Their Principal Financial-Service Competitors

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 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.
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 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
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Offering Risk Management and Hedging Services
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 TABLE 11 The Many Different Roles Banks and Their
Closest Competitors Play in Todays Economy

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 TABLE 12 Some of the Leading Financial-Service Firms
around the Globe

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 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 servicesand 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
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 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 bankings closest and toughest competitors?
What services do they offer that compete directly with banks services?
What is happening to bankings 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?
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 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
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 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
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 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:
1. Banking has changed from money changers
and money issuers to being a complex giver
of information and products.

2. Banks are pressured on all sides by many

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 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 customers cash and property
(cash, risk and trust management functions); (d)
assisting customers in raising funds and saving
(brokerage, investment banking, savings function)

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 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.
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