Chapter 1 An overview of banks and the financialservices sector

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Chapter 1An overview of banks and the
financial-services sector

• Slides based on Bank Management Financial
  Services by Peter Rose and Sylvia Hudgins, 7th
  ed., McGraw-Hill, Gup book, and adapted by Dorla
  A. Evans, 2008.

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Functions and forms of banking

• Key Topics in Chapter
• What is a bank?
• Competing financial-service institutions
• What do banks do?
• Key trends affecting all financial-services firms
• Career opportunities in financial services

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What is a bank?

• Why is
• Bank of America called a bank
• J.P. Morgan called an investment bank
• Merrill-Lynch called a securities brokerage firm
• Alabama Credit Union called a credit union
• and State Farm an insurance company?

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What is a bank?

• History makes these organizations different
• Historically, banks accepted demand deposits and
  made business loans
• Hence, called commercial banks

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What is a bank?

• Recent definition
• qualifies to be regulated by FDIC!

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Bank competition Market share
March 2005, out of 43 trillion
Based on 2003 data
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Bank competition Change in market share
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How do banks compare Deposits in M in 2004
From Koch and MacDonald, Bank Management, 6e,
2006, p.6
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Number of banks by asset size
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Total assets in B by size of bank
Money-centered banks versus community banks
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Types of banks

• Global money-centered
• Medium- and large-sized full-service banks
• Small- and medium-size banks
• Wholesale banks
• Limited-purpose banks
• Internet

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What do banks do for their customers?

• Payment system
• Financial intermediation
• Other financial services

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What do banks do for their customers?

• Payments
• Coin and currency currency exchange
• Retail payments system
• Large-dollar payments system for business and
  government

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What do banks do for their customers?

• Financial intermediation

50 M
5,000
5
8
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What do banks do for their customers?

• Other financial services
• Safety deposit boxes
• Fee services lockboxes letters of credit
• Insurance-related activities
• Securities-related services underwriting,
  brokerage
• Leasing
• Trust services

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Why do banks perform those services?
Goal
Size of cash flow
Maximize shareholder wealth
Timing of cash flow
Risk of cash flow
Credit
Interest rate
Operational
Liquidity
Price
Constraints
Market competition
Social
Legal and regulatory
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Trends affecting financial services firms

• Service proliferation
• Rising competition
• Deregulation
• Interest sensitivity of funds
• Technological advances
• Consolidation and geographic expansion
• Convergence
• Globalization
• Securitization

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Questions?