ASSIGNMENT NO 2

COMMERCIAL BANKING POLICIES

Course Code: FIN 602

MBA Finance
Semester: Fall 2019

Submitted By: Nadir Rafi (BM-26142)

Submitted To: Sir Asim Mehboob

Date of Submission: 21-09-2019

Question No 1: Impact of the government policies and regulations
on the financial services industries.
Answer: Government policy and regulation affect the financial services industry in
many ways, but the specific impact depends on the nature of the policy and
regulation. Increased regulation typically means a higher workload for people in
financial services, because it takes time and effort to adapt business practices that
follow the new regulations correctly.

While the increased time and workload resulting from government policy and
regulation can be detrimental to individual financial or credit services companies in
the short term, government policies and regulations can also benefit the financial
services industry as a whole in the long term. The Sarbanes-Oxley Act was passed
by Congress in 2002 in response to multiple financial scandals involving large
conglomerates such as Enron and WorldCom.

KEY TAKEAWAYS
 Government policy and regulation can affect the financial industry in
positive and negative ways.
 The major downside is that it increases the workload for people in the
industry who ensure regulations are adhered to.
 On the positive side, some regulations help hold companies accountable and
increase internal controls, such as the 2002 Sarbanes-Oxley Act.
 The SEC is the main regulatory body for the stock market, protecting
investors from mismanagement and fraud, which boosts investor confidence
and investment.
 The act held senior management of companies accountable for the accuracy
of their financial statements, while also requiring that internal controls be
established at these companies to prevent future fraud and abuse.
Implementing these regulations was expensive, but the act gave more
protection to people investing in financial services, which can increase
investor confidence and improve overall corporate investment.

Regulations That Affect the Stock Market

The Securities and Exchange Commission (SEC) regulates the securities
markets and is tasked with protecting investors against mismanagement and
fraud. Ideally, these types of regulations also encourage more investment and
help protect the stability of financial services companies. This does not always
work, as the financial crisis of 2007 demonstrated. The SEC had relaxed the net
capital requirement for major investment banks, allowing them to carry
significantly more debt than what they had in equity. When the housing
bubble imploded, the excess debt became toxic and banks started to fail.

There's a fine line between over and under regulation, where overregulation
hampers innovation and under regulation can lead to widespread
mismanagement.

Regulations Affecting the Financial Industry

Other types of regulation do not benefit financial services or asset management
at all but are intended to protect other interests outside of the corporate world.
Environmental regulations are a common example of this. The Environmental
Protection Agency (EPA) often requires a company or industry to upgrade
equipment and to use more expensive processes to reduce environmental
impact. These types of regulations often have a ripple effect, causing tumult in
the stock market and overall instability in the financial sector as the regulations
take effect. Companies often try to shift their increased costs to their consumers
or customers, which is another reason why environmental regulations are often
controversial.

Government regulation has also been used in the past to save businesses that
would otherwise not survive. The Troubled Asset Relief Program was run by
the United States Treasury and gave it the authority to inject billions of dollars
into the U.S. financial system to stabilize it in the wake of the 2007 and
2008 financial crisis. This type of government intervention is typically frowned
upon in the U.S., but the extreme nature of the crisis required quick and strong
action to prevent a complete financial collapse.

The Government and the Financial Industry

The government plays the role of moderator between brokerage firms and
consumers. Too much regulation can stifle innovation and drive up costs, while
too little can lead to mismanagement, corruption, and collapse. This makes it
difficult to determine the exact impact government regulation will have in the
financial services sector, but that impact is typically far-reaching and long-
lasting.
QUESTION NO 2: ORGANIZATIONAL STRUCTURE
 Question No 3
What is the procedure to open a new bank, branch, ATM, Telephone service
and websites?
Banking is a difficult industry to join. However, many community-oriented banks
are opening across the country. With careful planning, the task of opening a bank
might not be as impossible as you think.

1. Determine a need. Why are you opening a bank? Are there local community
banks in your area? Any business will only succeed if there is a market. People
in the area need the product you are trying to sell them.

2. Appoint a board of directors. Typically, this is five to thirteen people. The

board of directors oversees the strategic plan of the bank, and makes sure
employees at all levels comply with company policies and federal regulations.
 Board members should not be directly involved with the bank, and a few should
have previous banking experience.
 Appoint a few members over the regulation level in case someone drops out for
any reason.

3. Make sure you have the starting capital. This amount can run anywhere from
12 to 20 million dollars. This money can come from various places. If your
board of directors is community business owners, they might be willing to
invest the money. Other sources of capital include private equity funds,
founders groups, a bank holding company, supporting financial institutions, and
special funding available for community banks.

 Starting capital ensures all the banks operations and gives the bank a certain
amount of collateral.
 Capital guidelines are found through the primary regulator, Federal Reserve, FDIC,
or OCC.

4. Create a business summary plan. A financial projection is required during the

charter application process. This may require a three to five year business plan
and projection.
 You need to demonstrate that a new bank would profit. Showing the plans for
growth shows investors what they can expect as a return on their investment (ROI).
 Before you can open a bank, you have to prove you've done research into your
competitor's businesses and that you can either come up with a comparable product
or somehow provide a beneficial service no one else has thought up yet.

5. Hire a legal team. Opening a bank can be a very arduous and confusing
process with many legal regulations that must be followed and applications that
must be filed. Hiring someone familiar with this process can expedite your
preparations and help you cover all your bases.

6. Establish a risk management infrastructure. This must be done before the

bank is opened. A risk management structure "identifies, measures, monitors,
and controls the risks involved in an institution's various products and lines.
These risks include, but are not limited to, credit, market, and liquidity,
operational, legal, and reputational risk. Hire the best people who know how to
assess for risk and keep policy and procedures in place that keep your
employees aware of the next scheme, fraud, or bad decision.

7. Hire a public face. A community reinvestment specialist responds when your

bank is called to show how the bank is contributing to the community. They
must be knowledgeable of the rules and regulations in place and be able to
respond appropriately to concerns for the bank. They must also report in their
meetings with you the ways in which the bank would be appropriately steered
toward investment efforts.

8. Apply for all charters. These include both federal and state legal charters. The
Office of the Comptroller of the Currency grants federal documents. You can
find a list and instructions on the OCC website. The state can issue the state
charter.

A bank must also be approved for deposit insurance by the Federal Deposit
Insurance Corporation.

Making It Happen
 Find a place. Now that you have completed all the initial steps and gotten your
bank approved, you need to find a suitable place. It's of vital important for you to
familiarize yourself with all potential customers and competitors around you.
 Find a place with smooth traffic.
 Choose a position with a great deal of markets and residential buildings.
 Seek out a location with other competitive bank as little as possible.

Purchase the space. Since you have found an appropriate place, you need a place
to establish your bank. Make sure there is enough room for:

 At least three personal banker offices

 A seating area
 An inside teller area
 A drive-thru teller
 A vault. This can be accessible to both the tellers and deposit box customers, or the
bank can house separate vaults. The vault needs to be far into the bank, not near
the door.
 An internal and an external ATM
 A security guard station

Establish the appropriate relationships. Work with money transportation specialty

companies, such as armored car services, as well as any governing bodies, such as
regulators.

Establish what the bank will offer. Doing an analysis of your community and its
demographics can help you determine what services the bank should offer. If you
are striving for a community bank approach, offer:

 Checking
 Savings
 Mortgage Loans
 Small Business Loans
 Investment and Planning
CDs and other short/long-term savings methods
 Invest in your community. Growing the money means spending the money. Your
bank customers depend upon you to know when to apply the money to a
construction loan for a new hospital and when to put the money into a growing
investment. Risk is always a factor, but knowing what is an acceptable risk is part
of the game.

Establish an online banking option. Many people do their banking online, so an

online banking system is necessary for running a successful bank.

Hire excellent employees. For many banks starting out, reputation and word of
mouth is pivotal in their survival. Having competent bankers with strong financial
and banking backgrounds gives the customers’ confidence when placing their
money. Placing friendly tellers with excellent customer service skills leaves a
lasting impression on the customers, making them want to return.