Chapter One

An Overview of the Changing

Financial-Services Sector

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 Key Topics

• Powerful Forces Reshaping 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-Service Firms
• Appendix: Career Opportunities in Banking and
Financial Services

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Chapter Outline
• I. Introduction: Powerful Forces Reshaping
the Industry
• II. What Is a Bank?
• A. Defined by the Functions:
• B. Banks and their Principal Competitors
• C. Many Kinds of Banks
• D. Money-Centered Banks vs. Community
Banks

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 Chapter Outline(continued)
• E. The Legal Basis for Banking
• III. The Financial System and Competing
Financial-Service Institutions
• A. Roles of the Financial System
• B. The Competitive Challenge for Banks
• C. Leading Competitors with Banks
• 1. Savings Associations
• 2. Credit Unions
• 3. Fringe Banks
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 Chapter Outline(continued)
• 4. Money Market Funds
• 5. Mutual Funds
• 6. Hedge Funds
• 7. Security Brokers and Dealers
• 8. Investment Banks
• 9. Finance Companies
• 10. Financial Holding Companies
• 11. Life and Property/Casualty Insurance
Companies
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 Introduction
• Banks are the principal source of credit (loanable funds)
for millions of individuals and families and for many
units of government

• Worldwide banks grant more installment loans to

consumers (individuals and families) than any other
financial-service provider

• 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 its existence

• Historically, banks have been recognized for the great

range of financial services they offer
▫ Bank service menus are expanding rapidly today to include
investment banking, insurance protection, financial planning,
advice for merging companies, the sale of risk-management
services to businesses and consumers, and numerous other
innovative financial products

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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
▫ Industry leaders
▫ 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
▫ Service local communities and towns
▫ Offer a narrower, but often more personalized, menu of
financial services
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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 had come to be defined,
not so much by its array of service offerings, but by the
government agency insuring its deposits

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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 to individuals and
institutions planning to invest and needing credit to do so

▫ 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
▫ Risk protection services
▫ Liquidity 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 authorities in the financial-services field fear that this

apparent erosion of market share may imply that traditional
banking is dying
▫ Other experts counter that banking is not dying but changing by
offering new services and changing its form

▫ The banking industry’s largest customers have found ways

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

▫ Perhaps banking is being “regulated to death”

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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 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 of differentiating banks from other
financial-service providers is difficult today

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 EXHIBIT 1–2 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
▫ 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 (Demand Deposits)
▫ Offering Trust Services

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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
▫ 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
▫ Offering Risk Management and Hedging Services
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