U.O.

H
BANK MANAGEMENT
TEACHER: ASMA

CHAPTER ONE:
Banking and the Financial Services
Industry
OBJECTIVES ON THIS CHAPTER

Role of financial system

Financial Crisis
(Global Financial Crisis of 2007–2009)
Competitive challenge for banks
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INTRODUCTION

In 1993 the Glass–Steagall Act created three separate lines of

business within the financial services industry—commercial
banking, investment banking, and insurance.
Commercial banks have long been one of the most highly
regulated businesses in the United States. In order to start a
bank, investors must select an experienced management team
and board of directors and have a business plan that explains the
bank’s business strategy and justifies why a new bank is needed.
The group must then present its plan to bank regulators for
approval.

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 What is financial system?
financial system is a system that allows the exchange of funds between lenders, investors, and borrowers

Role of financial system

The primary purpose of this ever-changing financial system is to
encourage individuals and institutions to save and to transfer
those savings to those individuals and institutions who planning
to invest in new projects.
financial system does more then simply transform saving into
investment, it provides payment services , liquidity services, risk
protection service.

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What is financial crisis?
A financial crisis occurs when there is a particularly large disruption to information flows
in financial markets, with the result that financial frictions increase sharply and financial
markets stop functioning

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Dynamics OF FinanciaL crises:
As earth-shaking and headline-grabbing as the most recent
financial crisis was, it was only one of a number of financial
crises that have hit industrialized countries like the United
States over the years
Financial crises in advanced economies have progressed in two
and sometimes three stages. To understand how these crises
have unfolded:
stage One: initial Phase.
-credit boom and bust: Mismanagement of financial
liberalization
innovation leading to asset price boom and bust

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Stage two: currency crisis
- Severe fiscal imbalances triggers currency crises
• Government cannot raise interest rate
Stage three: full-fledged financial crisis
- This debt burden in terms of domestic currency increase
- A reduction in investment and economic activity.

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 Financial Crisis of 2007–2009
• Beginning in mid-2007, the U.S. and global economies began to weaken following
a series of crises related to problem mortgages and other loans and the resulting
difficulties this situation created for financial institutions that played a role in
these markets.
• As home prices started to decline, many institutions involved in housing finance
began to realize losses from home mortgage defaults. Initially, several small
mortgage banks failed. Following these failures, national mortgage lenders, such
as Countrywide and Washington Mutual, began to experience large waves of
borrowers defaulting on their loans
• This situation led to a dramatic restructuring of financial markets and institutions
throughout the world as many foreign-based institutions bought the bad
mortgages originated in the United States. In March 2008, Bear Stearns collapsed
and was absorbed by JPMorgan Chase.
• This event was followed by the failure of Lehman Brothers and the effective
failures of Countrywide, Washington Mutual, and Wachovia, which were absorbed
by Bank of America, JPMorgan Chase, and Wells Fargo, respectively. Given the
interconnected nature of financial markets.
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Causes of the 2007 – 2009 financial crisis :
- Financial innovation emerge in the mortgages markets
• Subprime mortgage
• Mortgage-back securities
- Housing price bubble forms
• Increase in liquidity from cash flows surging to the USA
• Development of subprime mortgage market fuelled housing
demand and housing prices

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- Agent problem arise
Where investor is (AGENT) and Mortgage broker (PROBLEM)
• Borrowers had little incentive to disclose information about their ability to
pay

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EUROPEAN SOVEREING DEBT CRISIS
• The increase in budget deficit that followed the financial
crash of 2007-2009 led to fears the government defaults and
surge in interest rate
• The sovereign debt, which began in Greece, moved on
Ireland, Portugal, Spain and Italy.
• The stresses created by this and related events continue to
threaten the viability of the Euro

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In order to address the crisis, the U.S. government took the
following actions from September through December of 2008:
 Placed two government-sponsored enterprises (GSEs), Fannie Mae and Freddie
Mac, into conservatorship—thereby effectively making them fully operated by the
U.S. government. These firms supported the housing market and origination of
mortgages. Banks that owned preferred stock issued by these firms wrote the value
of their investments down to zero.
 Loaned American International Group (AIG) over $150 billion, effectively taking
ownership of the insurance company.
 Authorized Bank of America to acquire Merrill Lynch
(wealth management company with years of professional experience and knowledge
help you reach your goals)
 Authorized the Federal Reserve to purchase commercial paper directly from
companies such as General Electric

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 Saving and loan associations

Credit unions

Money market fund

Mutual fund
Competitive
challenge for banks
Security brokers and dealers

Investment banks

Finance companies

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 Saving and loan associations
• A savings and loan association (S&L), or thrift institution, is a 
financial institution that specializes in accepting savings, deposits, and
making mortgage and other loans. 

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 Credit Union
A credit union is a type of financial cooperative that provides
traditional banking services.

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 Money Market Fund
A money market fund is a kind of mutual fund that invests only in
highly liquid instruments such as cash.

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 Mutual fund

is a type of financial vehicle made up of a pool of money

collected from many investors to invest in securities such as
stocks, bonds, money market instruments, and other assets.

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 Security Brokers and Dealers
is a person or firm in the business of buying and
selling security for its own account or on behalf of its customers
Dealer
Is a firm or personal that purchases securities and hold them for later sale at a profit

Broker
Is an individual that arranges transactions between a buyer and a
seller for a commission when the deal is executed

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 Investment Bank
is the division of a bank or financial institution that serves
governments, corporations, and institutions

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 Finance company
A finance company is an organization that makes loans to
individuals and businesses.

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THANK YOU

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 REVRENCE

• 1: Book of Bank Management

• 2: Slides of Teacher
• 3: https://www.investopedia.com/
• 4:
https://www.encyclopedia.com/finance/encyclopedias-almanacs-tra
nscripts-and-maps/finance-company

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