AN OVERVIEW OF

BANKING SECTOR

Chapter 1

1
William Chittenden edited and updated the PowerPoint slides for this edition.

Introduction
 What?
 Why?
 How?
 When?
 Who?

1
 Write 3 words you think of banks with
these pictures

Ice breaking
 What do you expect from this course?
 What are the jobs relating to banking
sector?
- Read appendix – p 25-26
- Which job do you prefer?

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 Key topics
1. Bank definitions
2. Bank regulation
 Goals of regulation
 Regulators

 Rationality of regulation

3. Bank functions
4. Bank services
5. Bank organization
6. Fundamental sources of changes
5

Quick quiz
 Can you list down the name of banks
you know?

 What are the main activities of banks?

 What banking services are used by

yourself/your family members?

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 What is a bank?

 Definition by functions it serves

 Institutions involves in transferring funds from
savers to borrowers (financial intermediation)
& in paying for goods and services
 Definition by services it offers to
customers
 Accept deposits, make commercial loans,
offer trust services, manage cash, etc

What is a bank?

 Necessity of a legal definition:

 Regulation purpose
 Banking service menu is expanding
 Other financial-service institution provide
similar services

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 What is a bank?

 Definition by legal basis for regulation

 US: any institution that could qualify for
deposit insurance administered by the
FDIC

 VN: a credit institution permitted to conduct

all banking activities and other related
business operations.

What is a bank?

 Definition by legal basis for regulation

 VN: "Non-bank credit institution" is a credit
institution permitted to engage in some
banking activities as its regular business, but
not permitted to receive demand deposits and
to provide payment services.
 VN: "Banking activities" are monetary
business activities and banking services, the
regular operation of which is the receipt of
deposits and use of that to extend credits,
provide payment services;
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 Financial service competitors of banks

 Savings associations
 Credit unions
 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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Reasons for Gov regulations on

financial firms

 P. 29 – Regulations of financial firms:

pros & cons
 Read Insights and Issues – p. 30

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 Goals of bank regulation

 Ensure safety and soundness of banks protecting

public’s savings and confidence
 Provide an efficient and competitive financial system
 Provide monetary stability to achieve national broad
economic goals
 Maintain the integrity of the payments system
 Ensure equal opportunity and fairness in the public’s
access to financial services
 Provide government with credit, tax revenues and
other services
 Help sectors that have special credit needs
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Banking principal regulatory agencies (US)

 Federal Reserve System (FED)

 Comptroller of the Currency (OCC)

 Federal Deposit Insurance Corporation (FDIC)

 Department of Justice

 Securities and Exchange Commission (SEC)

 State Boards of Commissions

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 Banking principal regulatory
agencies (VN)

 State Bank of Vietnam (SBV)

 Deposit Insurance of Vietnam (DIV)

 Ministry of Finance (MOF)

 State Securities Commission of Vietnam (SSC)

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Why banks are closely regulated?

 Banks are among leading repositories of
public’s savings
 Bank’s power of creating money in form of
readily spendable deposits
 Banks provide individuals and businesses with
loans for consumption and investment, which
should be equally and adequately supplied.
 Government rely upon banks in conducting
economic policies, collecting taxes and
dispensing government payment.
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 Shortcomings of restrictive bank regulation

 May encourage monopoly due to conditional

entry
 Does not prevent bank failure
 Cannot eliminate economic risk
 Does not guarantee that bank management will
make good decisions, but create a struggle
between regulators and banks going on
definitively
 Less-regulated business win customers away
from more-regulated banks.
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The Federal Reserve System

 The Federal Reserve System

 Fundamental Functions
 Conduct monetary policy
 Provide and maintain the payments

system
 Supervise and regulate banking

operations
 Organization
 Board of Governors
 12 Federal Reserve District Banks
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 State Bank of Vietnam

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The Federal Reserve System

 Monetary Policy Tools
 Open Market Operations
 Open market purchases (sales) increase
(decrease) reserves & the money supply
 Discount Rate

 Decreasing (Increasing) the discount rate

makes bank borrowing less (more) expensive,
which leads to an increase (decrease) in the
money supply
 Reserve Requirements

 Decreasing (Increasing) reserve requirements

increases (decreases) the money supply 20

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 Commercial banks and the economy

 Banks are the primary conduit for monetary policy

 Banks are the primary source of credit for most

small businesses and many individuals

 Banks are the major repository of public savings

 Banks are the principal operator of payment

system.

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Traditional services offered by banks

1. Carrying out currency exchange

2. Discounting commercial notes and making
business loans
3. Offering savings deposits
4. Safekeeping of valuables
5. Supporting government activities with credit
6. Offering checking accounts
7. Offering trust services
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 Carrying out currency exchange

 Bank trade one form of currency to another in

return for fee
 Start from early days of banks
 Become more complicated in the global
financial market
 Be provided by large and well-experienced
banks

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Discounting commercial notes and

making business loans
 Discounting commercial notes/making loans to
merchants based on accounts receivable
 Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)
 Be provided by banks and many other financial-
service competitors
 Be the core and main revenue-earning service
of many banks
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 Offering savings deposits

 Be the earliest and major source of fund for

making loan

 Compose of many types different in maturity,

form of currency, interest, etc.

 Be the most stable funding source

 Deposit is subject to reserve requirement and

insurance
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Safekeeping of valuables

 Keep gold and other valuables of customers in

secure vaults in return for fee

 Start since the old days of banks in the Middle

Ages

 Question: which banks are famous for this

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service? Why?
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 Supporting government with credit

 Banks in Europe during the Industrial

Revolution and in America during the

Revolutionary War had to purchase
government bonds with a portion of deposits.

 The custom continues in the modern world

 Banks use government bond as a shelter of

liquidity risk and a source of revenue

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Offering checking accounts

 Demand deposits permit depositors to write

draft/cheque for payment of goods and services
 Be one of the most important offerings of the
industry
 Service is provided by not only banks but also
credit unions, savings associations, etc.
 Today the service is extended to the internet
with the use of smart cards
 Provide banks with cheap source of fund.
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 Offering trust services

 Banks manage financial affairs and property of

individuals and firms in return for fee
 In property management, banks acts as a
trustee for wills, managing the deceased
customer’s estate,…
 In commercial trust department, bank manages
pension plan for businesses and acts as an
agent issuing stocks and bonds.

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Test

 How do banking services become

available, and the sequences of
traditional services?
 (Read page 4 – history)

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 More recent services offered by banks

8. Granting consumer loans

9. Providing financial advice
10. Managing cash
11. Offering equipment leasing
12. Making venture capital loans
13. Selling insurance policies
14. Selling retirement plans
15. Dealing in securities: brokerage and
investment banking services

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Granting consumer loans

 By early 20th century, banks started lending

consumers given the heavy competition for
business deposits and loans
 The trend has increased rapidly after the World
War 2
 Other current competitors for the consumer
credit accounts are credit unions and credit
card companies.
 The service bears high risk but returns high
earnings.
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 Providing financial advice

 Banks gains good reputation for understanding

and experience in the financial market
 Customers ask for advice, particularly in credit
utilization, saving or investing funds
 Services provided are plentiful including
financial plan preparation, marketing
opportunity consultation, fund seeking,
investment options, etc.

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Managing cash

 Bank handle cash collection and disbursement

for firms, invest temporary cash surpluses

 Service is expanded to individuals and firms

 Bank earns not only fee, but also low-cost fund

in demand deposit accounts

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 Offering equipment leasing

Bank/Lessor

Equipment
Firm/Lessee
Vendor
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Making venture capital loans

 Finance the start-up cost of new companies

 Implement through a venture capital firm
because added risk
 The venture capital firm raise fund from
investors looking for high profit

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 Selling insurance policies

 Bank sell insurance policies through acquiring

control of insurance companies
 Bank can gain high earning in the high-risk
insurance industry
 Bank possess privileges over independent
insurer in terms of customers, branches,
system, etc.
 Insurance agencies are affiliates or BHC or
FHC

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Selling retirement plans

 Bank actively involves in managing retirement

plan of businesses make available to
employees
 Incoming fund is invested to wisely selected
securities ensuring acceptable risk and return
 Bank also is in charge of dispensing payment to
retired or disabled employees.

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 Dealing in securities
 Bank provides security brokerage service and security
underwriting/investment banking services
 Bank offer mutual funds, annuities and other
investment products with clear consultation to
customers regarding higher expected yields and risk
 Bank temporarily buy stocks of large corporation aiding
new business launching or company expansion by
offering merchant banking services
 Bank acts as risk intermediation providing customer
with risk hedging tools (e.g. swap, option, future
contract) offered by themselves or from third party
 Services are provided through affiliated securities firms
or insurance companies. 39

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Question:

 Concept check: Question 1.6 and 1.7,

page 15

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 News

 Read the news of banking Vietnam

2014?

 What banking services are mentioned

in each event?

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Organizational form of the banking industry

 Read the exhibit 3.1. – p.67

 Characteristics of banking industry in US

 What about Vietnam?

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 Organizational form of the banking industry

 Unit banking versus Branch banking

 Offer all Services from one office

 One of the oldest kinds of banks

 New banks are generally unit banks until can

grow and attract more resources

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Concept check

 Q 3.4 and 3.5 – page 73

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 Organizational form of the banking industry

 Branch banking
 Offer full range of services from several
locations
 Senior management at the home office
 Each branch has its own management
team with limited decision making ability
 Some functions are highly centralized,
while others are decentralized

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News on banking and finance

 News
 What activities are related to?
 How will the bank carry out the activities?
 How do they affect bank balance sheet?

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 Branch banking

 Reasons for branch expansion? – page

75
 E-banking trend: p 76-77-79
 Your view of branch banking in Vietnam?

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Game: 35 min

 6 groups
 Link the name of bank and its
abbreviations.
 Each group – 2 persons – 1 reading, 1
writing
 No duplications
 Winners:
 Losers: 2-4-6-8-10k/person

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 Game: 45 min

 7 groups
 Link the name of bank service and its
characteristics.
 Some switching of contents
 Groups have to seek for the correct parts
from other groups
 The winner get prize basing on the time
of completion.
 Added mark: 20 – 18 – 16 …2
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3-50

Organizational form of the banking industry

What trend in branch banking has been

prominent in the U.S. in recent years?
Year # of Bank # of Total of Ave # of
Main Branch U.S. Bank Branches/
Offices Offices Offices U.S. Bank

1934 14,146 2,985 17,131 0.21

1970 13,511 21,810 35,321 1.61

1982 14,451 39,784 54,235 1.75

2007 7,241 77,947 85,188 10.76

From Table 3-2; Source: FDIC

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 Question

 Have you ever been to a bank branch?

 Which one?
 What is your favorite bank branch?
 What is your comment on
- Location
- Inner decorations
- Why?

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Bank branch policy in Vietnam

 New branch set up – Circular No. 21/2013/TT-NHNN

VND 300 billion x N1 + VND 50 billion x N2 < C

Of which:

- C means the real value of the charter capital of commercial bank till the time of
request (counted by billion VND).
 - N1 means quantity of branches which have been established and request for
establishment at Hanoi and Ho Chi Minh urban area.
 - N2 means quantity of branches which have been established and request for
establishment at Hanoi suburban, Ho Chi Minh suburban; and other provinces and
centrally-run cities.

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 Question for discussion

 Why do the quantity of branches are

directly related to banks’ capital?

 What is the difference between head

quarter and branch of banks?

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Quality of branching

 c) To comply with limitations to ensure

safety in operation of credit
institutions specified in Articles 126,
127, 128, 129; Clause 1 Article 130 and
Article 135 of law on credit institutions
and guides of state bank for this
provision uninterruptedly during 12
months before the request month;

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 Question

 Why quality of bank branches are strictly

supervised by Central bank?

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Organizational form of the banking industry

 Bank holding companies

 Parent

 Subsidiaries

 One-Bank holding companies

 Mutli-Bank holding companies

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 Organizational form of the banking industry

 Bank holding companies

 A corporation chartered for the purpose of
holding the stock of one or more banks
 Control of a bank is assumed when 25% or
more of the stock is owned
 Must get approval from federal reserve board
to control a bank
 One-Bank holding companies vs. multibank
holding companies

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Bank holding companies vs financial

hoding companies
 BHC: A corporation chartered for the purpose
of holding the stock (equity shares) of at least
one bank, often along with other businesses.
 OBHC (One-bank holding company): control
one or more non-bak businesses.
 MBHC (Multibank holding company): a minority
of bank holding company organizations. (eg.
Exhibit 3.8 + ad/dis on MBHC – p80)

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 Bank holding companies vs financial
hoding companies
 Affiliated banks: banks acquired by holding
companies.
 Independent bank: Not owned by holding
companies
 FHC: special type of holding company that may
offer the broadest range of financial services,
including dealing in and underwriting securities,
and selling and underwriting insurances.
 E.g of FHC: p 83 – exhibit 3.9

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Exhibit 1.10
Organizational structure of the BHC

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 3-61

Organizational form of the banking industry

Nonbank Businesses of BHCs

 Finance Companies  Investment Banking
 Mortgage Companies
Firms
 Data Processing
 Trust Companies
Companies  Credit Card Companies
 Factoring Companies  Leasing Companies
 Security Brokerage Firms  Insurance Companies
 Financial Advising and Agencies
 Credit Insurance  Real Estate Services
Underwriters  Savings Associations
 Merchant Banking 61

61

Organizational Form of the Banking Industry

 Financial holding companies

 Special type of holding company
 Offers the broadest range of services
 List of activities offered may expand as
regulators decide what services are
‘compatible’ with banking
 Each affiliated financial firm has its own
capital and management and its own profit
or loss
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 Organizational Form of the Banking Industry

 Financial Holding Companies

 Can engage in financial activities not permitted
in a bank or bank holding company
 Federal Reserve may not permit a company to

form a financial holding company or a bank

holding company to convert to a financial
holding company if
 any of its insured depository institution subsidiaries is
not well capitalized, well managed, or
 did not receive a satisfactory rating on its most
recent CRA (Community Reinvestment Act) exam.

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63

Exhibit 1.11
Organizational structure of a financial holding company

Financial Holding
Company

Bank Securities Real

Insurance Thrift Holding
Subsidiaries
Holding Subsidiary Company Estate
Company Subsidiary

Subsidiaries
Banking Nonbank Thrift Company and Service
Company Subsidiaries Companies

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 Quick quiz

 What are the differences between Bank

Holding Companies and Financial Holding
Companies?

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Organizational form of the banking industry

 Bank subsidiaries
 Bank controls one or more subsidiaries
 Subsidiaries offer other services such as
insurance and security brokerage services
 Profits and losses of each subsidiary impact
parent Bank
 Parent company’s net income is typically
derived from dividends, interest,
management fees from equity in subsidiaries,
and interest paid on holding company debt.
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 Banking Business Models
 Global Banks
 International presence
 Nationwide Banks
 Coast-to-coast presence
 Super-Regional Banks
 Extensive operations in a limited
geographic area of the U.S.
 Regional Banks
 Specialty Banks
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Exhibit 1.17 DISTRIBUTION OF THE NUMBER OF

BANKS AND TOTAL ASSETS BY TOTAL ASSETS:
1995 - 2004

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 Banking Business Models

 Specialty banks
 Also known as:
 Community Banks
 Independent Banks

 Typically have less than $1 billion in

assets
 Organization

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Exhibit 1.18
Organizational structure of an independent bank

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 Organizational structure – Vietcombank
Operation Center
INTERNAL AUDIT DEPT

ADMINISTRATION DEPT

HUMAN RESOURCES MGMT DEPT

DIRECTOR
LOAN WORKOUT UNIT
Nguyen My Hao
PROJECT INVESTMENT DEPT

CORPORATE BANKING DEPT

DEPUTY DIRECTOR DEPUTY DIRECTOR DEPUTY DIRECTOR

Nguyen Hung Son Nguyen Thi Bao Pham Thi Mai

TRANSACTION OFFICES SME CREDIT DEPT FOREX AND TREASURY DEPT

GUARANTEE DEPT INTERNATIONAL PAYMENT DEPT VIP DEPT

DEBT HANDLING DEPT FOREX AND TREASURY DEPT

AID AND LOANS SETTELEMENT DEPT
BUDGET DEPT
PERSONAL BANKING DEPT
CARDS DEPT INFORMATION TECHNOLOGY DEPT

SERVICE BUSINESS DEPT

FINANCIAL ACCOUNTING DEPT

TRANSACTION ACCOUNTING DEPT 71

71

Banking business models

 Specialty banks
 Personnel
 Senior Credit Officer
 Cashier/Chief Financial Officer

 Senior Operations Officer

 Senior Investment Officer

 Branch Area Executive

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 Quick quiz

 Types of banks in Vietnam?

 Can you name banks under each type

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Fundamental forces of change

 Service Proliferation

 Rising competition

 Deregulation/reregulation

 Crisis, reform and change in banking and financial services

 Increasingly interest-sensitive mix of funds

 Tech change and automation

 Consolidation & geographic expansion

 Convergence

 globalization

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 Read 1.5. – p. 16

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Fundamental forces of change:

Role of Regulation

 Regulatory Dialectic

 Process of regulation, market response,

and reregulation

 Financial Innovation

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 Fundamental forces of change:
Increased Competition
 For Deposits
 Interest rate ceilings and inflation
 For Loans
 Commercial paper
 Junk bonds
 Credit scoring
 Credit derivatives

77

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Fundamental forces of change:

Off-Balance Sheet Activities
 Loan commitments
 Loan guarantees
 Standby letters of credit
 Interest rate swaps
 Futures, forwards & options
 Leases

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 Fundamental forces of change:
Impact of Nonbank Competition
 Captive Finance Companies
 A subsidiary whose purpose is to provide
financing to customers buying the parent
company's product (e.g. General Motors
Acceptance Corporation (GMAC))
 General Finance Companies
 Fund their loans by issuing commercial
paper and long-term bonds. Their cost of
funds is higher than a bank’s, but they
charge higher rates.
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79

Fundamental forces of change:

Competition for Payments Services

 Credit Cards

 Debit Cards

 Prepaid Cards

 CHIPS

 ACH

80

80

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 Fundamental forces of change:
Competition for Other Bank Services

 Trust services

 Brokerage services

 Data processing

 Real estate appraisal

 Credit life insurance

 Personal financial consulting

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81

Fundamental forces of change:

Change Investment Banking

 National full-line firms

 Investment banking firms

 Underwriter

 Underwriter syndicate

 Broker versus Dealer

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 Fundamental forces of change:
Deregulation and Re-regulation
 Deregulation

 Eliminating existing regulations

 Reregulation

 Implementing new restrictions on banking

activities

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Fundamental forces of change:

Financial Innovation
 Innovation may be caused by a bank

wanting to:
 Enter into a new geographic market

 Enter into a new product market

 Deliver services less expensively

 etc.

84

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 Fundamental forces of change:
Securitization

 Securitization

 The process of converting assets into

marketable securities
 Mortgages

 Credit card receivables

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85

Fundamental forces of change:

Globalization
 Globalization

 Is the evolution of markets and institutions

where geographic boundaries do not
restrict financial transactions or
competition

86

86

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 Fundamental forces of change:
Technology
 Advances in Technology

 Advances in technology increase the scope of the

global market place and competition

 Advances in technology also reduce the need for

an intermediary by providing easy access to
information

 Increasing competition by reducing the cost of

being an information intermediary
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Vietnam case

 Opportunities and challenges

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 Explanation

 Foreign investors can buy shares of

Vietnamese state-owned commercial
banks to 49%.
 List down the advantages and
disadvantages of having foreign investors
(individuals)

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89

Quick test

 Multiple questions of chap 1

 Choose the best answer and explain

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 Game: 45 min

 6 groups
 Link the name of bank service and its
characteristics.
 Some switching of contents
 Groups have to seek for the correct parts
from other groups
 The winner get prize basing on the time
of completion.
 Added mark: 20 – 18 – 16 …2
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91

Home exercise

 Problem 1 – page 22
 Exercises 4, 5 – p 125.

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 AN OVERVIEW OF
BANKING SECTOR

Chapter 1

93
William Chittenden edited and updated the PowerPoint slides for this edition.

93

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