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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 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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 TABLE 1–1 The Many Different Roles Banks and Their
Closest Competitors Play in Today’s Economy

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 TABLE 1–2 Some of the Leading Financial-Service Firms
around the Globe

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 Key Trends Affecting All Financial-Service
Firms – Crisis, Reform, and Change
• Service Proliferation
• Rising Competition
• Government Deregulation and then Reregulation
• Crisis, Reform, and Change in Banking and Financial
Services
• An Increasingly Interest-Sensitive Mix of Funds
• Technological Change and Automation
• Consolidation and Geographic Expansion
• Convergence
• Globalization
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Quick Quiz
• What is a bank? How does a bank differ from most other financial-
service providers?

• Why are some banks reaching out to become one-stop financial-

service conglomerates? Is this a good idea?

• Which businesses are banking’s closest and toughest competitors?

What services do they offer that compete directly with banks’
services?

• What is happening to banking’s share of the financial marketplace

and why?

• How have banking and the financial-services market changed in

recent years? What powerful forces are shaping financial markets
and institutions today?
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 Appendix: Career Opportunities in Banking
and Financial Services
• What different kinds of professionals work inside
financial firms?
▫ Loan Officers
▫ Credit Analysts
▫ Managers of Operations
▫ Branch Managers
▫ Systems Analyst
▫ Auditing and Control Personnel
▫ Trust Department Specialist
▫ Tellers
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 Appendix: Career Opportunities in Banking
and Financial Services (continued)
• What different kinds of professionals work inside
financial firms?
▫ Security Analysts and Traders
▫ Marketing Personnel
▫ Human Resources Managers
▫ Investment Banking Specialists
▫ Bank Examiners and Regulators
▫ Regulatory Compliance Officers
▫ Risk Management Specialists
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