Financial Institutions AccountingDr. Salah Hammad

Chapter 1

An Overview of the Changing Financial-Services Sector

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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 performs2. The services it offers its customers3. 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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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 12

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

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