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Overview of Banking

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The Financial System

• The financial system is the collection of markets, institutions, regulations, and techniques through which bonds, stocks, and other securities are traded, interest rates are determined, and financial services are produced and delivered around the world

• 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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What Is a Bank?

• Historically, banks have been recognized for the great range of financial services they offer

– Banks are the principal source of credit (loanable funds) for millions of individuals/families, businesses and for many units of government

– 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

– 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

• 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

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1-4

The Many Different Kinds of Financial-Service Firms

Calling Themselves Banks

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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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Competing Financial-Service Institutions

• 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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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

▫ 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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1-8

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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1-11

The Many Different Roles Banks and Their Closest

Competitors Play in Today’s Economy

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1-12

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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1-14

The Structure of the Commercial Banking Industry

• Advancing Size and Concentration of Assets

▫ Commercial banking is the dominant supplier of credit and payments services to businesses and households

▫ Many banks in the United States are small by global standards

▫ These smallest financial institutions, numerous as they are, held little more than one percent of total industry assets

▫ In contrast, the American banking industry also contains some of the largest financial service organizations on the planet

▫ Citigroup, JP Morgan Chase, and the Bank of America hold about 6 trillion dollars combined

▫ Thus, banking continues to be increasingly concentrated not only in the smallest, but also in the very largest of all financial firms

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Large Banks vs. Small Banks • 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

▫ Face tough global competition

▫ Community banks ▫ Much smaller

▫ Service local communities and towns

▫ Offer a narrower, but often more personalized, menu of financial services

• Unit Banking Organizations

▫ Unit banks, one of the oldest kinds, offer all of their services from one office

▫ Some services (such as taking deposits, cashing checks, or paying bills) may be offered from limited-service facilities, such as drive-up windows and automated teller machines (ATMs)

▫ These organizations are still common today

▫ One reason for the large numbers of unit banks is the continuing formation of new banks. Many new banks start out as unit organizations

▫ Many customers still seem to prefer smaller banks, which often seem to know their customers better than larger banks

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The Structure of the U.S. Commercial

Banking Industry, December 31, 2009

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The Structure of the U.S. Commercial

Banking Industry, December 31, 2009

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1-18

Small and Medium-Size U.S. Banks Lose Market Share to the

Largest Banking Institutions

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1-19

The 10 Largest Bank Holding Companies Operating in the

United States (Total Assets as Reported on June 30, 2010)

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1-20

The Most Efficient Sizes for Banks

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1-21

Entry and Exit in U.S. Banking

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1-22

Growth of Commercial Bank Branch Offices in the United States

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1-23

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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1-24

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