Chapter OneAn Overview of the Changing Financial- Services SectorCopyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Key TopicsPowerful 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 Services1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

IntroductionBanks 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 system1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

What Is a Bank?A bank can be defined in terms of:The economic functions it performsThe services it offers its customersThe legal basis for its existence

Historically, banks have been recognized for the great range of financial services they offerBank 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 products1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

EXHIBIT 1-1 The Many Different Kinds of Financial-Service Firms Calling Themselves Banks1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

What Is a Bank? (continued)Money-Centered Banks vs. Community BanksMoney-center banksIndustry leadersCover whole regions, nations, and continentsOffer the widest possible menu of financial servicesAcquire smaller businessesFace tough global competitionCommunity banksMuch smallerService local communities and townsOffer a narrower, but often more personalized, menu of financial services1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

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 deposits1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Financial System and Competing Financial-Service InstitutionsRoles 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 servicesRisk protection servicesLiquidity services1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

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 dyingOther experts counter that banking is not dying but changing by offering new services and changing its form

The banking industrys largest customers have found ways around banks to obtain the funds that they needBorrowing in the open market

Perhaps banking is being regulated to death 1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Financial System and Competing Financial-Service Institutions (continued)Leading Competitors with Banks Savings AssociationsCredit UnionsFringe BanksMoney Market FundsMutual Funds (Investment Companies)Hedge FundsSecurity Brokers and DealersInvestment BanksFinance CompaniesFinancial Holding CompaniesLife and Property/Casualty Insurance Companies1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Financial System and Competing Financial-Service Institutions (continued)Leading Competitors with Banks Financial-service providers are converging in terms of the services they offerThe 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 today1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

EXHIBIT 12 Comparative Size by Industry of Commercial Banks and Their Principal Financial-Service Competitors1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Services Banks and Many of Their Closest Competitors Offer the Public Services Banks Have Offered for CenturiesCarrying Out Currency ExchangeDiscounting Commercial Notes and Making Business LoansOffering Savings DepositsSafekeeping of Valuables and Certification of ValueSupporting Government Activities with CreditOffering Checking Accounts (Demand Deposits)Offering Trust Services1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

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 CenturyGranting Consumer LoansFinancial Advising Managing CashOffering Equipment LeasingMaking Venture Capital LoansSelling Insurance PoliciesSelling and Managing Retirement PlansDealing in Securities: Offering Security Brokerage and Investment Banking ServicesOffering Mutual Funds, Annuities, and Other Investment Products Offering Merchant Banking ServiceOffering Risk Management and Hedging Services

1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

TABLE 11 The Many Different Roles Banks and Their Closest Competitors Play in Todays Economy1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

TABLE 12 Some of the Leading Financial-Service Firms around the Globe1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Key Trends Affecting All Financial-Service Firms Crisis, Reform, and ChangeService ProliferationRising CompetitionGovernment Deregulation and then ReregulationCrisis, Reform, and Change in Banking and Financial ServicesAn Increasingly Interest-Sensitive Mix of FundsTechnological Change and AutomationConsolidation and Geographic ExpansionConvergenceGlobalization1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Quick QuizWhat 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 bankings closest and toughest competitors? What services do they offer that compete directly with banks services?

What is happening to bankings 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? 1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Appendix: Career Opportunities in Banking and Financial ServicesWhat different kinds of professionals work inside financial firms?Loan OfficersCredit AnalystsManagers of OperationsBranch ManagersSystems AnalystAuditing and Control PersonnelTrust Department SpecialistTellers

1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Appendix: Career Opportunities in Banking and Financial Services (continued)What different kinds of professionals work inside financial firms?Security Analysts and TradersMarketing PersonnelHuman Resources ManagersInvestment Banking SpecialistsBank Examiners and RegulatorsRegulatory Compliance Officers Risk Management Specialists

1-*Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

*******************