Presentation on theme: "An Overview of the Changing Financial-Services Sector"— Presentation transcript:
1 An Overview of the Changing Financial-Services Sector Chapter OneAn Overview of the Changing Financial-Services Sector
2 Powerful Forces Changing the Industry What Is a Bank? Key TopicsPowerful Forces Changing the IndustryWhat Is a Bank?The Financial System and Competing Financial-Service InstitutionsOld and New Services Offered to the PublicKey Trends Affecting All Financial- Service Firms
3 IntroductionBanks are the main source of credit (loans) for millions of households and for many units of governmentWorld-wide banks grant more loans to consumers (households) than any other financial-service companiesThe assets held by U.S. banks represent about one- fifth of the total assetsIn other nations banks hold half or more of all assets in the financial system
4 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 why it exists.Historically, banks have been recognized for the many different financial services they offer, such as:Investment BankingInsuranceFinancial planningAdvice for merging companiesRisk-management services to businesses and consumers ……And many other services
5 EXHIBIT 1-1 The Many Different Kinds of Financial-Service Firms Calling Themselves Banks
6 What Is a Bank? (continued) Money-Centered Banks vs. Community BanksMoney-center banksCover whole regions, nations, and continentsOffer the widest possible menu of financial servicesAcquire smaller businessesFace tough global competitionCommunity banksMuch smallerService local communities and townsOffer less financial services
7 What Is a Bank? (continued) The Legal Basis for BankingA bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business natureCongress 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 is not defined so much by its many products, but by the government agency insuring its deposits
8 The Financial System and Competing Financial-Service Institutions Roles of the Financial SystemThe primary purpose of the financial system is to encourage saving and to transfer those savings from savers and lenders to borrowers and spenders.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 riseThe financial system also provides a variety of supporting services:Payment servicesRisk protection servicesLiquidity services
9 The Financial System and Competing Financial-Service Institutions (continued) The Competitive Challenge for BanksLately, the financial market share that banking comprised has fallenSome fear that this downward trend in market share may mean that traditional banking is dyingOther experts say that banking is not dying but changing by offering new services and changing its formThe banking industry’s largest customers have found ways around banks to obtain the funds that they needBorrowing in the open marketPerhaps banking is being “regulated to death”
10 The Financial System and Competing Financial-Service Institutions (continued) Leading Competitors with BanksSavings AssociationsCredit UnionsFringe BanksMoney Market FundsMutual Funds (Investment Companies)Hedge FundsSecurity Brokers and DealersInvestment BanksFinance CompaniesFinancial Holding CompaniesLife and Property/Casualty Insurance Companies
11 The Financial System and Competing Financial-Service Institutions (continued) Leading Competitors with BanksFinancial-service providers are converging or coming together 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 servicesThe challenge today is seeing the difference banks & other financial-service providers.
12 EXHIBIT 1–2 Comparative Size by Industry of Commercial Banks and Their Principal Financial-Service Competitors
13 Services Banks and Many of Their Closest Competitors Offer the Public Services Banks Have Offered for CenturiesCurrency ExchangeDiscounting Commercial Notes and Making Business LoansOffering Savings DepositsSafekeeping of ValuablesSupporting Government Activities with CreditOffering Checking Accounts (Demand Deposits)Offering Trust Services – managing the accounts of wealthy individuals.
14 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 Loans Financial AdvisingManaging Cash Offering Equipment LeasingMaking Venture Capital Loans – new business loansSelling Insurance PoliciesSelling and Managing Retirement PlansDealing in Securities: Offering Security Brokerage and Investment Banking ServicesOffering Mutual Funds, Annuities, and Other Investment ProductsOffering Merchant Banking ServiceOffering Risk Management and Hedging Services
15 TABLE 1–1 The Many Different Roles Banks and Their Closest Competitors Play in Today’s Economy
16 TABLE 1–2 Some of the Leading Financial-Service Firms around the Globe
17 INDUSTRY OVERVIEW (cont) Below is a list of the largest commercial/investment banks in the world and where they are located.Bank HeadquartersBank of America Merrill Lynch New York City, USBarclays London, UKCitigroup New York CityCredit Suisse Zurich, SwitzerlandDeutsche Bank Franfurt, GermanyGoldman Sachs New York CityJ.P. Morgan New York CityMorgan Stanley New York CityUBS Zurich, Switzerland
18 Key Trends Affecting All Financial-Service Firms – Crisis, Reform, and Change More and more services and Rising CompetitionGovernment Deregulation and then ReregulationCrisis, Reform, and Change in Banking and Financial ServicesAn Interest-Sensitive Mix of FundsTechnological Change & AutomationConsolidation (getting bigger through mergers and acquisitions) and Geographic Expansion – economies of scale.Convergence – economies of scope, more productsGlobalization
19 Concept Check – Homework assignment for next week Concept Check – Homework assignment for next week. One from each group to share in class.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?
20 Appendix: Career Opportunities in Banking and Financial Services What different kinds of professionals work inside financial firms?Loan Officers Credit AnalystsManagers of Operations TellersBranch ManagersSystems AnalystAuditing and Control PersonnelTrust Department Specialists
21 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 OfficersRisk Management Specialists
22 SUMMARYThis first chapter explored the many roles played by modern banks and their financial- service competitors. We can also see how rapidly the financial world is changing.The following represent the most important points in the chapter:Banking has changed from money changers and money issuers to being a complex giver of information and products.Banks are pressured on all sides by many key financial-service competitors.
23 SUMMARY continued3. Banks and non-bank businesses are hard to separate from one another. Yet, the large banks still offer the widest range of products and services.4. The main functions offered by many financial- service firms include: (a) lending & investing money (credit function); (b) making payments of goods and services for customers (payment function); (c) managing and protecting customer’s cash and property (cash, risk and trust management functions); (d) assisting customers in raising funds and saving (brokerage, investment banking, savings function)
24 SUMMARY continued5. Major trends affecting performance of financial firms today include: (a) wide range of products; (b) globalization; (c) government regulation and de-regulation; (d) the intense competition between financial service firms; (e) convergence – the fact that so many financial firms look the same and offer many of the same services; (f) consolidation – many more mergers and acquisitions as smaller banks and financial service providers fail; (g) the increase of innovation and automation.