Current Topics

Trends in Banking G & K Chps. 16, 17 & 18 G & K Chps. 16, 17 & 18 Financial Services Financial Services Electronic Banking Electronic Banking Global Bank Management Global Bank Management

Financial Services Cash management services Cash management services Investment products Investment products Trust services Trust services

Cash Management Services Cash concentration locates deposits for a firm into a single account. Cash concentration locates deposits for a firm into a single account. Zero balance accounts reduce firm’s bank account balance by transferring funds only when a bill is to be paid by the firm. Zero balance accounts reduce firm’s bank account balance by transferring funds only when a bill is to be paid by the firm. Lock boxes are post office boxes of a firm for receiving payments. Banks empty the lock boxes and deposit for firms. Lock boxes are strategically located to speed collection times. Lock boxes are post office boxes of a firm for receiving payments. Banks empty the lock boxes and deposit for firms. Lock boxes are strategically located to speed collection times.

Investment Products Annuities are purchased CF streams; Fixed, Variable Annuities are purchased CF streams; Fixed, Variable Mutual funds to generate sales commissions and loads. Can be In- House products. Mutual funds to generate sales commissions and loads. Can be In- House products. Sweep accounts for temporary transfer of funds from non-interest bearing accounts into an investment account earning higher yields. Sweep accounts for temporary transfer of funds from non-interest bearing accounts into an investment account earning higher yields.

Trust Services A legal entity that can hold and manage assets for one or more beneficiaries over time. A legal entity that can hold and manage assets for one or more beneficiaries over time. A bank can act as an agent for the trustee to invest funds according to the directions of the trustee. A bank can act as an agent for the trustee to invest funds according to the directions of the trustee. A bank can handle employee benefit programs, personal trusts and estates, and corporate trusts. Employee benefit programs include profit sharing plans, defined benefit plans, and defined contribution plans (401K). A bank can handle employee benefit programs, personal trusts and estates, and corporate trusts. Employee benefit programs include profit sharing plans, defined benefit plans, and defined contribution plans (401K).

Electronic Banking Visible vs. Behind-the-scenes Visible vs. Behind-the-scenes New Services New Services ATMs ATMs Debit Card Services Debit Card Services Electronic Bill Paymt Electronic Bill Paymt

Electronic Banking Behind-the-Scenes Behind-the-Scenes Fedwire is a real-time gross settlements system processing checks in North America CHIPS is for international funds transfers of checks CHIPS is for international funds transfers of checks S.W.I.F.T. in Belgium is cooperatively owned by banks around the world. This system is used primarily for communications, and CHIPs and Fedwire handle payments transfers. S.W.I.F.T. in Belgium is cooperatively owned by banks around the world. This system is used primarily for communications, and CHIPs and Fedwire handle payments transfers. CHECK 21 CHECK 21

Electronic Banking Visible Visible ATMs ATMs Point-Of-Sale (POS) and Debit Cards Point-Of-Sale (POS) and Debit Cards Electronic Bill Pymt and Regular Debits Electronic Bill Pymt and Regular Debits Internet Access; Accts, EFTs, Loans & Stmts Internet Access; Accts, EFTs, Loans & Stmts

Electronic Banking Next Step: Electronic Money Next Step: Electronic Money Stored value cards and smart cards that can be reloaded with funds for payments Stored value cards and smart cards that can be reloaded with funds for payments Advantages and disadvantages Advantages and disadvantages Fast and convenient, can be used over internet. Not all merchants accept all forms of electronic money. Security and privacy could be problems. Need to verify identity. Government policy is unclear on deposit insurance, who can “coin” digitized money, and control of this money supply.

Global Bank Management Why and how U.S. banks engage in international banking Why and how U.S. banks engage in international banking Foreign banks in the U.S. Foreign banks in the U.S. International lending International lending Foreign exchange markets Foreign exchange markets

Why U.S. banks engage in international banking Serve the needs of their customers (imports and exports, foreign production operations, etc). Serve the needs of their customers (imports and exports, foreign production operations, etc). Profit motive of opening new markets. Profit motive of opening new markets. Global diversification. Global diversification. Prestige of having offices in important financial centers around the world. Prestige of having offices in important financial centers around the world.

How U.S. banks engage in international banking Correspondent banks Correspondent banks Foreign branches Foreign branches Representative offices Representative offices Foreign affiliates Foreign affiliates Edge Act offices (subsidiaries devoted to international trade). Edge Act offices (subsidiaries devoted to international trade). International banking facilities (Frgn Deps) International banking facilities (Frgn Deps)

Foreign banks in the U.S. International Banking Act of 1978 International Banking Act of 1978 Allows foreign banks to operate in US Allows foreign banks to operate in US An agency can provide credit and clear checks but cannot take deposits of U.S. citizens. Primarily used for foreign trade. An agency can provide credit and clear checks but cannot take deposits of U.S. citizens. Primarily used for foreign trade. A branch can accept deposits of U.S. citizens if for the purpose of carrying out transactions in foreign countries. A branch can accept deposits of U.S. citizens if for the purpose of carrying out transactions in foreign countries. A subsidiary is a U.S. bank that is owned by a foreign bank. A subsidiary is a U.S. bank that is owned by a foreign bank. A finance company can be owned and operated by a foreign financial organization. A finance company can be owned and operated by a foreign financial organization.

International lending Syndicated loans Syndicated loans Large loans that enable borrowers to obtain large amounts of funds and lenders can diversify their credit risk. Lead bank can earn fee income for management services. Large loans that enable borrowers to obtain large amounts of funds and lenders can diversify their credit risk. Lead bank can earn fee income for management services. Letters of credit Letters of credit Import letters of credit are issued by a bank in favor of a firm in most cases. An export letter of credit is issued by a foreign bank to a firm in the U.S. Import letters of credit are issued by a bank in favor of a firm in most cases. An export letter of credit is issued by a foreign bank to a firm in the U.S.

International lending Letters of credit Letters of credit The letter of credit is a document from a bank that says it will pay the exporter when the conditions in the letter are met. The letter of credit is a document from a bank that says it will pay the exporter when the conditions in the letter are met. In effect, the bank’s credit is substituted for the importer. In effect, the bank’s credit is substituted for the importer. The issuing bank pays the seller through the advising (paying) bank. The issuing bank pays the seller through the advising (paying) bank. The importer pays the issuing bank a fee for its services. The importer pays the issuing bank a fee for its services.

Foreign exchange markets Interbank market of money center banks and major foreign banks. Interbank market of money center banks and major foreign banks. Foreign exchange brokers facilitate currency trading. Foreign exchange brokers facilitate currency trading. Credit risk associated with the counterparty (bank or broker) failing to meet its obligations. Credit risk associated with the counterparty (bank or broker) failing to meet its obligations.