Professor Lieberman
09/06/2016
1
Assignment
A. Read Chapters 1-2 in “Bank Management & Financial Services”
B. Complete questions attached herein
i. To be submitted via Blackboard and emailed to llieberman@pace.edu by
5pm on Monday prior to next class
ii. To be discussed during next class meeting
CHAPTER 1 – AN OVERVIEW OF THE CHANGING FINANCIAL SERVICES SECTOR
1-1. What is a bank? How does a bank differ from most other financial-service providers?
Soln: A bank should be defined by what it does; banks are financial institutions offering the widest range of
financial services. Other financial service providers offer some of the financial services offered in a
bank, but not all services are offered within a single institution.
1-2. Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?
Soln: Under U.S. Law, commercial banks must offer two essential services to qualify as banks for purposes of
regulation and taxation, demandable deposits and commercial loans. Congress defined a bank as any
institution that could qualify for deposit insurance administered by the FDIC.
1-3. Why are some banks reaching out to become one-stop financial-service conglomerates? Is this
a good idea, in your opinion?
Soln: There are two reasons that banks are increasingly becoming one-stop financial service
conglomerates. The first reason is the increased competition from other types of financial institutions
and the erosion of the banks’ traditional service areas. The second reason is the Financial Services
Modernization Act which has allowed banks to expand their role to be full service providers.
1-4. Which businesses are banking’s closest and toughest competitors? What services do they offer
that compete directly with banks’ services?
Soln: Amongst a banks closest competitors are savings associations, credit unions, money market funds,
mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies,
financial holding companies, and life and property-casualty insurance companies. All of these
financial service providers are converging and embracing each other’s innovations. The Financial
Services Modernization Act has allowed many of these financial service providers to offer the public
one-stop shopping for financial services.
1-5. What is happening to banking’s share of the financial marketplace and why? What kind of
banking and financial system do you foresee for the future if present trends continue?
Soln: The Financial Services Modernization Act of 1999 allowed many of the banks closest competitors to
offer a wide array of financial services thereby taking away market share from traditional banks.
Professor Lieberman
09/06/2016
2
Banks and their closest competitors are converging into one-stop shopping for financial services and
this trend should continue in the future.
1-6. What different kinds of services do banks offer the public today? What services do their
closest competitors offer?
Soln: Banks offer the widest range of services of any financial institution. They offer thrift deposits to
encourage saving and checkable (demand) deposits to provide a means of payment for purchases of
goods and services. They also provide credit through direct loans, by discounting the notes that
business customers hold, and by issuing credit guarantees.
Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and
for home improvements, etc. Banks also manage the property of customers under trust agreements
and manage the cash positions of their business customers. They purchase and lease equipment to
customers as an alternative to direct loans. Many banks also assist their customers with buying and
selling securities through discount brokerage subsidiaries, the acquisition and sale of foreign
currencies, the supplying of venture capital to start new businesses, and the purchase of annuities to
supply future funding at retirement or for other long-term projects such as supporting a college
education.
All of these services are also offered by their closest competitors. Banks and their closest
competitors are converging and becoming the financial department stores of the modern era.
1-7. What is a financial department store? A universal bank? Why do you think these institutions
have become so important in the modern financial system?
Soln: Financial department store and universal bank refer to the same concept. A financial department
store is an institution where banking, fiduciary, insurance, and security brokerage services are unified
under one roof. A bank that offers all these services is normally referred to as a universal bank.
These have become important because of convergence and changes in regulations that have allowed
financial service providers to offer all services under one roof.
1-8. Why do banks and other financial intermediaries exist in modern society, according to the
theory of finance?
Soln: There are multiple approaches to answering this question. The traditional view of banks as financial
intermediaries sees them as simultaneously fulfilling the financial-service needs of savers and
borrowers, providing both a supply of credit and a supply of liquid assets.
A newer view sees banks as delegated monitors who assess and evaluate borrowers on behalf of their
depositors and earn fees for supplying monitoring services. Banks also have been viewed in recent
theory as suppliers of liquidity and transactions services that reduce costs for their customers and,
through diversification, reduce risk. Banks are also critical in the payment system for goods and
services and have played an increasingly important role as a guarantor and a risk management role
for customers.
Professor Lieberman
09/06/2016
3
1-9. How have banking and the financial-services market changed in recent years? What powerful
forces are shaping financial markets and institutions today? Which of these forces do you
think will continue into the future?
Soln: Banking is becoming a more volatile industry due, in part, to deregulation which has opened up
individual banks to the full force of the financial marketplace. At the same time the number and
variety of banking services has increased greatly due to the pressure of intensifying competition from
nonbank financial-service providers and changing public demand for more conveniently and reliably
provided services.
Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter
countries overseas and attract away profitable domestic business and household accounts.
1-10. Can you explain why many of the forces you named in the answer to the previous question have
led to significant problems for the management of banks and other financial firms and for
their stockholders?
Soln: The net result of recent changes in banking and the financial services market has been to put greater
pressure upon their earnings, resulting in more volatile returns to stockholders and an increased
bank failure rates.
Some experts see banks role and market share shrinking due to restrictive government regulations
and intensifying competition. Institutions have also become more innovative in their service
offerings and in finding new sources of funding, such as off-balance-sheet transactions.
The increased risk faced by institutions today, therefore, has forced managers to more aggressively
utilize a wide array of tools and techniques to improve and stabilize their earnings streams and
manage the various risks they face.
1-11. What do you think the financial-services industry will look like 20 years from now? What are
the implications of your projections for its management today?
Soln: There appears to be a trend toward continuing consolidation and convergence. There are likely to be
fewer financial service providers in the future and many of these will be very large and provide a broad
range of financial services under one roof. In addition, global expansion will continue and will be
critical to the survival of many financial service providers. Management of financial service providers
will have to be more technologically astute and be able to make a more diverse set of decisions including
decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.
Professor Lieberman
09/06/2016
CHAPTER 2
THE IMPACT OF GOVERNMENT POLICY AND REGULATION ON THE FINANCIAL-SERVICES INDUSTRY
2-1. What key areas or functions of a bank or other financial firm are regulated today?
Among the most important areas of banking subject to regulation are the adequacy of a bank’s capital,
the quality of its loans and security investments, its liquidity position, fund-raising options, services
offered, and its ability to expand through branching and the formation of holding companies.
2-2. What are the reasons for regulating each of these key areas or functions?
These areas are regulated, first of all, to primarily protect the safety of the depositors’ funds so that the
public has some assurance that its savings and transactions balances are secure. Thus, bank failure is
