Profile Chapter 01 An Overview of

Chapter 01 – An Overview of the Changing Financial-Services Sector

1-1

CHAPTER 1

AN OVERVIEW OF THE CHANGING FINANCIAL-SERVICES SECTOR

Goal of This Chapter: You will learn about the many roles financial service – providers play in

the economy today. You will examine how and why the banking industry and the financial

services marketplace as a whole is rapidly changing, becoming new and different as we move

forward into the future. You will also learn about new and old services offered to the public.

Key Topics in This Chapter

 Powerful 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 Financial Services

Chapter Outline

I . Introduction: Powerful Forces Reshaping the Industry

II. What Is a Bank?

A. Defined by the Functions It Serves and the Roles It Play:

B. Banks and their Principal Competitors

C. Legal Basis of a Bank

D. Defined by the Government Agency That Insures Its Deposits

III. The Financial System and Competing Financial-Service Institutions

A. Roles of financial system

B. The competitive challenge for banks

C. Leading Competitors with banks

 Savings Associations

 Credit Unions

 Money Market Funds

 Mutual Funds

 Hedge Funds

 Security Brokers and Dealers

 Investment Banks

 Finance Companies

 Financial Holding Companies

 Life and Property/Casualty Insurance Companies

IV. Services Banks and Many of Their Closest Competitors Offer the Public

A. Services Banks Have Offered for Centuries

1. Carrying Out Currency Exchanges

2. Discounting Commercial Notes and Making Business Loans

3. Offering Savings Deposits

4. Safekeeping of Valuables and Certification of Value

5. Supporting Government Activities with Credit

6. Offering Checking Accounts (Demand Deposits)

7. Offering Trust Services

Chapter 01 – An Overview of the Changing Financial-Services Sector

1-2

B. Services Banks and Many of Their Financial-Service Competitors Began Offering in

the Past Century

1. Granting Consumer Loans

2. Financial Advising

3. Managing Cash

4. Offering Equipment Leasing

5. Making Venture Capital Loans

6. Selling Insurance Policies

7. Selling and Managing Retirement Plans

C. Dealing in Securities: Offering Security Brokerage and Investment Banking Services

1. Offering Security Underwriting

2. Offering Mutual Funds, Annuities, and Other Investment Products

3. Offering Merchant Banking Services

4. Offering Risk Management and Hedging Services

D. Convenience: The Sum Total of All Banking and Financial Services

V. Key Trends Affecting All Financial-Service Firms

A. Service Proliferation

B. Rising Competition

C. Government Deregulation

D. An Increasingly Interest-Sensitive Mix of Funds

E. Technological Change and Automation

F. Consolidation and Geographic Expansion

G. Convergence

H. Globalization

VI. The Plan of This Book

VII. Summary Concept Checks

1-1. What is a bank? How does a bank differ from most other financial-service providers?

A bank should be defined by what it does; in this case, banks are generally those financial

institutions offering the widest range of financial services. Other financial service providers

offer some of the financial services offered by a bank, but not all of them within one institution.

1-2. Under U.S. law what must a corporation do to qualify and be regulated as a

commercial bank?

Under U.S. law, commercial banks must offer two essential services to qualify as banks for

purposes of regulation and taxation, demand (checkable) deposits and commercial loans. More

recently, 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?

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 banks’ traditional service areas. The second reason is the

Chapter 01 – An Overview of the Changing Financial-Services Sector

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?

Among a bank’s 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?

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. 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

1-4

1-5

1-6

1-7