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CHAPTER TWO
An Overview of Banks and the
Financial Services Sector

Bank And Other Financial Service Competitor

Definition
History
Type
Functions
Services offered
Challenges faced

Chapter 1, Rose and Hudgins

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What is a Bank?

ë A bank can be defined in terms of

1) Economic function
Õ Transferring funds from savers to borrowers

(financial intermediaries)
Õ Paying for goods and services

2) Services it offers
Õ Checking accounts, savings plans and loans

Õ But, expanded to security underwriting, insurance

protection, merging companies etc.

3) legal basis for existence (regulations)
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The Different Kinds of Banks Today

ë Commercial Banks:
Banks: Sell deposits and make
loans to businesses and individuals
ë Savings Banks:
Banks: Attract savings deposits and
make loans to individuals and families
ë Cooperative Banks:
Banks: Help farmers
farmers,, ranchers,
and consumers acquire goods and services
ë Mortgage Banks:
Banks: Provide mortgage loans on
new homes and housing projects

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The Different Kinds of Banks Today

ëCommunity Banks:: Smaller, locally focused

Banks
commercial and savings banks
ëMoney Center Banks:
Banks: Large commercial
banks based in leading financial centers
ëInvestment Banks:: Underwrite issues of new
Banks
securities by their customers (IP
(IPO)
O)
ëMerchant Banks:: Supply both debt and
Banks
equity capital to businesses

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The Different Kinds of Banks Today

ëInternationalBanks: Commercial banks

present more than one nation
ëWholesale Banks: Large commercial banks
serving corporations and governments
ëRetail Banks: Smaller banks serving
primarily households and small businesses
ëBankersƍ Banks: Supply services (Check
clearing and security trading) to banks

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The Different Kinds of Banks Today

ëMinority Banks: Focus on customers from

minority groups
ëNational Banks: Function under federal
charter (NCBs
(NCBs))
ëState Banks: Function under charter of the
state
ëInsured Banks: Maintain deposits backed by
federal deposit insurance plans

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The Different Kinds of Banks Today

ëMember (Scheduled) Banks: Belong to the

Federal Reserve System
ëAffiliatedBanks: Wholly or partially owned
by a holding company
ëFringe Banks: Offer payday and title loans,
cash checks, rent to own firms
ëUniversal Banks: Offer virtually all financial
services available in todayƍs marketplace

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Different Types of Activities of Banks/FI

Investment and Commercial Banking

Investment banking is banking with the help of financial
instruments, which are of security papers in nature, while
in case of commercial banking, this is banking with cash
mode of financial instruments.
instruments.

Merchant Banking
In Bangladesh MBs have been provided licenses, not for
undertaking full range of investment banking activities,
rather only for providing services namely, new issue
management, underwriting and personal portfolio services
to general investors.
investors.

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Different Types of Activities of Banks/FI

Mutual Fund
A mutual fund is a financial intermediary that sells shares of
individuals and then invest the proceeds in bonds or stocks.
stocks.
Mutual Fund may be open ended or closed ended
ended..
Closed-end Funds vs. Open-end Funds
Rype How Shares are Bought Sales Price Shares Outstanding

Closed-end Stock Exchange Market price Fixed

Open-end Directly through fund Net asset value Varies

Leasing
Leasing means equipment financing.
financing. It is a contract between
two parties, lessor and lessee, that conveys the right of
possession and use of specific asset to the lessee for specific
span of time and in return lessee pays predetermined rentals
to the lessor.
lessor.

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Different Types of Activities of Banks/FI

Unit banking Vs.

Vs. Branch banking
AUnit banking is confining its operation mostly to a single office
or a number of offices in a single region ( U.S.A system)
Awhile branch banking is a system of banking where business is
carried with a network of branches throughout the country.
country.
ARhe unit banks are linked together with a system of
correspondent banks.
banks.

Retail Vs.
Vs. Wholesale/Corporate/Institutional Banking
ARetail banking is small denomination/volume banking
Awhile wholesale banking is large denomination banking

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Different Types of Activities of Banks/FI

|ain Banking
oIn Japan, it is a very common saying that ³Bank X is the main
bank of Firm Y´ or ³Firm Y has Bank X as its main bank.
bank.´
oThe main bank relationship is a long-
long-term relationship between
a firm and a particular bank from which the firm obtains its
borrowings..
borrowings
oThe term ³main bank system´ thus refers to a system of
corporate financing, monitoring and governance.
governance.

Universal Bank
oThese are banks, which provide both banking as well as non
non--
banking financial services
oGerman banking is the forerunner of this concept

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Different Types of Activities of Banks/FI

International Banking
The term international banking has been used to refer to the
cross--border and cross-
cross cross-currency aspects of banking business.
business.

|ultinational banking
The term, multinational banking, has been referred to the location
and ownership of banking facilities in a large number of countries
and geographic regions.
regions.

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The Financial Service Competitors of Banks
Other Financial Intermediaries

ë Savings and Loans Associations:

Associations: Sell
savings deposits and grant home mortgage
loans to individuals and families
ë Savings Banks:
Banks: Sell savings deposits, grant
consumer and home mortgage loans,loans, and
invest in high-
high-quality securities>under
charters of the govt.
ë Credit Unions: Collect deposits from and
make loans to their members as nonprofit
associations of individuals sharing a
common bond (same employer
employer))

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The Financial Service Competitors of Banks

ëMoney Market Funds:Collect

Funds:Collect short term,
liquid funds from individuals and
institutions>by buying shares in the
fund>invest the collected fund in quality
securities of short duration
ëMutual Funds (Investment Companies):Sell
Companies):Sell
shares to the public representing an interest
in the value of and returns from a
professionally managed pool of stocks
ëHedge Funds:Sell
Funds: Sell shares to invest in less
liquid and more risky assets>unregulated

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The Financial Service Competitors of Banks

ëSecurity Brokers and Dealers:Buy

Dealers:Buy and sell
securities
ëFinance Companies:Offer
Companies: Offer loan to commercial
enterprises and to consumers using funds
borrowed from in the open market or from
other financial institutions
ëFinancial Holding Companies:Credit
Companies:Credit card
company, insurance and finance companies and
security broker etc. under one corporate
umbrella
ëLifeand Property-
Property-Casualty Insurance
Companies:: Protect against risk of persons or
Companies
property
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Traditional Services Offered By Banks

ë Exchange of Currency:
Currency: One of the first
service offered by banks
ë Commercial Notes and Loans:
Loans: Discounting
of debts (accounts receivable)>Also
provided by finance and insurance
companies
ë Offering Savings Deposits:
Deposits: Raising
funds>Greece
funds> Greece bankers and ship owners
ë Safekeeping of Valuables: ƏGoldsmithsƐ
and their certificates

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Traditional Services Offered By Banks

ëSupporting Government Activities with

Credit:: Purchasing government bonds
Credit
ëChecking Accounts: Demand deposit
service> Current Account>Also
Account>Also provided by
savings association, credit unions,
securities firms.
ëRrust Services: Managing the financial
affairs and property of individuals and
business firms in return for a fee

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Recent Services of Banks and FIs

ë Consumer Loans:
ë Financial Advice:
Advice: Use of credit and investment of funds
ë Cash |anagement:
|anagement: Collects cash, make payments and
invest the surplus in short term interest bearing assets.
ë Equipment Leasing:
Leasing: Rent to the customer
ë Venture Capital Loans:
Loans: Finance the start up cost of high
tech new ventures
ë Selling Insurance Products:
Products: US case>Bank vs Ins. Co.
ë Security Underwriting and Brokerage Services:
Services: Banks as
³financial department stores´: US Case
Glass--Steagall Act 1933>>Gramm-
Glass 1933>>Gramm-Leach
Leach--Bliley Act1999
ë |utual Funds and Annuities:
Annuities:
ë |erchant Banking Services: Temporary purchase of
corporate stock> to aid launching of new business

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Trends Affecting Banks and Other Financial
Service Firms Today

ë Service Proliferation:
Proliferation: Non-
Non-interest service fees vs.
interest earned on loans
ë Rising Competition: Deregulation
ë Government Deregulation:
Deregulation: Broadening the service field
ë Increased Interest Rate Sensitivity:
Sensitivity: of customers
ë Technological Change:
Change: AT|, cell phone, POS
ë Consolidation and Geographic Expansion
ë E-Banking and E- E-Commerce: Operating costs
ë Convergence:: crossing industry line to broaden
Convergence
service base
ë Globalization::
Globalization
ë Increased Risk of Poor Performance and Failure

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HISRORY OF BANKS AND ORHER FINANCIAL-
FINANCIAL-SERVICE FIRMS
(Page 7: Insights and Issues)

Review Questions:
ë ëhat are the services offered by banks 2000 years ago?

ë ëhat was the source of funds to the earliest bankers?

ë ëhy banking faced religious opposition in the |iddle Ages ?

How it was resolved?
ë ëhat led to the development of banking in the 15th to 17th
century?
ë ëhy in the early Europe people used to deposit wealth in the
goldsmiths¶ shops?
ë How money was developed?

ë ëhat is certification of value services?

ë How financial service competitors, such as insurance companies

came into existence?
ë ëhen and where first |utual Funds emerged?

ë How mutual funds, money market funds, hedge funds attracted

bank deposits?
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