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An Overview of Banks and the Financial Services Sector Bank And Other Financial Service Competitor
Definition History Type Functions Services offered Challenges faced

CHAPTER TWO

Chapter 1, Rose and Hudgins


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What is a Bank?

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A bank can be defined in terms of 1) Economic function Transferring funds from savers to borrowers (financial intermediaries) Paying for goods and services 2) Services it offers Checking accounts, savings plans and loans But, expanded to security underwriting, insurance protection, merging companies etc. 3) legal basis for existence (regulations) A bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature
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The Different Kinds of Banks Today

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

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The Different Kinds of Banks Today


Community Money

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Banks: Smaller, locally focused commercial and savings banks


Center Banks: Large commercial banks based in leading financial centers
Investment Merchant

Banks: Underwrite issues of new securities by their customers (IPO) Banks: Supply both debt and equity capital to businesses

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The Different Kinds of Banks Today


International Wholesale Retail

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Banks: Commercial banks present more than one nation Banks: Large commercial banks serving corporations and governments Banks: Smaller banks serving primarily households and small businesses
Bankers

Banks: Supply services (Check clearing and security trading) to banks

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The Different Kinds of Banks Today

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Minority

Banks: Focus on customers from minority groups


National State

Banks: Function under federal charter (NCBs) state Banks: Function under charter of the

Insured

Banks: Maintain deposits backed by federal deposit insurance plans

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The Different Kinds of Banks Today


Member

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(Scheduled) Banks: Belong to the Federal Reserve System


Affiliated Fringe

Banks: Wholly or partially owned by a holding company


Banks: Offer payday and title loans, cash checks, rent to own firms
Universal

Banks: Offer virtually all financial services available in todays 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. 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.

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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. Mutual Fund may be open ended or closed ended. Closed-end Funds vs. Open-end Funds
Type Closed-end How Shares are Bought Stock Exchange Sales Price Market price Shares Outstanding Fixed

Open-end

Directly through fund

Net asset value

Varies

Leasing Leasing means equipment 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.
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Different Types of Activities of Banks/FI


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

Retail Vs. Wholesale/Corporate/Institutional Banking


Retail banking is small denomination/volume banking while wholesale banking is large denomination banking

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Different Types of Activities of Banks/FI


Main Banking In Japan, it is a very common saying that Bank X is the main bank of Firm Y or Firm Y has Bank X as its main bank.

The main bank relationship is a long-term relationship between a firm and a particular bank from which the firm obtains its borrowings.
The term main bank system thus refers to a system of corporate financing, monitoring and governance.

Universal Bank These are banks, which provide both banking as well as nonbanking financial services German 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-currency aspects of banking business.

Multinational 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.

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The Financial Service Competitors of Banks Other Financial Intermediaries

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

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The Financial Service Competitors of Banks


Money

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Market 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
Mutual

Funds (Investment Companies):Sell shares to the public representing an interest in the value of and returns from a professionally managed pool of stocks
Hedge

Funds:Sell shares to invest in less liquid and more risky assets>unregulated

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The Financial Service Competitors of Banks


Security Finance

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securities

Brokers and Dealers:Buy and sell

Companies:Offer loan to commercial enterprises and to consumers using funds borrowed from in the open market or from other financial institutions
Financial

Holding Companies:Credit card company, insurance and finance companies and security broker etc. under one corporate umbrella
Life

and Property-Casualty Insurance Companies: Protect against risk of persons or property


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Traditional Services Offered By Banks

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

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Traditional Services Offered By Banks


Supporting Checking

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Government Activities with Credit: Purchasing government bonds

Accounts: Demand deposit service> Current Account>Also provided by savings association, credit unions, securities firms.
Trust

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


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

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

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Assets ($Millions) Citigroup (USA) 1,097,000 Mizuho Financial Group (Japan) 945,688 UBS (Switzerland) 825,000 Sumitomo Mitsui Fin. (Japan) 802,674 Deutsche Bank (Germany) 794,984 Bank of Tokyo-Mitsubishi (Japan) 789,495

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Pertinent Websites The Banker Federal Reserve Wall Street Journal Bangladesh Bank www.thebanker.com www.federalreserve.gov www.wsj.com

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www.bangladesh-bank.org

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HISTORY OF BANKS AND OTHER FINANCIAL-SERVICE FIRMS


(Page 7: Insights and Issues)

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Review Questions: What are the services offered by banks 2000 years ago? What was the source of funds to the earliest bankers? Why banking faced religious opposition in the Middle Ages ? How it was resolved? What led to the development of banking in the 15th to 17th century? Why in the early Europe people used to deposit wealth in the goldsmiths shops? How money was developed? What is certification of value services? How financial service competitors, such as insurance companies came into existence? When and where first Mutual Funds emerged? How mutual funds, money market funds, hedge funds attracted bank deposits?
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