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Chapter 14

Investment Banking, Insurance, and Other Sources of Fee Income

Traditional Sources of Fee Income


Service

Charges on Deposit Accounts Credit Card Service Fees Commitment Fees for Making Credit Available Fees for Use of Safe Deposit Boxes Rental of Bank Property to Individuals and Businesses
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Newer Sources of Fee Income


Commissions

and Fees From Investment Banking Services Brokerage Commissions for Aiding in the Purchase of Securities Fiduciary Income Trust Services Commissions for the Sake of Insurance Servicing Fees from Securitization and Sales of Loans
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Reasons for the Drive for More Service Fees


A

Desire to Supplement Traditional Sources of Funds An Effort to Offset Higher Production Costs A desire to Reduce Overall Risk A goal to Promote Cross-Selling of Traditional and New Services
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Investment Banking Services


Under

The Authority Of The GrammLeach-Bliley-Act Many Banking Firms Have Either Acquired Or Formed Their Own Investment Banking Affiliates. The Primary Role Of Investment Bankers Is to Serve As Financial Advisers To Corporations, Governments, And Other Large Institutions.
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Principal Types of Securities Underwritten by Investment Bankers

Government and Federal Agency Securities Investment Grade Corporate Bonds Convertible Corporate Bonds and Stock
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Common and Preferred Stock Corporate Junk Bonds Asset Backed Securities

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Additional Sources of Revenue for Investment Bankers

Advising Clients Regarding Acquisitions and Mergers Creating and Trading Derivatives Brokering Loan Sales Setting Up Special Purpose Entities
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Stock and Bond Trading Currency and Commodity Trading Issuing Credit and Liquidity Enhancements Developing Business Plans
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Mutual Funds
Companies that Offer Shares in a Pool of Securities and Flow Through Any Earnings Generated to Shareholding Customers

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Two Popular Mutual Funds


Traded Funds (ETFs) Behave Like Index-Tracking Mutual Funds but Trade All Day on Stock Exchanges Hedge Funds Private Partnerships Whose Shares are Offered Primarily to Wealthy Clients that Often Make HighStakes Bets on the Direction of the Market
Exchange
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Two Different Ways of Being Involved with Mutual Funds


Proprietary

Funds Offered Through One of Their Affiliated Companies


Offer Investment Advice Serve as Transfer Agents Execute the Transactions of the Fund

Nonproprietary

Funds The Offering Institution Acts as a Broker for an Unaffiliated Mutual Fund
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Annuities
A Savings Instrument in Which the Customer Makes Cash Payments to an Investment Manager Who Places Them Into Earning Assets and Where Later the Purchaser Receives a Stream of Income From Those Assets
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Types of Annuities
Fixed Annuities Promise a Customer Who Contributes a Lump Sum a Fixed Rate of Return Over the Life of the Contract Variable Rate Annuities A Lump Sum of Money is Invested Into a Basket of Stocks, Mutual Funds or Other Investments Return for a Customer But is Not Promised a Fixed Equity-Index Annuity Combines Features of Both Fixed and Variable Annuities

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Regulations Regarding Investment Products


Customers

Must be Informed that Investment Products are:


Not Insured by the FDIC Not a Deposit or Other Obligation of a Depository Institution Subject to Investment Risks

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Trust Services
These Services are Centered on the Management of Property Owned By a Banks Customers, Such as Securities, Land, Buildings and Other Investments

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Types of Trusts

Living Trusts Allows Trust Officers to Act on Behalf of a Living Customer without a Court Order Testamentary Trusts Arise Under a Probated Will and Used to Save on Estate Taxes Irrevocable Trusts Allows Wealth to be Passed Free of Gift and Estate Taxes Charitable Trusts Used to Support Worthwhile Causes Indenture Trusts Used Collect, Hold and Manage Assets to Back an Issue of Securities by a Corporation Dynasty Trusts Set Up to Avoid Paying Federal Estate Taxes and Generation-Skipping Taxes
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Offerings of Insurance Related Products


Life

Insurance Policies Life Insurance Underwriters Property-Casualty Insurance Policies Property-Casualty Insurance Underwriting

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Insurance Products Disclosure Rules

An Insurance Product is not a Deposit or Other Obligation of a Depository Institution An Insurance Product is not Insured by the FDIC Insurance Products May Involve Investment Risk and Possible Loss of Value Depository Institutions Cannot Base Granting Loans Based on the Purchase of Insurance

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Product-Line Diversification Effect


Offering More Than One Product or Service Through the Same Company in Order to Reduce the Overall Risk of the Revenues Flows Through the Individual Firm

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Risk and Return With Traditional and Nontraditional Services

E(R) w NT R NT w T R T
w
2 NT 2 NT

w 2w NT w T rNT*T NT T
2 T 2 T

1 2

Where: NT is Nontraditional Services and T is Traditional Services and

r is the Correlation Between Them


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Customer Privacy
Protecting the Personal Information That Customers Supply to Their Financial-Service Providers So That Customers are Not Damaged By the Release of Their Private Data to Outside Parties
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