Chapter One

An Overview of the Changing

Financial-Services Sector
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Key Topics
Powerful Forces Reshaping the Industry
What Is a Bank?
The Financial System and Competing FinancialService Institutions
Old and New Services Offered to the Public
Key Trends Affecting All Financial-Service Firms
Appendix: Career Opportunities in Banking and
Financial Services
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Introduction
Banks are the principal source of credit (loanable funds)
for millions of individuals and families and for many
units of government
Worldwide banks grant more installment loans to
consumers (individuals and families) than any other
financial-service provider
The assets held by U.S. banks represent about one-fifth
of the total assets
In other nations banks hold half or more of all assets in the
financial system
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What Is a Bank?
A bank can be defined in terms of:
1. The economic functions it performs
2. The services it offers its customers
3. The legal basis for its existence

Historically, banks have been recognized for the great

range of financial services they offer

Bank service menus are expanding rapidly today to include

investment banking, insurance protection, financial
planning, advice for merging companies, the sale of riskmanagement services to businesses and consumers, and
numerous other innovative financial products

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EXHIBIT 1-1 The Many Different Kinds of Financial-Service

Firms Calling Themselves Banks

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What Is a Bank? (continued)

Money-Centered Banks vs. Community Banks
Money-center banks

Industry leaders
Cover whole regions, nations, and continents
Offer the widest possible menu of financial services
Acquire smaller businesses
Face tough global competition

Community banks
Much smaller
Service local communities and towns
Offer a narrower, but often more personalized, menu of
financial services
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What Is a Bank? (continued)

The Legal Basis for Banking
A bank is any business offering deposits subject to
withdrawal on demand and making loans of a commercial or
business nature
Congress then defined a bank as any institution that could
qualify for deposit insurance administered by the Federal
Deposit Insurance Corporation (FDIC)
Under federal law in the U.S., a bank had come to be defined,
not so much by its array of service offerings, but by the
government agency insuring its deposits

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The Financial System and Competing

Financial-Service Institutions
Roles of the Financial System
The primary purpose of the financial system is to encourage
saving and to transfer those savings to individuals and
institutions planning to invest and needing credit to do so
This process of encouraging savings and transforming savings
into investment spending causes the economy to grow, new
jobs to be created, and living standards to rise
The financial system also provides a variety of supporting
services:
Payment services
Risk protection services
Liquidity services

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The Financial System and Competing

Financial-Service Institutions (continued)
The Competitive Challenge for Banks
Lately, the financial market share that banking comprised has
fallen
Some authorities in the financial-services field fear that this
apparent erosion of market share may imply that traditional
banking is dying
Other experts counter that banking is not dying but changing by
offering new services and changing its form
The banking industrys largest customers have found ways
around banks to obtain the funds that they need
Borrowing in the open market
Perhaps banking is being regulated to death

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The Financial System and Competing

Financial-Service Institutions (continued)
Leading Competitors with Banks

Savings Associations
Credit Unions
Fringe Banks
Money Market Funds
Mutual Funds (Investment Companies)
Hedge Funds
Security Brokers and Dealers
Investment Banks
Finance Companies
Financial Holding Companies
Life and Property/Casualty Insurance Companies

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The Financial System and Competing

Financial-Service Institutions (continued)
Leading Competitors with Banks
Financial-service providers are converging in terms of
the services they offer
The U.S. Financial Services Modernization (GrammLeach-Bliley) Act of 1999 has allowed many different
types of financial firms to offer the public one-stop
shopping for financial services
The challenge of differentiating banks from other
financial-service providers is difficult today

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EXHIBIT 12 Comparative Size by Industry of Commercial

Banks and Their Principal Financial-Service Competitors

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Services Banks and Many of Their Closest

Competitors Offer the Public
Services Banks Have Offered for Centuries
Carrying Out Currency Exchange
Discounting Commercial Notes and Making Business
Loans
Offering Savings Deposits
Safekeeping of Valuables and Certification of Value
Supporting Government Activities with Credit
Offering Checking Accounts (Demand Deposits)
Offering Trust Services

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Services Banks and Many of Their Closest

Competitors Offer the Public (continued)
Services Banks and Many of Their Financial-Service Competitors
Began Offering in the Past Century

Granting Consumer Loans

Financial Advising
Managing Cash
Offering Equipment Leasing
Making Venture Capital Loans
Selling Insurance Policies
Selling and Managing Retirement Plans
Dealing in Securities: Offering Security Brokerage and Investment
Banking Services
Offering Mutual Funds, Annuities, and Other Investment Products
Offering Merchant Banking Service
Offering Risk Management and Hedging Services
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TABLE 11 The Many Different Roles Banks and Their

Closest Competitors Play in Todays Economy

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TABLE 12 Some of the Leading Financial-Service Firms

around the Globe

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Key Trends Affecting All Financial-Service

Firms Crisis, Reform, and Change

Service Proliferation
Rising Competition
Government Deregulation and then Reregulation
Crisis, Reform, and Change in Banking and Financial
Services
An Increasingly Interest-Sensitive Mix of Funds
Technological Change and Automation
Consolidation and Geographic Expansion
Convergence
Globalization

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Quick Quiz
What is a bank? How does a bank differ from most other financialservice providers?
Why are some banks reaching out to become one-stop financialservice conglomerates? Is this a good idea?
Which businesses are bankings closest and toughest competitors?
What services do they offer that compete directly with banks
services?
What is happening to bankings share of the financial marketplace
and why?
How have banking and the financial-services market changed in
recent years? What powerful forces are shaping financial markets and
institutions today?
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Appendix: Career Opportunities in Banking

and Financial Services
What different kinds of professionals work inside
financial firms?

Loan Officers
Credit Analysts
Managers of Operations
Branch Managers
Systems Analyst
Auditing and Control Personnel
Trust Department Specialist
Tellers

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Appendix: Career Opportunities in Banking

and Financial Services (continued)
What different kinds of professionals work inside
financial firms?
Security Analysts and Traders
Marketing Personnel
Human Resources Managers
Investment Banking Specialists
Bank Examiners and Regulators
Regulatory Compliance Officers
Risk Management Specialists
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