Chapter 1
An overview of banks and the
financial-services sector
Slides based on Bank Management & Financial Services by
Peter Rose and Sylvia Hudgins, 7th ed., McGraw-Hill, Gup
book, and adapted by Dorla A. Evans, 2008. 1
Functions and forms of banking
• Key Topics in Chapter
– What is a bank?
– Competing financial-service institutions
– What do banks do?
– Key trends affecting all financial-services firms
– Career opportunities in financial services
2
What is a bank?
• Why is
– Bank of America called a bank
– J.P. Morgan called an investment bank
– Merrill-Lynch called a securities brokerage
firm
– Alabama Credit Union called a credit union
– and State Farm an insurance company?
3
What is a bank?
• History makes these organizations
different
– Historically, banks accepted demand
deposits and made business loans
– Hence, called commercial banks
4
What is a bank?
• Recent definition:
– qualifies to be regulated
by FDIC!
5
Bank competition: Market share
6
March 2005, out of $43 trillion * Based on 2003 data
Bank competition: Change in
market share
7
How do banks compare:
Deposits in $M in 2004
From Koch and MacDonald, Bank Management, 6e, 2006, p.6 8
Number of banks by asset size
9
Total assets in $B by size of bank
Money-centered banks versus community banks 10
Types of banks
• Global – money-centered
• Medium- and large-sized full-service
banks
• Small- and medium-size banks
• Wholesale banks
• Limited-purpose banks
• Internet
11
What do banks do for their customers?
• Payment system
• Financial intermediation
• Other financial services
12
What do banks do for their customers?
• Payments
– Coin and currency; currency exchange
– Retail payments system
– Large-dollar payments system for business and
government
13
What do banks do for their customers?
• Financial intermediation
$50 M $5,000
8% 5%
14
What do banks do for their customers?
• Other financial services
– Safety deposit boxes
– Fee services: lockboxes & letters of credit
– Insurance-related activities
– Securities-related services: underwriting,
brokerage
– Leasing
– Trust services
15
Why do banks perform those services?
Goal
Maximize Size of cash flow
shareholder Timing of cash flow
wealth
Risk of cash flow
Credit Interest Operational Liquidity Price
rate
Constraints
Market Social Legal and
competition regulatory 16
Trends affecting financial services firms
• Service proliferation
• Rising competition
• Deregulation
• Interest sensitivity of funds
• Technological advances
• Consolidation and geographic expansion
• Convergence
• Globalization
• Securitization
17
Questions?
18
