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  • 1. What Do Banks Do?
    • Intermediation
      • Transforming savings received primarily from households into credit for business firms and others in order to make investments
      • Are there others who perform intermediation roles in the financial markets?
  • 2. Why Is Intermediation Important?
    • Liquidity
      • Intermediaries provide liquid financial instruments
      • One of the oldest reasons for the existence of financial institutions
        • Knights Templar
    • Delegated Monitoring
      • Individuals do not have the ability to make informed investment decisions
      • Intermediaries act as agents
  • 3. Why Is Intermediation Important?
    • Information asymmetries
      • Financial intermediaries have unique abilities to select investment opportunities
      • Work with clients one on one
    • Transaction costs
      • Intermediaries reduce transaction costs in markets
        • Access to markets for individuals
        • Allow for smaller transaction sizes for individuals
  • 4. Are Banks Unique In Their Intermediation Role
    • Yes…
      • Bank loans contain information
        • Markets respond positively to bank loan renewals
      • Banks create relationships
        • Relationship lending
        • Able to exploit profitable opportunities that others would avoid
      • Banks are in a unique position to provide liquidity and serve as the best alternative
        • Deposit insurance
  • 5. Are Banks Unique In Their Intermediation Role
    • No…
      • Any intermediary can provide liquidity
      • Many non-bank firms create relationships that create unique opportunities
        • Venture capital
      • Banking system is a product of regulation and is not efficient
        • Un-regulated markets would have developed an efficient system
  • 6. The Other Roles of Commercial Banks Today
    • Payment Role
      • Checkable deposits, clear checks, transfer funds
        • Again, not unique
    • Guarantor Role
      • Provide standby letters of credit and other forms of guarantees
    • Risk Management Role
      • Essentially providing insurance services both traditional and non-traditional
  • 7. The Other Roles of Commercial Banks Today
    • The Investment Banking Role
      • Financial service diversification has allowed banks to take a more active role
      • Underwriting Securities
        • Big issuer of ABS
      • Offering Mutual Funds and Annuities
      • Offering Merchant Banking Services
        • Venture capital role
      • Offering Risk Management and Hedging Services
        • Exchange rate risk
        • Interest rate risk
      • Essentially banks have become market makers for many financial products
  • 8. The Roles of Commercial Banks Today
    • Savings/Investment Advisor Role
      • One stop shop concept
      • Again, financial service diversification has allowed this to happen
    • Safekeeping/Certification of Value Role
      • Safe deposit boxes, savings accounts, CD’s
    • Agency Role
      • Trust services
    • Policy Role
      • Banks are used by government to control the economy
        • Federal Reserve Bank
  • 9. Traditional Services Offered By Banks
    • Carrying Out Currency Exchange
    • Discounting Commercial Notes and Making Business Loans
    • Offering Savings Deposits
    • Safekeeping of Valuables
    • Supporting Government Activities with Credit
    • Offering Checking Accounts
    • Offering Trust Services
  • 10. More Recent Services Offered by Banks
    • Granting Consumer Loans
    • Providing Financial Advice
    • Managing Cash
    • Offering Equipment Leasing
    • Making Venture Capital Loans
    • Selling Insurance Policies
    • Selling Retirement Plans
  • 11. The Financial Service Competitors of Banks
    • Savings Associations
    • Savings Banks
    • Credit Unions
    • 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
  • 12. Some Leading Non-Bank Competitors
    • Merrill-Lynch
      • Traditionally think of them as a stock broker
      • One of the first non-bank companies to form a holding company
      • Deals in gov’t securities, asset management, and mutual funds (especially money market funds)
      • Controls an industrial bank
  • 13. Some Leading Non-Bank Competitors
    • American Express
      • Credit cards
      • Owns FDIC-insured industrial bank
        • Provides mortgage, home equity, and consumer loans
        • Offers savings and deposits, on-line bill paying
    • Household International
      • Largest finance company in the world
        • Credit cards, auto loans, home loans, consumer loans
      • Purchased HSCB of London in 2002
  • 14. Some Leading Non-Bank Competitors
    • Countrywide
      • Mortgages
        • Set up branch-like offices
      • Broker/dealer subsidiary and insurance subsidiary
      • Bought Treasury Bank, NA
    • GE Capital
      • Originally set up as a “captive” finance company to provide financing to customers
      • Today does a bunch of leasing, credit cards, insurance, etc.
      • Would be 10 th largest bank in the US
  • 15. Common Thread
    • What do all of these competitors have in common with banks?
      • They all own banks or have industrial banks
      • Is this a potential problem?
  • 16. $94,906,746   MCLEAN, VA CAPITAL ONE FINANCIAL CORPORATION (2277860) 20 $95,682,192   CLEVELAND, OH KEYCORP (1068025) 19 $98,464,925   PITTSBURGH, PA PNC FINANCIAL SERVICES GROUP, INC., THE (1069778) 18 $105,828,398   CINCINNATI, OH FIFTH THIRD BANCORP (1070345) 17 $106,730,000   NEW YORK, NY BANK OF NEW YORK COMPANY, INC., THE (1033470) 16 $112,341,939   BOSTON, MA STATE STREET CORPORATION (1111435) 15 $118,523,897   WINSTON-SALEM, NC BB&T CORPORATION (1074156) 14 $138,134,005   CLEVELAND, OH NATIONAL CITY CORPORATION (1069125) 13 $155,199,559   CHICAGO, IL ABN AMRO NORTH AMERICA HOLDING COMPANY (1379552) 12 $163,084,111   PROVIDENCE, RI CITIZENS FINANCIAL GROUP, INC. (1132449) 11 $183,104,553   ATLANTA, GA SUNTRUST BANKS, INC. (1131787) 10 $193,194,572   CALABASAS, CA COUNTRYWIDE FINANCIAL CORPORATION (2549857) 9 $216,855,000   MINNEAPOLIS, MN U.S. BANCORP (1119794) 8 $430,384,000   NEW YORK, NY TAUNUS CORPORATION (2816906) 7 $473,711,105   PROSPECT HEIGHTS, IL HSBC NORTH AMERICA HOLDINGS INC. (3232316) 6 $483,441,000   SAN FRANCISCO, CA WELLS FARGO & COMPANY (1120754) 5 $559,922,000   CHARLOTTE, NC WACHOVIA CORPORATION (1073551) 4 $1,338,029,000   NEW YORK, NY JPMORGAN CHASE & CO. (1039502) 3 $1,451,603,528   CHARLOTTE, NC BANK OF AMERICA CORPORATION (1073757) 2 $1,746,248,000   NEW YORK, NY CITIGROUP INC. (1951350) 1
  • 17. Bank Structure
    • Unit Bank
      • Offer All Services From One Office
      • One of the Oldest Kinds of Banks
      • New Banks are Generally Unit Banks
  • 18. Bank Structure
    • Branch banking
      • Offer Full Range of Services from Several Locations
      • Senior Management at the Home Office
      • Each Branch has its Own Management Team with Limited Decision Making Ability
      • Some Functions are Highly Centralized, While Others are Decentralized
  • 19. Bank Structure
    • Bank Holding Company
      • A Corporation Chartered for the Purpose of Holding the Stock of One or More Banks
      • Control of a bank is Assumed When 25% or More of the Stock is Owned
      • Must Get Approval from Federal Reserve Board to Control a Bank
  • 20. Reasons for the Growth of BHCs
    • A Way Around Regulatory Restrictions
    • Geographic Diversification
    • Product Line Diversification
    • Tax Sheltering
    • Double Leveraging
  • 21. Nonbank Businesses of BHCs
    • Finance Companies
    • Mortgage Companies
    • Data Processing Companies
    • Factoring Companies
    • Security Brokerage Firms
    • Financial Advising
    • Credit Insurance Underwriters
    • Merchant Banking
    • Investment Banking Firms
    • Trust Companies
    • Credit Card Companies
    • Leasing Companies
    • Insurance Companies and Agencies
    • Real Estate Services
    • Savings Associations
  • 22. Bank Structure
    • Financial Holding Company
      • Special Type of Holding Company
      • Offers the Broadest Range of Services
      • List of Activities Offered May Expand as Regulators Decide What Services are ‘Compatible’ with Banking
      • Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss
  • 23. Bank Structure
    • Bank Subsidiaries
      • Bank Controls One or More Subsidiaries
      • Subsidiaries Offer Other Services Such as Insurance and Security Brokerage Services
      • Profits and Losses of Each Subsidiary Impact Parent Bank
  • 24. Structure and Organization of Banks in Europe
    • Germany – Largest European Banking Industry
      • Private Sector Banks
      • Public Sector Banks
    • France – Second in Number of Banks
    • Belgium – Dominated by Five Large Banks
    • Great Britain – Dominated by a Half Dozen Banking Firms
    • Switzerland – Credit Suisse and UBS and Many Smaller Firms
    • Italy Privatized Banking in the 1990’s
  • 25. Structure and Organization of Banks in Asia
    • China – Large Dominating Government Sector, Although Private Banks are Expanding
    • Japan – Dominated by the Big Four Financial Group with More than One Hundred Smaller Domestic Banks and Seventy Foreign Banks
  • 26.  
  • 27.  
  • 28.  
  • 29. Consolidation in Banking
    • Decreased # of banks
      • Primarily smaller banks that have gone away
    • Increased importance on asset size
      • Larger banks have greater share of the market
    • Will this trend continue?
  • 30. Bank Efficiency
    • Economies of Scale
      • As Output Doubles Economies of Scale Mean Less Than the Doubling of Production Costs
      • Producing Multiple Units of the Same Package Costs Less Because of Efficiencies
    • Economies of Scope
      • A Financial Services Provider can Save Operating Costs When it Expands the Mix of Products it Offers
      • Resources are Used More Efficiently in Jointly Producing Multiple Services
  • 31. Bank Efficiency
    • Are the largest banks the most cost efficient?
      • Probably so
    • Are the largest banks the most profit efficient?
      • Not necessarily, not all bank operations shown to be particularly profitable
      • Asset specialization may play a role in overall profitability
  • 32. Community Banks
    • ‘ Typical’ Size is $250 Million
    • Organizational Chart is Not Complicated
    • Significantly Affected by Health of Local Economy
    • Generally Know their Customers Well
  • 33. Money Center or Wholesale Banks
    • Generally Multi-Billion Dollar Company
    • Organizational Chart is Much More Complex
    • Serve Many Different Markets with Many Different Services
    • Better Able to Withstand Risks of Fluctuating Economy
    • Able to Raise Large Amounts of Capital at Relatively Low Costs

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