Has banking changed

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  • 1. ASSIGNMANT # 2 ARE BANKS REALLY DYINGThe banks are facing increased competition due to financial deregulation and increased information dissemination andaccessibility. Banks are losing loans due to easier access to foreign capital markets or self issuing of securities. Bankstherefore are losing revenue to be more efficient and competitive. HAS BANKING CHANGEDBanking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the fullforce of the financial marketplace. At the same time the number and variety of banking services has increased greatly dueto the pressure of intensifying competition from non-bank financial-service providers and changing public demand for moreconveniently and reliably provided services. Adding to the intensity of competition, foreign banks have enjoyed success intheir efforts to enter countries overseas and attract away profitable domestic business and household accounts.There are Two Statements:A: "Banking business is the same all around the world and nothing much has changed over centuries. Banks arecollecting deposits and use them to provide loans. Their profit comes from the difference of high interest rate onloans and low interest rate paid for deposits. "B: "You are mistaken. The banking has changed considerably due to numerous financial innovations. Its rolewithin the economic system has also changed and it is not the same in different countries."Both the statements, A and B, have very valid points and neither one of them is actually right or wrong. In fact I wouldsay, they are complementary to each other and give a better definition of the role of banks in general.Taking statement A first, this describes the original function of the bank since its creation. It is an institution, whichprovides individuals with the facilities to safe-keep their savings in deposits within the bank. With this set of assets, thebanks can loan out a certain amount of its capital as loans to individuals or corporations. Providing funds and stimuli foreconomic growth and development. In order to maintain some earnings, to pay off its employees, debts and bills, banks tryto earn some profits through the difference gained from interests on loans and the interests paid on deposits. Thesefunctions are the most basic tasks carried out by the banks found throughout the world, and is similarly carried out by thenation.Statement B was correct in saying that there have been numerous financial innovations since the early beginnings of thefirst banks. Innovations like  Mutual Funds  Forward Contracts  Futures and Options derivatives  providing insuranceare relatively new. How and what the banks can participate in however vary from nation to nation. For instance, banks inthe U.S. used to mainly deal in savings and providing loans. It wasn’t allowed to participate in offering insurance andsecurities.Due to financial innovations, such as  Money market mutual funds  commercial paperSubmitted to: Mr.Mohsin Razzaq 1
  • 2. ASSIGNMANT # 2  junk bondsBanks have been forced to conduct “off-balance sheet” activities, such as charging fees to their customers and loan sales,to compensate for the loss of business these financial innovations have caused. Due to the difference in regulations indifferent countries, banks and their functions differ throughout the world. American banks weren’t even allowed to haveequity in commercial holdings. However this has changed with a new act passed by Congress in 1999, to make U.S. banksmore competitive. While simultaneously, securities and insurance companies are now allowed to enter the bankingbusiness, in order to compete with banks. There is no more any separation between the entities. In the case of UnitedKingdom, the banks took part in traditional banking facilities and also provided services for securities issuing. However itwas prevented from providing insurance. Thus the banking roles, varies from country to country.However, statement B’s inference that the roles of banks in the economy have changed. In fact it continues to provide theservices it originally established and set out to accomplish. That is to provide facilities for deposits and loans. Throughthis, its most important role can be carried out, which is the creation of money to ensure the continual economic growth ofthe nations. Despite all the new financial innovations, these can be considered subsets of its activities. It is important tonote that improper activities from these innovations, which could lead to major losses, could lead to major economicinstability. Can you explain why many of these changes have led to significant problems for bank managers and stockholders?The net result of recent changes in banking has been to put greater pressure upon bank earnings, resulting in more volatilereturns to bank stockholders and an increased bank failure rate. Some experts see banks role and market share shrinkingdue to restrictive government regulations and intensifying competition. Banks have also become more innovative in theirservice offerings and in finding new sources of funding, such as off-balance-sheet transactions. The increased risk faced bybanks today, therefore, has forced bank managers to more aggressively utilize a wide array of tools and techniques toimprove and stabilize their earnings streams and manage the various risks they face.Submitted to: Mr.Mohsin Razzaq 2
  • 3. ASSIGNMANT # 2 Problems and Projects1. You have just been hired as the marketing officer for the new First National Bank of Vincent, a suburban bankinginstitution that will soon be serving a local community of 120,000 people. The town is adjacent to a major metropolitanarea with a total population of well over 1 million. Opening day for the newly chartered bank is just two months away, andthe president and the board of directors are concerned that the new bank may not be able to attract enough depositors andgood-quality loan customers to meet its growth and profit projections. Your task is to recommend the various services thebank should offer initially to build up an adequate customer base. You are asked to do the following:a. Make a list of all the services the new bank could offer, according to current regulations.b. List the type of information you will need about the local community to help you decide which of the possible servicesare likely to have sufficient demand to make them profitable.c. Divide the possible services into two groups--those you think are essential to customers and should be offered beginningwith opening day, and those that can be offered later as the bank grows.d. Briefly describe the kind of advertising campaign you would like to run to help the public see how your bank is differentfrom all the other financial service providers in the local area. Banks can offer, if they choose, a wide variety of financial services today. These services are listed below. However, unless they are affiliated with a larger bank holding company and can offer some of these services through that company, it may be more limited in what it can offer.  Regular Checking Accounts  Management Consulting Services  NOW Accounts  Letters of Credit  Passbook Savings Deposits  Business Inventory Loans  Certificates of Deposit  Asset-Based Commercial Loans  Money Market Deposits  Discounting of Commercial Paper  Automobile Loans  Plant and Equipment Loans  Retirement Savings Plans  Venture Capital Loans  Non-auto Installment Loans to Individuals  Leasing Plans for Business Property and Equipment  Residential Real Estate Loans  Home Improvement Loans  Security Dealing and Underwriting  Personal Trust Management Services  Discount Security Brokerage  Commercial Trust Services  Foreign Currency Trading and Exchange  Institutional Trust Services  Personal Financial AdvisingSubmitted to: Mr.Mohsin Razzaq 3
  • 4. ASSIGNMANT # 2  Personal Cash-Management Services  Insurance Policy Sales To help the new bank decide which services to offer it would be helpful to gather information about some of the following items in the local community:  School Enrollments and Growth in School Enrollments  Estimated Value of Residential and Commercial Property  Retail Sales  Percentage of Home Ownership Among Residents in the Area  Number and Size (in Sales and Work Force) of Local Business Establishments  Major Population Locations (i.e., Major Subdivisions, etc.) and Any Projected Growth Areas  Population Demographics (i.e., Age Distribution of the Area)  Projected Growth Areas of Industries in the Area  Essential services the bank would probably want to offer includes: 1st day After some time periodRegular Checking Accounts Home Improvement LoansOnline Banking Automobile and other Consumer LoansUtility Bills acceptance Business Inventory LoansMoney Market Deposit Accounts Residential Real Estate LoansTransfer of Payments Retirement Savings PlansNOW Accounts Insurance policyPassbook Savings Deposits Credit CardsDiscounting of High-Quality Commercial Notes Hire PurchaseCertificates of Deposit Opening of LCsATMs Hajj SchemesCollection of Cross ChequesDemand drafts As the bank grows, opportunities for the profitable sale of additional services usually increase, especially for trust services for individuals and smaller businesses and personal financial advising as well as some commercial (plant and equipment) loans and leases. Further growth may result in the expansion of commercial trust services as well as a widening variety of commercial loans and credit guarantees. The bank would want to develop an advertising campaign that sends a message to potential customersthat the new bank is, indeed, different from its competitors. Small banks often have the advantage of offering highlypersonalized services in which their customers are known and recognized and services are tailored to each individualcustomers special financial needs.Quality and reliability of banking service are often more important to individual customers than is price. A new bank musttry to sell prospective customers, most of whom will come from other banks in the area, on personalized services, quality,and reliability, all three of which should be emphasized in its advertising program.Submitted to: Mr.Mohsin Razzaq 4
  • 5. ASSIGNMANT # 2Submitted to: Mr.Mohsin Razzaq 5