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US Bank of Washington; Commercial Banks in US
 

US Bank of Washington; Commercial Banks in US

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US Bank of Washington (9-292-057 HBR Case Study) ...

US Bank of Washington (9-292-057 HBR Case Study)

-Commercial Banks and their Role
-Their changing role in US economy
-Possible strategies for value creation in the future

Done By-
109 Ghanshyam Gupta
301 Balagopal Padmakumar
302 Harbir Singh Banga
402 Rishi Bajaj
503 Anirwan Bhattacharya

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  • Commercial bank accepts various types of deposits from public especially from its clients. The commercial banks provide loans and advances of various forms. : It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words while sanctioning a loan a bank automatically creates deposits. This is known as a credit creation from commercial bank.
  • Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.The repeal of the Glass-Steagall Act in 1999 allowed commercial banks to engage in investment activities traditionally relegated to large investment firms. Large commercial banks, including Chase and Bank of America, have investment operations as well. Investment activities include buying and selling financial instruments on the market. These instruments include interest-rate swaps, forward rate agreements and credit default swaps. One objective of these investment activities is to earn a profit by capitalizing on the interest rate or price fluctuations, as is the case for currency swaps. The profit goals of certain investment activities are akin to those of insurance firms: Credit default swaps, for instance, provide a guarantee against a security for a fee and anticipate earning money if it doesn't default.Read more: The Objectives of Commercial Banking | eHow.comhttp://www.ehow.com/info_8087191_objectives-commercial-banking.html#ixzz2B36DuhbUThe repeal of the Glass-Steagall Act in 1999 allowed commercial banks to engage in investment activities traditionally relegated to large investment firms. Large commercial banks, including Chase and Bank of America, have investment operations as well. Investment activities include buying and selling financial instruments on the market. These instruments include interest-rate swaps, forward rate agreements and credit default swaps. One objective of these investment activities is to earn a profit by capitalizing on the interest rate or price fluctuations, as is the case for currency swaps. The profit goals of certain investment activities are akin to those of insurance firms: Credit default swaps, for instance, provide a guarantee against a security for a fee and anticipate earning money if it doesn't default.Read more: The Objectives of Commercial Banking | eHow.comhttp://www.ehow.com/info_8087191_objectives-commercial-banking.html#ixzz2B36DuhbU

US Bank of Washington; Commercial Banks in US US Bank of Washington; Commercial Banks in US Presentation Transcript

  • U.S BANK OF WASHINGTON HBR Case Study GROUP 1. Ghanshyam Gupta 109 Balagopal Padmakumar 301 Harbir Singh Banga 302 Rishi Bajaj 402 Anirwan Bhattacharya 503
  • Rishi Bajaj 402
  • • A financial institution that provides banking and financial services to Commercial institues, organizations, bodies, companies and entities.• The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs.
  • • The term ‘Commercial Bank’ used for a normal bank to distinguish it from an investment bank.• After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities.• Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
  • • The largest commercial banks – Bank of America Corp, – JP Morgan Chase & Co, – HSBC Bank, – Citigroup, and – Goldman Sachs Group (96 percent of all exposures and had the largest share of derivative exposures of the commercial banking sector)• Some commercial banks, also have investment banking divisions, while others, such as Ally, operate strictly on the commercial side of the business.
  • • Processing of payments by way of telegraphic transfer, internet banking, or other means• Issuing bank drafts and bank cheques• Accepting money on term deposit• Lending money by overdraft, installment loan, or other means• Providing documentary and standby LC, Guarantees, Performance Bonds, Security underwriting and other forms of off balance sheet exposure
  • • Safekeeping of documents and other items in safe deposit boxes• Sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a “financial supermarket”• Cash management and treasury• Merchant Banking & PE Financing• Traditionally, large commercial banks also underwrite bonds, make markets in currency, interest rates and credit related securities (usually handled by IB now)• Broader role towards economy, government.
  • Primary FunctionAccepting DepositsMaking AdvancesCredit creation
  • Secondary FunctionAgency FunctionsGeneral Utility Functions
  • • To collect and clear cheque, dividends and interest warrant.• To make payment of rent, insurance premium, etc.• To deal in foreign exchange transactions.• To purchase and sell securities.• To act as trusty, attorney, correspondent and executor.• To accept tax proceeds and tax returns.
  • • To provide safety locker facility to customers.• To provide money transfer facility.• To issue travellers cheque.• To accept various bills for payment e.g phone bills, gas bills, water bills, etc.• To provide merchant banking facility.• To provide various cards such as credit cards, debit cards, Smart cards, etc.
  • Ghanshyam Gupta 109
  • The two main roles played by banks in US are• Operate payment system of credit cards, checks etc• Channelizing credit to business and households, investing money into the economy
  • • Traditionally, banks funded their loan portfolios by issuance of deposit/insurance & pension liabilities to the investors.Credit Market in 1950• Primary Asset Held: U.S. Treasury Securities, C&I loans, Business & Home mortgages, Consumer Credit• Sources of Funding: Zero interest bearing checking accounts, saving accounts• There has been a shift in how banks lend: from short term lending of funds unsecured by real estate to collateralized loans.
  • • Asset securitization of home mortgages as well as consumer credit have resulted in an reduction in the extent to which commercial banks fund these loans directly to the client.• There has been a change in the composition of bank loan portfolio as well as the bank customers.• Small time deposits have been increasing as a percentage of total assets. Demand deposits continued to fall.• There has been a change in the maturity structure of bank’s assets, average maturity of banks loans and earning assets has risen since 1988.• Providing several services through separate business units e.g. US Bancorp
  • • The Gramm-Leach-Bliley Act, allows banks again to merge with investment and insurance houses.• Banks have expanded the use of risk-based pricing from business lending to consumer lending• Third, banks have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards.
  • Anirwan Bhattacharya 503
  • • Held loans and securities as assets, which in turn were primarily funded by issuance of deposit liabilities• By 1989, loans accounted for over 61% of total assets held by US commercial banks• Strong growth in real estate loans, steady growth in consumer loans• Due to high perceived risk in commercial sector, banks’ real estate portfolio has seen a shift from commercial to residential mortgages
  • • $11 billion consumer receivables mostly credit card debt and automobile loans were securitized in 1989• Securitization helped banks to remove underlying loans from bank’s balance sheet thus lowering the regulatory capital required to support actual level of bank’s lending activity• It also enabled banks to earn free income from originating and servicing the loans• Non-interest income has seen an increase
  • • In 1989, Net income for banking industry was down due to provisions for losses on non-performing loans• Interest cost of deposits and purchased funds increased resulting lower net interest margin• Small banks continued to book relatively high profits, larger banks, particularly the money center institutions, reported weak earnings.• This was due to losses for commercial real estate and domestic business loans
  • Harbir Singh Banga 302Balagopal Padmakumar 301