CHAP_01_An-overview-of-banking-sector.ppt

cai trang loz bat up cl gi mai ghet

1. William Chittenden edited and updated the PowerPoint slides for this edition.
AN OVERVIEW OF
BANKING SECTOR
Chapter 1
1

2. Key topics
1.Bank definitions
2.Bank regulation
Goals of regulation
Regulators
Rationality of regulation
3.Bank functions
4.Bank services
5.Bank organization
6.Fundamental sources of changes
2

3. 1. What is a bank?
Definition by functions it serves
Institutions involves in transferring funds from
savers to borrowers (financial intermediation)
& in paying for goods and services
Definition by services it offers to
customers
Accept deposits, make commercial loans,
offer trust services, manage cash, etc.
3

4. What is a bank?
Necessity of a legal definition:
Regulation purpose
Banking service menu is expanding
Other financial-service institution provide
similar services
4

5. What is a bank?
Definition by legal basis for regulation
US: any institution that could qualify for
deposit insurance administered by the
FDIC
VN: a credit institution permitted to conduct
all banking activities and other related
business operations.
5

6. What is a bank?
Definition by legal basis for regulation
VN: "Non-bank credit institution" is a credit
institution permitted to engage in some
banking activities as its regular business, but
not permitted to receive deposits from
individuals and to provide payment services.
VN: "Banking activities" are monetary
business activities and banking services, the
regular operation of which is the receipt of
depositsand use of that to extend credits,
provide payment services;
6

7. Question???
1.Why non-bank CI are restricted to
provide some banking activities?
2. Who are the main players in the
financial market offering banking
services?
7

8. Financial service competitors of banks
Savings associations
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
8

9. 2. Goals of bank regulation
Ensure safety and soundness of banks protecting
public’s savings and confidence
Provide an efficient and competitive financial system
Provide monetary stability to achieve national broad
economic goals
Maintain the integrityof the payments system
Ensure equal opportunity and fairness in the public’s
access to financial services
Provide government with credit, tax revenues and
other services
Help sectors that have special credit needs
9

10. Banking principal regulatory agencies (US)
Federal Reserve System (FED)
Comptroller of the Currency (OCC) –kiểm soát
tiền tệ
Federal Deposit Insurance Corporation (FDIC)
Department of Justice (sở tư pháp)
Securities and Exchange Commission (SEC)
State Boards of Commissions
10

11. Banking principal regulatory
agencies (VN)
State Bank of Vietnam (SBV)
Deposit Insurance of Vietnam (DIV)
Ministry of Finance (MOF)
State Securities Commission of Vietnam (SSC)
11

12. Why banks are closely regulated?
Banks are among leading repositories of
public’s savings
Bank’s power of creating money in form of
readily spendable deposits
Banks provide individuals and businesses with
loans for consumption and investment, which
should be equally and adequately supplied.
Government rely upon banks in conducting
economic policies, collecting taxes and
dispensing government payment.
12

13. Shortcomings of restrictive bank regulation
May encourage monopoly due to conditional
entry
Does not prevent bank failure
Cannot eliminate economic risk
Does not guarantee that bank management will
make good decisions, but create a struggle
between regulators and banks going on
definitively
Less-regulated business win customers away
from more-regulated banks.
13

14. The Federal Reserve System
The Federal Reserve System
Fundamental Functions
Conduct monetary policy
Provide and maintain the payments system
Supervise and regulate banking operations
Organization
Board of Governors
12 Federal Reserve District Banks
14

15. State Bank of Vietnam
15

16. The Federal Reserve System
Monetary Policy Tools
Open Market Operations
Open market purchases (sales) increase
(decrease) reserves & the money supply
Discount Rate
Decreasing (Increasing) the discount rate
makes bank borrowing less (more) expensive,
which leads to an increase (decrease) in the
money supply
Reserve Requirements
Decreasing (Increasing) reserve requirements
increases (decreases) the money supply
16

17. 3. Commercial banks and the economy
Banks are the primary conduit for monetary policy
Banks are the primary source of credit for most
small businesses and many individuals
Banks are the major repository of public savings
Banks are the principal operator of payment
system.
17

18. 4. Traditional services offered by banks
1.Carrying out currency exchange
2.Discounting commercial notes and making
business loans
3.Offering savings deposits
4.Safekeeping of valuables (bảoquảnvậtcó
giá)
5.Supporting government activities with credit
6.Offering checking accounts
7.Offering trust services
18

19. More recent services offered by banks
8.Granting consumer loans
9.Providing financial advice
10.Managing cash
11.Offering equipment leasing
12.Making venture capital loans(vốn mạo hiểm)
13.Selling insurance policies
14.Selling retirement plans
15.Dealing in securities(buôn bán ck): brokerage
and investment banking services
19

20. Carrying out currency exchange
Bank trade one form of currency to another in
return for fee
Start from early days of banks
Become more complicated in the global
financial market
Be provided by large and well-experienced
banks
20

21. Discounting commercial notes and
making business loans
Discounting commercial notes/making loans to
merchants(nhà buôn) based on accounts
receivable
Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)
Be provided by banks and many other financial-
service competitors
Be the core and main revenue-earning service
of many banks
21

22. Offering savings deposits
Be the earliest and major source of fund for
making loan
Compose of many types different in maturity,
form of currency, interest, etc.
Be the most stable funding source
Deposit is subject to reserve requirement and
insurance
22

23. Safekeeping of valuables
Keep gold and other valuables of customers in
secure vaults in return for fee (Giữ vàng và vật
có giá trị khác của khách hàng trong hầm an
toàn để đổi lấy phí)
Start since the old days of banks in the Middle
Ages
23

24. Supporting government with credit
Banks in Europe during the Industrial Revolution
and in America during the Revolutionary War
had to purchase government bonds with a
portion of deposits.
The custom (thói quen) continues in the modern
world
Banks use government bond as a shelter of
liquidity risk and a source of revenue
24

25. Offering checking accounts
Demand deposits permit depositors to write
draft/cheque for payment of goods and services
Be one of the most important offerings of the
industry
Service is provided by not only banks but also
credit unions, savings associations, etc.
Today the service is extended to the internet
with the use of smart cards
Provide banks with cheap source of fund.
25

26. Offering trust services
Banks manage financial affairs (đồ vật)and
property of individuals and firms in return for fee
In property management, banks acts as a
trustee for wills (ng được ủy quyền đối với các
di chúc), managing the deceased customer’s
estate (di sản của KH đã qua đời),…
In commercial trust department, bank manages
pension plan for businesses and acts as an
agent issuing stocks and bonds.
26

27. Granting consumer loans
By early 20
th
century, banks started lending
consumers given the heavy competition for
business deposits and loans
The trend has increased rapidly after the World
War 2
Other current competitors for the consumer
credit accounts are credit unions and credit
card companies.
The service bears high risk but returns high
earnings.
27

28. Providing financial advice
Banks gains good reputation for understanding
and experience in the financial market
Customers ask for advice, particularly in credit
utilization, saving or investing funds
Services provided are plentiful including
financial plan preparation, marketing
opportunity consultation, fund seeking,
investment options, etc.
28

29. Managing cash
Bank handle cash collection and disbursement
for firms, invest temporary cash surpluses
Service is expanded to individuals and firms
Bank earns not only fee, but also low-cost fund
in demand deposit accounts
29

30. Offering equipment leasing
Bank/Lessor
Equipment
Vendor
Firm/Lessee
30

31. Making venture capital loans
Finance the start-up cost of new companies
Implement through a venture capital firm
because added risk
The venture capital firm raise fund from
investors looking for high profit
31

32. Selling insurance policies
Bank sell insurance policies through acquiring
control of insurance companies
Bank can gain high earning in the high-risk
insurance industry
Bank possess privileges over independent
insurer in terms of customers, branches,
system, etc.
Insurance agencies are affiliates or BHC or
FHC
32

33. Selling retirement plans
Bank actively involves in managing retirement
plan of businesses make available to
employees
Incoming fund is invested to wisely selected
securities ensuring acceptable risk and return
Bank also is in charge of dispensing payment to
retired or disabled employees.
33

34. Dealing in securities
Bank provides security brokerage service and security
underwriting/investment banking services
Bank offer mutual funds, annuitiesand other
investment products with clear consultation to
customers regarding higher expected yields and risk
Bank temporarily buy stocks of large corporation aiding
new business launching or company expansion by
offering merchant banking services
Bank acts as risk intermediation providing customer
with risk hedging tools (e.g. swap, option, future
contract) offered by themselves or from third party
Services are provided through affiliated securities firms
or insurance companies.
34

35. 5. Organizational form of banking industry
Unit banking versus Branch banking
Offer all Services from one office
One of the oldest kinds of banks
New banks are generally unit banks until can
grow and attract more resources
35

36. Organizational form of the banking industry
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
36

37. What trend in branch banking has been
prominent in the U.S. in recent years?
Year # of Bank
Main
Offices
# of
Branch
Offices
Totalof
U.S. Bank
Offices
Ave# of
Branches/
U.S. Bank
1934 14,146 2,985 17,131 0.21
1970 13,511 21,810 35,321 1.61
1982 14,451 39,784 54,235 1.75
2007 7,241 77,947 85,188 10.76
From Table 3-2; Source: FDIC
3-37
Organizational form of the banking industry
37

38. Organizational form of the banking industry
Bank holding companies
Parent
Subsidiaries
One-Bank holding companies
Mutli-Bank holding companies
38

39. Organizational form of the banking industry
Bank holding companies
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
One-Bank holding companies vs. multibank
holding companies
39

40. Exhibit 1.10
Organizational structure of the BHCBoard of Direct ors
Parent Company
Bank Subsidiary Nonbank Subsidiaries
Bank Branches
Each subsidiary has a
president and line officers
The bottom four levels have the same organizational form as the independent bank.
Single Bank Holding Company
Mult ibank Holding Company
Board of Direct ors
Parent Company
Bank Subsidiary Nonbank Subsidiaries Bank Subsidiary
Bank Branches Bank Branches
40

41. 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
3-41
Organizational form of the banking industry
41

42. Organizational Form of the Banking Industry
Financial holding companies
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
42

43. Organizational Form of the Banking Industry
Financial Holding Companies
Can engage in financial activities not permitted
in a bank or bank holding company
Federal Reserve may not permit a company to
form a financial holding company or a bank
holding company to convert to a financial
holding company if
any of its insured depository institution subsidiariesis
not well capitalized, well managed, or
did not receive a satisfactory rating on its most
recent CRA (Community Reinvestment Act) exam.
43

44. Exhibit 1.11
Organizational structure of a financial holding company
Bank
Holding
Company
Securities
Subsidiaries
Insurance
Subsidiary
Thrift Holding
Company
Real
Estate
Subsidiary
Financial Holding
Company
Subsidiaries
and Service
Companies
Thrift Company
Nonbank
Subsidiaries
Banking
Company
44

45. Organizational form of the banking industry
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
Parent company’s net income is typically
derived from dividends, interest,
management fees from equity in subsidiaries,
and interest paid on holding company debt.
45

46. Banking Business Models
Global Banks
International presence
Nationwide Banks
Coast-to-coast presence
Super-Regional Banks
Extensive operations in a limited
geographic area of the U.S.
Regional Banks
Specialty Banks
46

47. Exhibit 1.17 DISTRIBUTION OF THE NUMBER OF
BANKS AND TOTAL ASSETS BY TOTAL ASSETS:
1995 -2004 Assets Size

Number of
Banks < $100 M $100M - $1B $1B - $10B > $10B
10,242 7,123 2,741 331 63
1995
(69.55%) (26.76%) (3.23%) (0.62%)
9,451 6,147 2,900 331 73
1997
(65.04%) (30.68%) (3.50%) (0.77%)
8,580 5,157 3,029 318 76
1999
(60.10%) (35.30%) (3.71%) (0.89%)
8,080 4,486 3,194 320 80
2001
(55.52%) (39.53%) (3.96%) (0.99%)
7,769 3,911 3,434 341 83
2003
50.34% 44.20% 4.39% 1.07%
7,630 3,655 3,530 360 85
2004
(47.90%) (46.26%) (4.72%) (1.11%)


Asset Size

Total
Assets < $100 M $100M - $1B $1B - $10B > $10B
$4,116 $310 $668 $1,077 $2,061
1995
(7.54%) (16.22%) (26.17%) (50.07%)
$4,642 $277 $711 $995 $2,658
1997
(5.97%) (15.32%) (21.45%) (57.27%)
$5,735 $243 $755 $915 $3,823
1999
(4.23%) (13.16%) (15.96%) (66.65%)
$6,569 $222 $819 $915 $4,613
2001
(3.37%) (12.47%) (13.93%) (70.22%)
$7,603 $201 $910 $947 $5,545
2003
(2.64%) (11.97%) (12.46%) (72.93%)
$8,413 $189 $953 $973 $6,297
2004
(2.25%) (11.33%) (11.57%) (74.85%)

47

48. Banking Business Models
Specialty banks
Also known as:
Community Banks
Independent Banks
Typically have less than $1 billion in
assets
Organization
48

49. Exhibit 1.18
Organizational structure of an independent bank
49

50. Banking business models
Specialty banks
Personnel
Senior Credit Officer
Cashier/Chief Financial Officer
Senior Operations Officer
Senior Investment Officer
Branch Area Executive
50

51. 6. Fundamental forces of change
Deregulation/reregulation
Financial innovation
Securitization
Globalization
Advances in technology
51

52. Fundamental forces of change:
Role of Regulation
Regulatory Dialectic /ˌdaɪəˈlektɪk/
Process of regulation, market response,
and reregulation
Financial Innovation
52

53. Fundamental forces of change:
Increased Competition
For Deposits
Interest rate ceilings and inflation
For Loans
Commercial paper
Junk bonds
Credit scoring
Credit derivatives
53

54. Fundamental forces of change:
Off-Balance Sheet Activities
Loan commitments
Loan guarantees
Standby letters of credit
Interest rate swaps
Futures, forwards & options
Leases
54

55. Fundamental forces of change:
Impact of Nonbank Competition
Captive Finance Companies
A subsidiarywhose purpose is to provide
financing to customers buying the parent
company's product (e.g. General Motors
Acceptance Corporation (GMAC))
General Finance Companies
Fund their loans by issuing commercial
paper and long-term bonds. Their cost of
funds is higher than a bank’s, but they
charge higher rates.
55

56. Fundamental forces of change:
Competition for Payments Services
Credit Cards
Debit Cards
Prepaid Cards
CHIPS
ACH
56

57. Fundamental forces of change:
Competition for Other Bank Services
Trust services
Brokerage services
Data processing
Real estate appraisal
Credit life insurance
Personal financial consulting
57

58. Fundamental forces of change:
Change Investment Banking
National full-line firms
Investment banking firms
Underwriter
Underwriter syndicate
Broker versus Dealer
58

59. Fundamental forces of change:
Deregulation and Re-regulation
Deregulation
Eliminating existing regulations
Reregulation
Implementing new restrictions on banking
activities
59

60. Fundamental forces of change:
Financial Innovation
Innovation may be caused by a bank
wanting to:
Enter into a new geographic market
Enter into a new product market
Deliver services less expensively
etc.
60

61. Fundamental forces of change:
Securitization
Securitization
The process of converting assets into
marketable securities
Mortgages
Credit card receivables
61

62. Fundamental forces of change:
Globalization
Globalization
Is the evolution of markets and institutions
where geographic boundaries do not
restrict financial transactions or
competition
62

63. Fundamental forces of change:
Technology
Advances in Technology
Advances in technology increase the scope of the
global market place and competition
Advances in technology also reduce the need for
an intermediary by providing easy access to
information
Increasing competition by reducing the cost of
being an information intermediary
63

64. Problems
You recently graduated from university with a business degree
and accepted a position at a major corporation earning
more than you could have ever dreamed. You want to
1.Open a checking account for transaction purposes
2.Open a saving account for emergencies
3.Invest in an equity mutual fund for that far-off future called
retirement
4.See if you can find more affordable auto insurance, and
5.Borrow fund to buy a condo given you uncle said he was so
proud of your grades and he wanted to give $20,000 for a down
payment.
Make five lists of financial service firms that could provide you
with each of these services
64

65. Problems -Answers
(1) Financial service firms that provide checking account
services include banks, credit unions and savings and
loan associations. Even securities brokers allow you to
open checking accounts. Recently brokers such as
Schwab have become more aggressive in offering
interest-bearing online checkable accounts that often post
higher interest rates than many banks are willing to pay.
(2) To open a savings account, one could approach
traditional commercial banks, savings associations, credit
unions, or online brokerages and banks with higher yields
but less ‘brick and mortar’ support.
65

66. Problems -Answers
(3) For a retirement fund one could choose from a plethora of
defined benefit and defined contribution schemes from
private pension funds. Banks, brokeragesand insurance
firmsoffer a variety of retirement investment options
including equity mutual funds.
(4) For affordable auto insurance one could use a traditional
insurersuch as Allstate or State Farm or approach some of
the newer discount insurers including Geicoand
Progressive. Alternatively, one could use a reverse auction
service such as Esuranceto get the best rate.
Note: reverse auction service: http://en.wikipedia.org/wiki/Reverse_auction
66

67. Problems -Answers
(5) To borrow funds to buy a condo one could
approach a traditional bank, savings associations
that specialize in granting home mortgage loans,
or financial companies such as GMAC. A reverse-
auction sitesuch as LendingTreemight also be
useful in this exercise. The borrower is not limited
to a mortgage loan for financing the purchase of a
condo. Other lending mechanisms are available to
finance such purchases.
Note: LendingTree:http://www.answers.com/topic/lendingtree
67

68. William Chittenden edited and updated the PowerPoint slides for this edition.
AN OVERVIEW OF
BANKING SECTOR
Chapter 1
68

69. Group presentation scoring
1.Presenter group is scored by defender group (50%) and vice
versa and the lecturers (50%)
2.Each group member gives a score for the other group and the
group’s score is the average of scores given by other group
members
3.Scores given by each group is to be sent to lecturers’email
by the next class section
4.Final score is the average of 2-time presentation
5.Score of Presenter group is marked based on
Slide appearance and presentation skill
Presentation content and Answers
6.Score of Defender group is marked based on
Comments
Questions
69