17-Feb-23

Chapter One
An Overview of the
Changing Financial-
Services Sector

1-2

Key Topics

• What Is a Bank?
• The Financial System and Competing
Financial-Service Institutions
• Old and New Services Offered to the Public
• Key Trends Affecting All Financial-Service
Firms

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Definition: Bank
• A bank is a financial institution licensed to receive
deposits and make loans
• Banks may also provide financial services such as
wealth management, currency exchange, and safe
deposit boxes
• In most countries, banks are regulated by the
national government or central bank

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1-4

The Different Kinds of Financial Service

Firms Calling Themselves Banks
• Commercial Banks • Limited Purpose Banks
• Savings Banks • Bankers’ Banks
• Cooperative Banks • Minority Banks
• Mortgage Banks • National Banks
• Community Banks • State Banks
• Money Center Banks • Insured Banks
• Investment Banks • Member Banks
• Merchant Banks • Affiliated Banks
• International Banks • Virtual Banks
• Wholesale Banks • Fringe Banks
• Retail Banks • Universal Banks

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Types of Bank
• Commercial Bank:
▫ A commercial bank is a type of financial institution that accepts
deposits, offers checking account services, makes various loans,
and offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and small
businesses
• Savings Bank:
▫ It is a financial institution that gathers savings, paying interest
or dividends to savers
▫ These institutions do not accept demand deposits
▫ Postal savings systems and many other European savings
institutions enjoy a government guarantee; savings are invested
mainly in government securities and other securities
guaranteed by the government
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Types of Bank (cont.)

• Cooperative Bank:
▫ A bank that holds deposits, makes loans and provides other
financial services to cooperatives and member-owned
organizations

• Mortgage Bank:
▫ A mortgage bank is a bank specializing in mortgage loans. It can
be involved in originating or servicing mortgage loans, or both.
The banks loan their own capital to borrowers and either collect
payments in installments along with a certain rate of interest or
sell their loans in the secondary market

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Types of Bank (cont.)

• Community Bank:
▫ An independent, locally-owned commercial bank
▫ It operates exclusively in and derives its funds from the community
in which it is based

• Money Center Bank:

• Its borrowing and lending activities are with governments,
large corporations, and regular banks
• These types of financial institutions (or designated branches of these
institutions) generally do not borrow from or lend to consumers

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Types of Bank (cont.)

• Investment Bank:
▫ Investment banks specialize in large and complex financial
transactions, such as underwriting, acting as an intermediary
between a securities issuer and the investing public,
facilitating mergers and other corporate reorganizations and
acting as a broker or financial adviser for institutional clients
• Merchant Bank:
▫ A merchant bank is a company that conducts underwriting, loan
services, financial advising, and fundraising services for large
corporations and high net worth individuals
▫ Merchant banks do not provide services to the general public
▫ They do not provide regular banking services like checking
accounts and do not take deposits
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Types of Bank (cont.)

• International Bank:
▫ International banking is an arrangement of financial service by a
residential bank of one country to the residents of another
country
▫ Mostly multinational companies and individuals use this banking
facility for transacting

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Types of Bank (cont.)

• Wholesale Bank:
▫ Wholesale banking refers to banking services between merchant
banks and other financial institutions
▫ This type of banking deals with larger clients, such as large
corporations and other banks

• Retail Bank:
▫ Retail banking, also known as consumer banking, is the typical
mass-market banking in which individual customers use local
branches of larger commercial banks

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1-11

The Financial Service Competitors of Banks

• Savings Associations
• Credit Unions
• Money Market Funds
• Mutual Funds (Investment Companies)
• Hedge Funds
• Security Brokers and Dealers
• Finance Companies
• Financial Holding Companies
• Life and Property-Casualty Insurance Companies

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1-12

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
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1-13

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

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Offering Security Brokerage and

Investment Banking Services

• Underwriting Securities
• Offering Mutual Funds and Annuities
• Offering Merchant Banking Services
• Offering Risk Management and Hedging
Services

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Trends Affecting Banks and Other

Financial Service Firms Today
• Service Proliferation
• Rising Competition
• Government Deregulation
• Increased Interest Rate Sensitivity
• Technological Change and Automation
• Consolidation and Geographic Expansion
• E-Banking and E-Commerce
• Convergence
• Globalization
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