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1-1

Overview of Banking

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What Is a Bank?

• Historically, banks have been recognized for the great range of financial services they offer

– Banks are the principal source of credit (loanable funds) for millions of individuals/families, businesses and for many units of government

– The assets held by U.S. banks represent about one-fifth of the total assets . In other nations banks hold half or more of all assets in the financial system

– Bank service menus are expanding rapidly today to include investment banking, insurance protection, financial planning, advice for merging companies, the sale of risk-management services to businesses and consumers, and numerous other innovative financial products

• A bank can be defined in terms of:1. The economic functions it performs

2. The services it offers its customers

3. The legal basis for its existence

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1-3

The Many Different Kinds of Financial-Service Firms

Calling Themselves Banks

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What Is a Bank? (continued)

• The Legal Basis for Banking

– A bank is any business offering deposits subject to

withdrawal on demand and making loans of a commercial or

business nature

– Congress then defined a bank as any institution that could

qualify for deposit insurance administered by the Federal

Deposit Insurance Corporation (FDIC)

▫ Under federal law in the U.S., a bank had come to be

defined, not so much by its array of service offerings, but by

the government agency insuring its deposits

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1-5

Competing Financial-Service Institutions

• Leading Competitors with Banks

▫ Savings Associations

▫ Credit Unions

▫ Fringe Banks

▫ 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

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1-6

Comparative Size by Industry of Commercial Banks and

Their Principal Financial-Service Competitors

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1-7

Services Banks and Many of Their Closest

Competitors Offer the Public

• Services Banks Have Offered for Centuries

▫ Carrying Out Currency Exchange

▫ Discounting Commercial Notes and Making Business

Loans

▫ Offering Savings Deposits

▫ Safekeeping of Valuables and Certification of Value

▫ Supporting Government Activities with Credit

▫ Offering Checking Accounts (Demand Deposits)

▫ Offering Trust Services

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Services Banks and Many of Their Closest

Competitors Offer the Public (continued)

• Services Banks and Many of Their Financial-Service Competitors

Began Offering in the Past Century

– Granting Consumer Loans

– Financial Advising

– Managing Cash

– Offering Equipment Leasing

– Making Venture Capital Loans

– Selling Insurance Policies

– Selling and Managing Retirement Plans

– Dealing in Securities: Offering Security Brokerage and Investment

Banking Services

– Offering Mutual Funds, Annuities, and Other Investment Products

– Offering Merchant Banking Service

– Offering Risk Management and Hedging Services

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1-9

Key Trends Affecting All Financial-Service

Firms – Crisis, Reform, and Change

• Service Proliferation

• Rising Competition

• Government Deregulation and then Reregulation

• Crisis, Reform, and Change in Banking and Financial

Services

• An Increasingly Interest-Sensitive Mix of Funds

• Technological Change and Automation

• Consolidation and Geographic Expansion

• Convergence

• Globalization

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1-10

The Structure of the Commercial Banking Industry

• Advancing Size and Concentration of Assets

▫ Commercial banking is the dominant supplier of credit and payments services to businesses and households

▫ Many banks in the United States are small by global standards

▫ These smallest financial institutions, numerous as they are, held little more than one percent of total industry assets

▫ In contrast, the American banking industry also contains some of the largest financial service organizations on the planet

▫ Citigroup, JP Morgan Chase, and the Bank of America hold about 6 trillion dollars combined

▫ Thus, banking continues to be increasingly concentrated not only in the smallest, but also in the very largest of all financial firms

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1-11

Large Banks vs. Small Banks• Money-Centered Banks vs. Community Banks

▫ Money-center banks▫ Industry leaders

▫ Cover whole regions, nations, and continents

▫ Offer the widest possible menu of financial services

▫ Face tough global competition

▫ Community banks▫ Much smaller

▫ Service local communities and towns

▫ Offer a narrower, but often more personalized, menu of financial services

• Unit Banking Organizations

▫ Unit banks, one of the oldest kinds, offer all of their services from one office

▫ Some services (such as taking deposits, cashing checks, or paying bills) may be offered from limited-service facilities, such as drive-up windows and automated teller machines (ATMs)

▫ These organizations are still common today

▫ One reason for the large numbers of unit banks is the continuing formation of new banks. Many new banks start out as unit organizations

▫ Many customers still seem to prefer smaller banks, which often seem to know their customers better than larger banks

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1-12

The Structure of the U.S. Commercial

Banking Industry, December 31, 2009

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The Structure of the U.S. Commercial

Banking Industry, December 31, 2009

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1-14

Small and Medium-Size U.S. Banks Lose Market Share to the

Largest Banking Institutions

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1-15

The 10 Largest Bank Holding Companies Operating in the

United States (Total Assets as Reported on June 30, 2010)

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1-16

The Most Efficient Sizes for Banks

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1-17

Entry and Exit in U.S. Banking

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1-18

Growth of Commercial Bank Branch Offices in the United States

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1-19

Career Opportunities in Banking and

Financial Services

• What different kinds of professionals work inside

financial firms?

– Loan Officers

– Credit Analysts

– Managers of Operations

– Branch Managers

– Systems Analyst

– Auditing and Control Personnel

– Trust Department Specialist

– Tellers

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1-20

Career Opportunities in Banking and

Financial Services (continued)

• What different kinds of professionals work inside

financial firms?

– Security Analysts and Traders

– Marketing Personnel

– Human Resources Managers

– Investment Banking Specialists

– Bank Examiners and Regulators

– Regulatory Compliance Officers

– Risk Management Specialists