Chapter 11 Part 1: Banking and the Forces of Change in the Financial-Services Industry Chapter 1:...
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Transcript of Chapter 11 Part 1: Banking and the Forces of Change in the Financial-Services Industry Chapter 1:...
Chapter 1 1
Part 1:Banking and the Forces of
Change in the Financial-Services Industry
Chapter 1: Overview of Banking and the Financial-Services Industry
Chapter 2: Drivers of Change, Innovation, and Consolidation in the Financial-Services Industry
Chapter 3: Technology in Banking: E-Money, E-Banking, and E-Commerce
Chapter 1 2
CHAPTER 1
OVERVIEW OF BANKING AND THE FINANCIAL-SERVICES INDUSTRY
Chapter 1 3
LEARNING OBJECTIVES
The functions of a financial system and that “Banks do it”
How to judge the efficiency of a financial system and how it interacts with the real economy
Who the major players in the FSI are and how they are organized
The role of the federal safety net and the difference between regulatory discipline and market discipline
The dimensions of bank competition and how regulation shapes them
TO UNDERSTAND....
Chapter 1 4
THE FUNCTIONS OF A FINANCIAL SYSTEM: Do Banks Do It?
Clear and settle payments to facilitate trade and commerce
Aggregate and disaggregate wealth and flows of funds so that both large-scale and small-scale projects can be financed
Transfer economic resources over time, space, and industries
Accumulate, process, and disseminate information for decision-making purposes
Provide ways for managing uncertainty and controlling risk
Provide ways for dealing with incentive and asymmetric-information problems that arise in financial contracting
Chapter 1 5
JUDGING THE EFFICIENCY OF A FINANCIAL SYSTEM
Allocative Efficiency
Operational or Cost Efficiency
Informational or Price Efficiency
Chapter 1 6
HOW THE FINANCIAL SECTOR AFFECTS THE REAL SECTOR
Credit Screening Activities Credit Rationing Creating Liquidity Facilitate Trade and Investment
Activities Debt Restructurings Feedback Role
Chapter 1 7
PLAYERS IN THE FINANCIAL- SERVICES
INDUSTRY
Financial Holding CompaniesEx: Citigroup, American Express, Capital One Financial
Bank Holding CompaniesEx: Bank of America, Wells Fargo, SunTrust
Community Banks Securities Firms
Ex: Merrill Lynch, MSDW, Charles Schwab
Thrift Institutions Ex: Washington Mutual, Charter One Financial, Dime Bancorp
Chapter 1 8
PLAYERS IN THE FINANCIAL SERVICES INDUSTRY
(Continued)
Insurance CompaniesEx: Aetna, AFLAC, Allstate
Pension Funds Finance Companies Investment Funds Nonfinancial Corporations Venture Capitalists
Chapter 1 9
THE “-IZATION” OF THE FSI
Institutionalization Securitization Globalization Privatization Modernization
Chapter 1 10
TYPES AND CLASSES OF COMMERCIAL BANKS
National Banks -- Charters are issued by the
Office of the Comptroller of the Currency (OCC)
State Banks -- chartered by states and D.C.
Fed-Member Bank -- Must be insured by the
Federal Deposit Insurance Corporation
Bankers’ Banks
Pawnshops (“shadow banks”)
Chapter 1 11
BANK HOLDING COMPANIES (BHCs)
Dominant Organizational Form in US is the BHC One-Bank Holding Company Multi-Bank Holding Company
Evolution to LCBOs and FHCs
Chapter 1 12
MARKET CAPITALIZATION OF LARGE BHCs
Citigroup = $285 Billion J.P. Morgan Chase Co = $96 Billion Bank of New York = $37 Billion These data are as of September 13, 2000 –
update them. Have they recovered from the financial aftermath of the “Attack on America”?
Chapter 1 13
THE FEDERAL SAFETY NET:
Two Basic Components
Discount Window -- The lender of last resort for banks that encounter liquidity crises
Deposit Insurance -- Provided by the FDIC, provides public confidence to the banking system
The TBTF policy is implemented through these two components
Moral Hazard -- refers to behavior that is altered by the existence of insurance
Chapter 1 14
HOW DOES THE SAFETY NET WORK?
When banks experience financial difficulty, they...
1.Borrow funds from the lender of last resort, the Fed
2.The FDIC has time, called “forbearance”, to arrange a permanent solution to the bank’s problems, usually a merger with another viable bank in a purchase-and-assumption transaction
3.FDICIA (1991), however, calls for “prompt corrective action” or PCA
Chapter 1 15
Principal-Agent Relations, Regulatory, Discipline, and Market Discipline The key players in regulatory discipline
are: Taxpayers as principals President/Congress as agents and then as
principals Regulators as agents and then as
principals Managers of insured depositories as
agents and then as principals See Figure 1-2 (p. 16) for additional details
Chapter 1 16
TECHNIQUES FOR MANAGING THE SAFETY
NET
Monitoring the value of the collateral
Restricting the kinds of assets acceptable as collateral, and
Charging risk-based premiums
Chapter 1 17
THE “CAMEL” MODEL
C = Capital AdequacyA = Asset QualityM = ManagementE = EarningsL = Liquidity(S = systemic risk, CAMELS)
Chapter 1 18
Regulatory Dialectic or Struggle Model Thesis Antithesis Synthesis
Chapter 1 19
THE RISKS OF BANKING
Credit Risk Interest-Rate Risk Liquidity Risk Foreign-Exchange Risk
Chapter 1 20
Strength-in-Banking Equation Strength = New powers + Firm
supervision New powers: GLB Act of 1999
(Modernization) Firm supervision: Risk-based
capital requirements (regulatory discipline) and market discipline
Chapter 1 21
The Dimensions of FSI Competition Price User convenience/service Public confidence Both market forces and regulations
shape these dimensions
Chapter 1 22
Chapter Summary Banks do it when it comes to the
functions of a financial system We judge financial systems in terms of
their efficiency – allocative, operating (cost), and price
Banks are heavily regulated firms (e.g., risk-based capital requirements, CAMEL, etc.) and structured as holding companies – BHCs, LCBOs, and FHCs
Chapter 1 23
Summary (continued) Customers pick financial-services
providers based on price, convenience, and confidence as shaped by market forces and regulators
As banks gain new powers (GLB Act of 1999) firm supervision by markets and regulators is required to maintain strength in banking
Chapter 1 24
Summary (continued) Principal-agent relations play a key
role in understanding how regulatory and market disciplines work
The regulatory dialectic or struggle model captures the ongoing battle between regulated FSFs and their regulators – thesis, antithesis, and synthesis