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
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Part 1: Banking and the Forces of Change in the Financial-Services Industry
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: - PowerPoint PPT Presentation
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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
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” MODELC = Capital AdequacyA = Asset QualityM = ManagementE = EarningsL = Liquidity(S = systemic risk, CAMELS)
Chapter 1 18
Regulatory Dialectic or Struggle Model Thesis Antithesis Synthesis