Topic 1

(Chapter One)

Introduction to Banking & Financial

Services Management
 1-8

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
• Appendix: Career Opportunities in Banking and
Financial Services

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What is a Bank?
 1-10

What Is a Bank?
• 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

▫
1) The economic functions it performs:-
They are involved in transferring funds from savers to
borrowers (financial intermediation) and in paying for
goods and services.

Banks are the principal source of credit/credit facilities

(loanable funds) for millions of individuals and families
and for many units of government
2) The services it offers its customers:-

Banks offer wide range of financial services.

a. Investment banking
b. Insurance protection
c. Financial planning
d. Advice for merging companies
e. The sale of risk-management services to businesses
and consumers
f. Other innovative financial products
Insurance Protection
Financial planning
1-11
1-12
1-13
1-14
2) The services it offers its customers:-

Banks offer wide range of financial services.

a. Investment banking
b. Insurance protection
c. Financial planning
d. Advice for merging companies
e. The sale of risk-management services to businesses
and consumers
f. Other innovative financial products
 1-13

3) 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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 1-11

EXHIBIT 1-1 The Many Different Kinds of Financial- Service

Firms Calling Themselves Banks

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 vs

No. Money-Centered Bank Community Bank

1. Industry leader. Much smaller.

2. Acquire smaller businesses. Service local communities and towns.

3. Face tough global competition. Tough competitors in the local areas.

 1-14

The Financial System and Competing

Financial-Service Institutions
• Roles of the Financial System
▫ The primary purpose of the financial system is to encourage
savings and to transfer those savings to individuals and
institutions planning to invest and needing credit to do so

▫ This process of encouraging savings and transforming

savings into investment spending causes the economy to grow,
new jobs to be created, and living standards to rise

▫ The financial system also provides a variety of supporting

services:
▫ Payment services
▫ Risk protection services
▫ Liquidity services

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 1-14

The Financial System and Competing

Financial-Service Institutions
• Roles of the Financial System
▫ The primary purpose of the financial system is to encourage
savings and to transfer those savings to individuals and
institutions planning to invest and needing credit to do so

▫ This process of encouraging savings and transforming

savings into investment spending causes the economy to grow,
new jobs to be created, and living standards to rise

▫ The financial system also provides a variety of supporting

services:
▫ Payment services
▫ Risk protection services
▫ Liquidity services

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 1-15

The Financial System and Competing

Financial-Service Institutions (continued)

• The Competitive Challenge for Banks

• The financial market share that banking comprised has fallen.
• Traditional banking is dying.
• Changing by offering new services and hanging its form.
• The banking industry’s largest customers have found ways around banks to obtain the
funds that they need.
• Borrowing in the open market.
• Perhaps banking is being “regulated to death”

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 1-16

The Financial System and Competing

Financial-Service Institutions (continued)
• 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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List of Approved Money Brokers

No. Name
1 Affin Moneybrokers Sdn Bhd
2 Amanah Butler Malaysia Sdn Bhd
3 Harlow's & MGI Sdn. Bhd.
4 Reuters Transaction Services
Malaysia Sdn Bhd
 1-17

The Financial System and Competing

Financial-Service Institutions (continued)
• Leading Competitors with Banks

▫ Financial-service providers are converging in

terms of the services they offer

▫ The U.S. Financial Services Modernization

(Gramm-Leach-Bliley) Act of 1999 has allowed many different
types of financial firms to offer the public one-stop shopping for
financial services

▫ The challenge of differentiating banks from other

financial-service providers is difficult today

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 1-18

EXHIBIT 1–2 Comparative Size by Industry of Commercial

Banks and Their Principal Financial- Service Competitors

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 1-19

Services Banks and Many of

Closest Competitors Offer the Public Thei
•Services Banks Have Offered for Centuries r
▫ 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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Trust Services
 1-20

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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 1-21

TABLE 1–1 The Many Different Roles Banks and

Their Closest Competitors Play in Today’s Economy

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 1-22

TABLE 1–2 Some of the Leading Financial-Service Firms

around the Globe

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 1-23

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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 1-24

Appendix: Career Opportunities in

Banking and Financial Services
• What different kinds of professionals work inside
financial firms?
■ Loan Officers
■ Credit Analysts
■ Treasury Dealers
■ Managers of Operations
■ Branch Managers
■ Systems Analyst
■ Auditing and Control Personnel
■ Trust Department Specialist
■ Tellers

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 1-25

Appendix: 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

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 BANK MARKETING
46

Marketing - refers to the need satisfaction of the institution’ s clients.

Involves
identifying the needs of the customers
developing products to suit their needs or modifying the existing products
accordingly.
the need for foreseeing wants of the customers in future and developing
suitable products of their requirement.

Bank marketing consists of

identifying the most profitable markets now and in the future;
assessing the present and future needs of customers;
setting business development goals and marketing plans to meet them
managing the various services and promoting them to achieve the plans
 Organizational Form of the Banking Industry
47

Unit Banking
- One of the oldest kinds

- Offer all services from one office

- Still common in U.S. banking today

- One reason for the comparatively large number of units banks is the rapid
formation of new banks
- Many customers still prefer small banks, which get to know their customer
well

Branch Banking
- Offer full range of services from several locations

Bank Holding Companies

- A corporation chartered for the purpose of holding the stock of one or more
banks
 Branch Banking Organizations
48

As unit bank grows larger in size – establish branch banking

Offer the full range of banking services from several locations, including a
head office and one or more full service branch offices
Likely to offer limited services through a supporting network of drive-in
windows, ATMs, computer electronically linked to the bank’ s computers
etc
Each branch may have their own management team with limited authority
to make decisions on customer loan application and other facets of daily
operations
■ Ex: branch bank manager may be authorized to approve a customer
loan of up to RM100,000. Larger loan requests must be referred to the
head office for final decisions
Senior management of a branch banking is usually located at the head
office
 Organizational Structure
Branch
49

Branch Manager

Assistant Manager

Bank Officer

Deposit Remittance Account Credit

 Organizational Structure
Head Office
50

Board of Directors

Chief Executive Officer

Head of Department

Departments*
 Organizational Structure
51

• Example of departments:
– Islamic Banking
– Corporate Banking
– Retail Banking
– Electronic Banking
– International Banking
– Information technology and management
information system
– Finance and administration
– Risk Management
– Branch Banking
 Advantages of Branch Banking
52

Greater operating efficiency

Increases the availability and convenience of services
Stimulates faster economic growth as branch banks tend to
make more loans available
Leads to fewer bank failures as a branch bank is less dependent
on the volume of business from a single industry or single local
market area
 Disadvantages of Branch Banking
53

Higher operating costs

Setting up new full-service branches seems to be a costly way
to grow
Branch banks do not seem to earn higher average profits than
other banks
 Bank Holding Company Organizations
54

A corporation chartered for the purpose of holding the stock

(equity shares) of at least one bank
A bank holding company is a company that controls one or more
banks
Many holding companies hold only a small minority of the
outstanding shares of one or more banks, thereby escaping
government regulation
 Organizational Structure
55

• Bank Holding Companies

Holding Corporation

Main Bank

Bank Subsidiaries Associated Business

Non-bank Subsidiaries