Financial Institutions Accounting
Dr. Salah Hammad
Chapter 1
An Overview of the Changing
Financial-Services Sector
2
Introduction
• Banks are the principal source of credit (loanable funds)
for millions of individuals and families and for many
units of government
• Worldwide banks grant more installment loans to
consumers (individuals and families) than any other
financial-service provider
• 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
3
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
• Historically, banks have been recognized for the great
range of financial services they offer
▫ 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
4
EXHIBIT 1-1 The Many Different Kinds of Financial-Service
Firms Calling Themselves Banks
5
What Is a Bank? (continued)
• 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
Acquire smaller businesses
Face tough global competition
▫ Community banks
▫ Much smaller
▫ Service local communities and towns
▫ Offer a narrower, but often more personalized, menu of
financial services
6
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
7
The Financial System and Competing
Financial-Service Institutions
• Roles of the Financial System
▫ The primary purpose of the financial system is to encourage
saving 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
8
The Financial System and Competing
Financial-Service Institutions (continued)
• The Competitive Challenge for Banks
▫ Lately, the financial market share that banking comprised has fallen
▫ Some authorities in the financial-services field fear that this apparent
erosion of market share may imply that traditional banking is dying
▫ Other experts counter that banking is not dying but changing by
offering new services and changing 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”
9
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
10
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
11
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
12
TABLE 1–1 The Many Different Roles Banks and Their
Closest Competitors Play in Today’s Economy
13