Bank Management & Financial Services

Title
Contents
PART ONE INTRODUCTION TO BANKING AND FINANCIAL SERVICES
1 An Overview of the Changing Financial- Services Sector
Key Topics in This Chapter
1–1 Introduction
1–2 What Is a Bank?
1–3 The Financial System and Competing Financial- Service Institutions
Roles of the Financial System
The Competitive Challenge for Banks
Leading Competitors with Banks
1–4 Services Banks and Many of Their Closest Competitors Offer the Public
Services Banks Have Offered for Centuries
Services Banks and Many of Their Financial-Service Competitors Began Offering in the Past Century
Convenience: The Sum Total of All Banking and Financial Services
1–5 Key Trends Affecting All Financial-Service Firms
1–6 The Plan of This Book
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: The Very First Case Assignment
Selected References
Appendix: Career Opportunities in Financial Services
2 The Impact of Government Policy and Regulation on the Financial-Services Industry
Key Topics in This Chapter
2–1 Introduction
2–2 Banking Regulation
Pros and Cons of Strict Rules
The Impact of Regulation—The Arguments for Strict Rules versus Lenient Rules
2–3 Major Banking Laws—Where and When the Rules Originated
Meet the “Parents”: The Legislation That Created Today’s Bank Regulators
Instilling Social Graces and Morals—Social Responsibility Laws
Legislation Aimed at Allowing Interstate Banking: Where Can the “Kids” Play?
The Gramm-Leach-Bliley Act (1999): What Are Acceptable Activities for Playtime?
The USA Patriot and Bank Secrecy Acts: Fighting Terrorism and Money Laundering
Telling the Truth and Not Stretching It—The Sarbanes- Oxley Accounting Standards Act (2002)
2–4 The 21st Century Ushers In an Array of New Laws, Regulations, and Regulatory Strategies
2–5 The Regulation of Nonbank Financial-Service Firms Competing with Banks
Regulating the Thrift (Savings) Industry
Regulating Other Nonbank Financial Firms
Are Regulations Really Necessary in the Financial-Services Sector?
2–6 The Central Banking System: Its Impact on the Decisions and Policies of Financial Institutions
Organizational Structure of the Federal Reserve System
The Central Bank’s Principal Task: Making and Implementing Monetary Policy
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 2
Selected References
3 The Organization and Structure of Banking and the Financial-Services Industry
Key Topics in This Chapter
3–1 Introduction
3–2 The Organization and Structure of the Commercial Banking Industry
Advancing Size and Concentration of Assets
Is a Countertrend Now under Way?
3–3 Internal Organization of the Banking Firm
Community Banks and Other Community-Oriented Financial Firms
Larger Banks—Money Center, Wholesale and Retail
Trends in Organization
3–4 The Array of Organizational Structures and Types in the Banking Industry
Unit Banking Organizations
Branching Organizations
Electronic Branching—Web Sites and Electronic Networks: An Alternative or a Supplement to Traditional Bank Branch Offices?
Holding Company Organizations
3–5 Interstate Banking Organizations and the Riegle- Neal Interstate Banking and Branching Efficiency Act of 1994
Research on Interstate Banking
3–6 An Alternative Type of Banking Organization Available as the 21st Century Opened: Financial Holding Companies (FHCs)
3–7 Mergers and Acquisitions Reshaping the Structure and Organization of the Financial-Services Sector
3–8 The Changing Organization and Structure of Banking’s Principal Competitors
3–9 Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost?
Efficiency in Producing Financial Services
3–10 Financial Firm Goals: Their Impact on Operating Cost, Efficiency, and Performance
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 3
S&P Market Insight Challenge
Selected References
4 Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites
Key Topics in This Chapter
4–1 Introduction
4–2 Chartering a New ( De Novo ) Financial-Service Institution
4–3 The Bank Chartering Process in the United States
4–4 Questions Regulators Usually Ask the Organizers of a New ( De Novo ) Bank
4–5 Factors Weighing on the Decision to Seek a New Charter
4–6 Volume and Characteristics of New Charters
4–7 How Well Do New Charters Perform?
4–8 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches
Desirable Sites for New Branches
Branch Regulation
The Changing Role of Financial-Service Branch Offices
In-Store Branching
4–9 Establishing and Monitoring Automated Limited-Service Facilities
Point-of-Sale Terminals
Automated Teller Machines (ATMs)
4–10 Home and Office Banking
Telephone Banking and Call Centers
Internet Banking
4–11 Financial-Service Facilities of the Future
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 4
S&P Market Insight Challenge
Selected References
PART TWO FINANCIAL STATEMENTS AND FINANCIAL-FIRM PERFORMANCE
5 The Financial Statements of Banks and Their Principal Competitors
Key Topics in This Chapter
5–1 Introduction
5–2 An Overview of Balance Sheets and Income Statements
5–3 The Balance Sheet (Report of Condition)
The Principal Types of Accounts
Recent Expansion of Off-Balance-Sheet Items in Banking
The Problem of Book-Value Accounting
Auditing: Assuring Reliability of Financial Statements
5–4 Components of the Income Statement (Report of Income)
Financial Flows and Stocks
Comparative Income Statement Ratios for Different-Size Financial Firms
5–5 The Financial Statements of Leading Nonbank Financial Firms: A Comparison to Bank Statements
5–6 An Overview of Key Features of Financial Statements and Their Consequences
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 5
Selected References
Appendix: Sources of Information on the Financial- Services Industry
6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors
Key Topics in This Chapter
6–1 Introduction
6–2 Evaluating Performance
Determining Long-Range Objectives
Maximizing the Value of the Firm: A Key Objective for Nearly All Financial-Service Institutions
Profitability Ratios: A Surrogate for Stock Values
Useful Profitability Formulas for Banks and Other Financial-Service Companies
Return on Equity and Its Principal Components
The Return on Assets and Its Principal Components
What a Breakdown of Profitability Measures Can Tell Us
Measuring Risk in Banking and Financial Services
Other Goals in Banking and Financial-Services Management
6–3 Performance Indicators among Banking’s Key Competitors
6–4 The Impact of Size on Performance
Size, Location, and Regulatory Bias in Analyzing the Performance of Banks and Competing Financial Institutions
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 6
Selected References
Appendix: Using Financial Ratios and Other Analytical Tools to Track Financial-Firm Performance—The UBPR and BHCPR
PART THREE TOOLS FOR MANAGING AND HEDGING AGAINST RISK
7 Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques
Key Topics in This Chapter
7–1 Introduction
7–2 Asset-Liability Management Strategies
Asset Management Strategy
Liability Management Strategy
Funds Management Strategy
7–3 Interest Rate Risk: One of the Greatest Management Challenges
Forces Determining Interest Rates
The Measurement of Interest Rates
The Components of Interest Rates
Responses to Interest Rate Risk
7–4 One of the Goals of Interest Rate Hedging: Protect the Net Interest Margin
Interest-Sensitive Gap Management as a Risk- Management Tool
Problems with Interest-Sensitive GAP Management
7–5 The Concept of Duration as a Risk- Management Tool
What Is Duration?
Price Sensitivity to Changes in Interest Rates and Duration
Convexity and Duration
7–6 Using Duration to Hedge against Interest Rate Risk
7–7 The Limitations of Duration Gap Management
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 7
S&P Market Insight Challenge
Selected References
8 Risk Management: Financial Futures, Options, Swaps, and Other Hedging Tools
Key Topics in This Chapter
8–1 Introduction
8–2 Uses of Derivative Contracts
8–3 Financial Futures Contracts: Promises of Future Security Trades at a Set Price
The Short Hedge in Futures
The Long Hedge in Futures
8–4 Interest-Rate Options
8–5 Regulations and Accounting Rules for Bank Futures and Options Trading
8–6 Interest-Rate Swaps
8–7 Caps, Floors, and Collars
Interest-Rate Caps
Interest-Rate Floors
Interest-Rate Collars
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 8
S&P Market Insight Challenge
Selected References
9 Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives
Key Topics in This Chapter
9–1 Introduction
9–2 Securitizing Loans and Other Assets
The Beginnings of Securitization—The Home Mortgage Market
Examples of Other Assets That Have Been Securitized
The Impact of Securitization upon Lending Institutions
Regulators’ Concerns about Securitization
9–3 Sales of Loans to Raise Funds and Reduce Risk
Reasons behind Loan Sales
The Risks in Loan Sales
9–4 Standby Credit Letters to Reduce the Risk of Nonpayment or Nonperformance
The Structure of SLCs
The Value and Pricing of Standby Letters
Sources of Risk with Standbys
Regulatory Concerns about SLCs
Research Studies on Standbys, Loan Sales, and Securitizations
9–5 Credit Derivatives: Contracts for Reducing Credit Risk Exposure on the Balance Sheet
Credit Swaps
Credit Options
Credit Default Swaps (CDSs)
Credit-Linked Notes
Collateralized Debt Obligations (CDOs)
Risks Associated with Credit Derivatives
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 9
Selected References
PART FOUR MANAGING INVESTMENT PORTFOLIOS AND LIQUIDITY POSITIONS FOR FINANCIAL FIRMS
10 The Investment Function in Financial- Services Management
Key Topics in This Chapter
10–1 Introduction
10–2 Investment Instruments Available to Financial Firms
10–3 Popular Money Market Investment Instruments
Treasury Bills
Short-Term Treasury Notes and Bonds
Federal Agency Securities
Certificates of Deposit
International Eurocurrency Deposits
Bankers’ Acceptances
Commercial Paper
Short-Term Municipal Obligations
10–4 Popular Capital Market Investment Instruments
Treasury Notes and Bonds
Municipal Notes and Bonds
Corporate Notes and Bonds
10–5 Investment Instruments Developed More Recently
Structured Notes
Securitized Assets
10–6 Investment Securities Held by Banks
10–7 Factors Affecting Choice of Investment Securities
Expected Rate of Return
Tax Exposure
Interest Rate Risk
Credit or Default Risk
Business Risk
Liquidity Risk
Call Risk
Prepayment Risk
Inflation Risk
Pledging Requirements
10–8 Investment Maturity Strategies
10–9 Maturity Management Tools
The Yield Curve
Duration
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 10
S&P Market Insight Challenge
Selected References
11 Liquidity and Reserves Management: Strategies and Policies
Key Topics in This Chapter
11–1 Introduction
11–2 The Demand for and Supply of Liquidity
11–3 Why Financial Firms Often Face Significant Liquidity Problems
11–4 Strategies for Liquidity Managers
Asset Liquidity Management (or Asset Conversion) Strategies
Borrowed Liquidity (Liability) Management Strategies
Balanced Liquidity Management Strategies
Guidelines for Liquidity Managers
11–5 Estimating Liquidity Needs
The Sources and Uses of Funds Approach
The Structure of Funds Approach
Liquidity Indicator Approach
The Ultimate Standard for Assessing Liquidity Needs: Signals from the Marketplace
11–6 Legal Reserves and Money Position Management
Regulations on Calculating Legal Reserve Requirements
Factors Influencing the Money Position
11–7 Factors in Choosing among the Different Sources of Reserves
11–8 Central Bank Reserve Requirements around the Globe
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 11
S&P Market Insight Challenge
Selected References
PART FIVE MANAGING SOURCES OF FUNDS FOR A FINANCIAL FIRM
12 Managing and Pricing Deposit Services
Key Topics in This Chapter
12–1 Introduction
12–2 Types of Deposits Offered by Banks and Other Depository Institutions
Transaction (Payments or Demand) Deposits
Nontransaction (Savings or Thrift) Deposits
Retirement Savings Deposits
12–3 Interest Rates Offered on Different Types of Deposits
The Composition of Deposits
The Ownership of Deposits
The Cost of Different Deposit Accounts
12–4 Pricing Deposit-Related Services
12–5 Pricing Deposits at Cost Plus Profit Margin
12–6 Using Marginal Cost to Set Interest Rates on Deposits
Conditional Pricing
12–7 Pricing Based on the Total Customer Relationship and Choosing a Depository
The Role That Pricing and Other Factors Play When Customers Choose a Depository Institution to Hold Their Accounts
12–8 Basic (Lifeline) Banking: Key Services for Low-Income Customers
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 12
S&P Market Insight Challenge
Selected References
13 Managing Nondeposit Liabilities
Key Topics in This Chapter
13–1 Introduction
13–2 Liability Management and the Customer Relationship Doctrine
13–3 Alternative Nondeposit Sources of Funds
Federal Funds Market (“Fed Funds”)
Repurchase Agreements as a Source of Funds
Borrowing from Federal Reserve Bank s
Advances from Federal Home Loan Banks
Development and Sale of Large Negotiable CDs
The Eurocurrency Deposit Market
Commercial Paper Market
Long-Term Nondeposit Funds Sources
13–4 Choosing among Alternative Nondeposit Sources
Measuring a Financial Firm’s Total Need for Nondeposit Funds: The Available Funds Gap
Nondeposit Funding Sources: Factors to Consider
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 13
Selected References
14 Investment Banking, Insurance, and Other Sources of Fee Income
Key Topics in This Chapter
14–1 Introduction
14–2 Sales of Investment Banking Services
Key Investment Banking Services
Linkages between Commercial and Investment Banking
Possible Advantages and Disadvantages of Linking Commercial and Investment Banking
Key Issues for Investment Banks of the Future
14–3 Selling Investment Products to Consumers
Mutual Fund Investment Products
Annuity Investment Products
The Track Record for Sales of Investment Products
Risks and Rules for Selling Investment Products
14–4 Trust Services as a Source of Fee Income
14–5 Sales of Insurance-Related Products
Types of Insurance Products Sold Today
Rules Covering Insurance Sales by Federally Insured Depository Institutions
14–6 The Alleged Benefits of Financial-Services Diversification
An Example of the Product-Line Diversification Effect Reducing Risk
Potential Economies of Scale and Scope
14–7 Information Flows within the Financial Firm
Summary
Key Terms
Problems and Projects
Internet Exercises
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 14
S&P Market Insight Challenge
Selected References
15 The Management of Capital
Key Topics in This Chapter
15–1 Introduction
15–2 The Many Tasks Capital Performs
15–3 Capital and Risk
Key Risks in Banking and Financial Institutions’ Management
Defenses against Risk
15–4 Types of Capital in Use
Relative Importance of Different Sources of Capital
15–5 One of the Great Issues in the History of Banking: How Much Capital Is Really Needed?
Regulatory Approach to Evaluating Capital Needs
15–6 The Basel Agreement on International Capital Standards: A Historic Contract among Leading Nations
Basel I
Capital Requirements Attached to Derivatives
Basel II: A New Capital Accord Unfolding
15–7 Changing Capital Standards Inside the United States
15–8 Planning to Meet Capital Needs
Raising Capital Internally
Raising Capital Externally
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 15
Selected References
PART SIX PROVIDING LOANS TO BUSINESSES AND CONSUMERS
16 Lending Policies and Procedures: Managing Credit Risk
Key Topics in This Chapter
16–1 Introduction
16–2 Types of Loans
Factors Determining the Growth and Mix of Loans
16–3 Regulation of Lending
Establishing a Good Written Loan Policy
16–4 Steps in the Lending Process
16–5 Credit Analysis: What Makes a Good Loan?
1. Is the Borrower Creditworthy? The Cs of Credit
2. Can the Loan Agreement Be Properly Structured and Documented?
3. Can the Lender Perfect Its Claim against the Borrower’s Earnings and Any Assets That May Be Pledged as Collateral?
16–6 Sources of Information about Loan Customers
16–7 Parts of a Typical Loan Agreement
16–8 Loan Review
16–9 Loan Workouts
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 16
Selected References
17 Lending to Business Firms and Pricing Business Loans
Key Topics in This Chapter
17–1 Introduction
17–2 Brief History of Business Lending
17–3 Types of Business Loans
17–4 Short-Term Loans to Business Firms
Self-Liquidating Inventory Loans
Working Capital Loans
Interim Construction Financing
Security Dealer Financing
Retailer and Equipment Financing
Asset-Based Financing
Syndicated Loans (SNCs)
17–5 Long-Term Loans to Business Firms
Term Business Loans
Revolving Credit Financing
Long-Term Project Loans
Loans to Support the Acquisition of Other Business Firms—Leveraged Buyouts
17–6 Analyzing Business Loan Applications
Analysis of a Business Borrower’s Financial Statements
17–7 Financial Ratio Analysis of a Customer’s Financial Statements
The Business Customer’s Control over Expenses
Operating Efficiency: Measure of a Business Firm’s Performance Effectiveness
Marketability of the Customer’s Product or Service
Coverage Ratios: Measuring the Adequacy of Earnings
Liquidity Indicators for Business Customers
Profitability Indicators
The Financial Leverage Factor as a Barometer of a Business Firm’s Capital Structure
17–8 Comparing a Business Customer’s Performance to the Performance of Its Industry
Contingent Liabilities
17–9 Preparing Statements of Cash Flows from Business Financial Statements
Pro Forma Statements of Cash Flows and Balance Sheets
The Loan Officer’s Responsibility to the Lending Institution and the Customer
17–10 Pricing Business Loans
The Cost-Plus Loan Pricing Method
The Price Leadership Model
Below-Prime Market Pricing
Customer Profitability Analysis (CPA)
Summary
Key Terms
Problems and Projects
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 17
Internet Exercises
S&P Market Insight Challenge
Selected References
18 Consumer Loans, Credit Cards, and Real Estate Lending
Key Topics in This Chapter
18–1 Introduction
18–2 Types of Loans Granted to Individuals and Families
Residential Loans
Nonresidential Loans
Credit Card Loans and Revolving Credit
New Credit Card Regulations
Debit Cards: A Partial Substitute for Credit Cards?
Rapid Consumer Loan Growth: Rising Debt-to-Income Ratios
18–3 Characteristics of Consumer Loans
18–4 Evaluating a Consumer Loan Application
18–5 Example of a Consumer Loan Application
18–6 Credit Scoring Consumer Loan Applications
The FICO Scoring System
18–7 Laws and Regulations Applying to Consumer Loans
Customer Disclosure Requirements
Outlawing Credit Discrimination
Predatory Lending and Subprime Loans
18–8 Real Estate Loans
Differences between Real Estate Loans and Other Loans
Factors in Evaluating Applications for Real Estate Loans
Home Equity Lending
The Most Controversial of Home Mortgage Loans: Interest-Only and Adjustable Mortgages and the Recent Mortgage Crisis
18–9 A New Federal Bankruptcy Code as Bankruptcy Filings Soar
18–10 Pricing Consumer and Real Estate Loans: Determining the Rate of Interest and Other Loan Terms
The Interest Rate Attached to Nonresidential Consumer Loans
Interest Rates on Home Mortgage Loans
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 18
Selected References
PART SEVEN MANAGING THE FUTURE IN A GLOBAL MARKETPLACE
19 Acquisitions and Mergers in Financial- Services Management
Key Topics in This Chapter
19–1 Introduction
19–2 Mergers on the Rise
19–3 The Motives behind the Rapid Growth of Financial-Service Mergers
19–4 Selecting a Suitable Merger Partner
19–5 The Merger and Acquisition Route to Growth
19–6 Methods of Consummating Merger Transactions
19–7 Regulatory Rules for Bank Mergers in the United States
Justice Department Guidelines
The Merger Decision-Making Process by U.S. Federal Regulators
19–8 Merger Rules in Europe and Asia
19–9 Making a Success of a Merger
19–10 Research Findings on the Impact of Financial- Service Mergers
The Financial and Economic Impact of Acquisitions and Mergers
Public Benefits from Mergers and Acquisitions
Summary
Key Terms
Problems and Projects
Internet Exercises
S&P Market Insight Challenge
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 19
Selected References
20 International Banking and the Future of Banking and Financial Services
Key Topics in This Chapter
20–1 Introduction
20–2 Types of International Banking Organizations
20–3 Regulation of International Banking
Goals of International Banking Regulation
U.S. Banks’ Activities Abroad
Expansion and Regulation of Foreign Bank Activity in the United States
New Capital Regulations for Major Banks Worldwide
20–4 Services Supplied by Banks in International Markets
Making Foreign Currencies Available to Customers
Hedging against Foreign Currency Risk Exposure
Other Tools for Reducing Currency Risk
Supplying Customers with Short- and Long-Term Credit or Credit Guarantees
Supplying Payments and Thrift (Savings) Instruments to International Customers
Underwriting Customer Note and Bond Issues in the Eurobond Market
Protecting Customers against Interest Rate Risk
Helping Customers Market Their Products through Export Trading Companies
20–5 Challenges for International Banks in Foreign Markets
Growing Customer Use of Securities Markets to Raise Funds in a More Volatile and Risky World
Developing Better Methods for Assessing Risk in International Lending
Adjusting to New Market Opportunities Created by Deregulation and New International Agreements
20–6 The Future of Banking and Financial Services
Summary
Key Terms
Problems and Projects
Real Numbers for Real Banks: Continuing Case Assignment for Chapter 20
Internet Exercises
S&P Market Insight Challenge
Selected References
Dictionary of Banking and Financial-Service Terms
Index