im01 - Chapter 1 Fundamental Forces of Change in Banking...

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Chapter 1 Fundamental Forces of Change in Banking Chapter Objectives 1. Examine how recent competitive trends affect the banking industry. 2. Demonstrate how the forces of change (deregulation and reregulation, financial innovation, securitization, globalization, and technological advances) reflect increased competition and have lead to industry consolidation, increased diversification of products and services, higher capital requirements, and entry into banking by nonbank firms, such as, investment banks, insurance companies, finance companies, and others. 3. Describe the activities of non-bank financial institutions, such as investment banks and captive automobile finance companies. 4. Introduce the structure and activities of GE Capital Services as a non-bank financial conglomerate. Key Concepts 1. Competition in banking is evidenced by five fundamental forces of change that transform the structure and operation of financial institutions and markets: a. deregulation and reregulation b. financial innovation c. securitization d. globalization e. technological advances 2. Increased competition brought about by deregulation has induced banks to take on greater portfolio risks in search of acceptable returns. Many banks have moved to nontraditional banking services to earn fees that can offset the volatility in earnings from traditional loans and better help grow earnings. Increased competition has also induced traditional nonbank firms to enter traditional banking businesses. 3. Since the 1980s deregulation efforts have removed interest rate ceilings on allowable rates paid depositors and charged on certain loans and also expanded the range of products and services that banks can offer. Interstate banking and branching restrictions have similarly been eliminated. 4. In response to regulation, financial institutions create new financial instruments and financial markets, and restructure the means by which they deliver products to consumers. This financial innovation enables them to circumvent restrictions and continue growth. 5. Securitization is the process of converting assets into marketable securities. It enables banks to move assets off-balance sheet and increase fee income. It increases competition for the types of standardized products, such as mortgages and other credit-scored loans, and eventually lowers the prices paid by consumers by increasing the supply and liquidity of these products. Given the problems of Enron, and Citicorp’s and J.P. Morgan’s efforts to make Enron’s financial statements appear less risky, analysts now focus carefully on which parties bear risk in securitization agreements. 6. Financial markets and institutions are becoming increasingly global in scope. Firms must recognize that businesses in other countries as well as their own are competitors, and that international events affect domestic operations. 7. Banks' traditional loan operations have been seriously undermined by the development of the commercial paper and
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im01 - Chapter 1 Fundamental Forces of Change in Banking...

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