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CHAPTER 4CREATING AND MANAGING SERVICE OUTLETS:NEW CHARTERS, BRANCHES, AND ELECTRONIC FACILITIESGoal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities.Key Topics in This Chapter•Chartering New Financial Service Institutions•Performance of New Banks•Establishing Full Service Branches•In-Store Branching•Establishing Limited Service Facilities•ATMs and Telephone Centers•The Internet and Online BankingChapter OutlineI. IntroductionA. The Importance of Convenience and Timely Access to CustomersB. Service Options Available Today1. Chartering New (De Novo) Financial Institutions2. Establishing New Full-Service Branches3. Setting Up Limited-Service FacilitiesII.Chartering a New Bank or Other Financial Service InstitutionsIII.The Bank Chartering Process in the United StatesA. The Chartering Authorities in the U.S.B. Benefits of Applying for a National CharterC. Benefits of Applying for a State CharterIV. Questions Regulators Usually Ask the Organizers of a New BankV. Factors Weighing on the Decision to Seek a New Bank CharterA. External Factors1. Level of Economic Activity2. Growth of Local Economic Activity3. The Need for a New Bank4. Strength and Character of Local Competition in Supplying FinancialServicesB. Internal Factors1. Qualifications and Contacts of the Organizers2. Management Quality3. Pledging of Capital and Funds to Cover the Cost of Filing a CharterApplication and Getting UnderwayVI. Volume and Characteristics of New Bank ChartersA. Numbers of New ChartersB. Characteristics of New Charter MarketsVII. How Well Do New Banks PerformA. New Bank Financial PerformanceB. Pro-Competitive Effects on Service Offerings and Service PricingVIII. Establishing Full-Service Branch Offices: Choosing Locations and Designing New BranchesA. Advantages of Full-Service BranchesB. Trends in the Design of New BranchesC. Desirable Sites for New BranchesD. Expected Rate of ReturnE. Geographic DiversificationF. Branch RegulationG. The Changing Role of BranchesH. In-Store BranchingIX. Establishing and Monitoring Automated Limited-Service FacilitiesX. Point-of-Sale TerminalsXI. Automated Tellers (ATMs)A. History of ATMsB. ATM ServicesC. Fee Structures for ATM UsageD. Customer Service Limitations of ATMsE. Example of the ATM Capital-Budgeting DecisionXII. Home and Office Online BankingA. Telephone Banking and Call CentersB. Internet Banking1. Services Provided Through the Internet2. Challenges in Providing Internet Services3. The Net and Customer Privacy and SecurityXIII. Financial Service Facilities of the FutureXIV. Summary of the ChapterConcept Checks4-1. Why is the physical presence of a bank still important to many bank customers despite recent advances in long-distance communications technologyMany customers still prefer the personal attention and personal service that contact with bank employees provides. Moreover, for those services where problems can arise that require detailed information and explanation-for example, when a checking account is overdrawn and checks begin to bounce-the customer needs quick access and, often, the personal attention to his or her problem on the part of one or more employees.4-2. Why is the creation (chartering) of new banks closely regulated What about nonblank financial firmsThe creation of new banks is regulated to insure the safety and soundness of existing banks and to avoid excessive numbers of bank failures. The same arguments are usually made for non-bank financial firms. Financial-Service fi rms hold the public’s savings, are the heart of the payment system and create money. The failure of these firms could disrupt the economy and too many could mean in excessive growth in the money supply and inflation.4-3. What do you see as the principal benefits and costs of government regulation of the number of financial service charters issuedWhile control over the entry of new banks may reduce the number of failures, it also limits competition, so that the public may receive a smaller volume or lower quality of services at excessive prices.4-4. Who charters new banks in the United States New thrift institutionsNew banks are chartered by the banking commissions of the individual states or, at the federal level, by the Comptroller of the Currency. Thrift institutions are chartered by the states or at the federal level by the Office of Thrift Supervision.4-5. What key role does the FDIC play in the chartering processThe FDIC exercises some control over state bank charter activity as well as federal charters because most states insist that their new banks qualify for federal deposit insurance before they can open for business.4-6. What are the advantages of having a national bank charter A state bank charterThe benefits of a national charter are:a.)It brings prestige due to stricter regulations and may help attract more customersb.)In times of trouble the technical assistance given may be better ensuring a betterchance of long run survivalThe benefits of a state charter are:a.)It may be easier and less costly to get a state charterb.)The bank does not have to join the Federal Reserve and therefore avoids buying andholding low yield stock of the Federal Reservec.)Many states let a bank lend more to one borrowerd.)State chartered banks may be able to make types of loans that a nationally charteredbank cannot4-7. What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter Why might this required information be importantThe Comptroller of the Currency asks for information on the number of competing banks and bank-like institutions in the service area of the proposed bank. More competitive market situations limit the profit potential and perhaps the growth potential of a new bank. Also requested is information about shopping centers, retail and wholesale business activity, recent population growth, traffic counts, and personal income levels - all viewed as indicators of potential demand for banking services in the service area of the proposed new bank. Applicants must also provide background information on the organizers and proposed management of a new bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to manage the public's funds as well as their own.4-8. Why do you think the organizers of a new financial firm are usually expected to put together and submit to the chartering authority a detailed business plan, including marketing, management, and financial componentsThis demonstrates to regulators that the organizers of the bank have the expertise, experience and skills necessary to be successful in managing the new bank. If the organizers of a bank do not know where they are going, they are unlikely to be successful. In addition, it demonstrates whether the organizers of the new bank have a realistic picture of the community they are planning on serving and whether the organizers have a realistic view of the profit potential in the new bank. 4-9. What are the key factors the organizers of a new financial firm should consider before deciding to seek a charterWhile a variety of factors are examined by different business people interested in establishing a new bank, most look at some or all of the following factors.1. External Factorsa. The level of local economic activity.b. Growth of local economic activity.c. The need for a new bank.d. The strength and character of local competition in supplying financialservices.2. Internal Factorsa. Qualifications and contacts of the new bank's organizers.b. Management quality.c. Pledging of capital and funds to cover the cost of filing a charter applicationand begin operations.4-10. Where are most new banks chartered in the United StatesNew charters tend to be concentrated in large urban areas where expected rates of return on the organizers investments are likely to be the highest. As the population increases relative to the number of financial firms, the number of new charters increases. The success of local banksalready in the area suggests that new financial firms would also be successful. Places where the concentration ratio for new banks has increased tend to have fewer new bank charters.4-11. How well do most new banks perform for the public and for their ownersMost new banks succeed, especially those whose organizers can bring in new deposits and loan accounts during the first year of the bank's operation. Most are profitable within two to three years of opening. There is some evidence that newly charted banks are financially ‘fragile’ and more prone to failure than existing banks. They appear to be more vulnerable to real estate crises than established banks. New banks tend to under perform their competitors until they have been around for a while and new banks are more closely supervised than established banks.4-12. Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial servicesThe chartering of a new financing corporation is normally a lengthy and expensive process, requiring the completion of elaborate federal or state application forms, while the branch application process is normally far simpler and less costly. Moreover, with the increase in the number of failures in recent years regulatory-imposed capital requirements for new charters have increased substantially, while new branch offices usually carry significantly lower capital requirements. Moreover, branch offices themselves are often much less elaborate and costly to build and maintain than are the headquarters' facility of a new institution where some duplicate facilities can be eliminated (for example, checking processing, credit analysis, and records departments).4-13. What factors are often considered in evaluating possible sites for new branch offices Bankers first need to decide the goals and objectives of a new facility. Often this means assessing whether the proposed new branch is aimed at selling one or more particular services, such as deposits or loans, and also deciding how closely correlated cash flows and returns from the new branch office may be with cash flows and returns from the other facilities operated by the bank. If returns or cash flows through the proposed new institution are negatively correlated or display low positive correlation with the institution's other facilities, they may be able to lower the variance of its returns or cash flows by proceeding to establish the new office.Other considerations revolve around the economic strength of the proposed branch officesite-whether there is adequate traffic volume, large numbers of stores and shops, older or younger age populations who often require slightly different menus of services, recent area population growth, density and income, the occupational and residential makeup of the proposed new branch area, a large enough population to generate enough customers to breakeven and the number and size of facilities operated by competitors. Generally, for branches designed to attract and hold deposits key factors to consider usually revolve around individual and family incomes, concentrations of retail stores and shops, older-than-average residents, and homeowners rather than renters. For branch facilities emphasizing credit services residential areas with substantial new construction activity, heavy traffic flow, and high concentrations of stores and shopping centers are typically desirable for consumer and retail loan demand, while central city office locations are often chosen as locations for commercial loan facilities.4-14. What changes are occurring in the design of, and the roles played by, branch offices Please explain why these changes are occurring.Bank branches are increasingly becoming selling platforms in which more and more fee-based services are attractively and prominently advertised in order to maximize the fee-income generating potential of each branch. Moreover, branches are becoming increasingly automated to reduce personnel and other operating costs and improve speed, efficiency, and accuracy in handling a growing service volume. Branch design has come to reflect these trends with automated facilities placed at easy access points, along with information booths to speedily direct customers to the service areas they need. Human tellers may be placed deeper inside branch facilities so that customers must pass by other service departments and conspicuous advertising in order to encourage customers to become aware of and avail themselves of other bank services.4-15. What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches What advantages and what problems can the closing of a branch office createThe opening of new branch offices must be approved by a bank's or thrift’s principal feder al or state supervisor. Closing a branch office has become much more complicated in recent years as the result of several new laws and regulations. For example, the FDIC Improvement Act requires 90 days advance notice of branch closings to both customers and the principal supervisory agency and a posting on the branch site at least 30 days prior to closing. Banks and thrifts must also make an "affirmative effort" to reach all segments of their communities without discrimination under the terms of the Community Reinvestment Act which raises the danger of customer protests against closings if it appears the bank is under-serving certain groups of customers. Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S. banks and thrifts from branching expansion when they have a poor record of serving all segments of their communities. Closing selected branch offices can reduce operating costs and divert resources from less profitable to more profitable uses. However, they risk alienating good customer relationships unless it can serve those same customers with its remaining facilities.4-16. What new and innovative sites have been selected for new branch offices in recent years Why have these sites been chosen by financial firms Do you have any ideas about other sites that you believe should be consideredRapid increases in new branches located in grocery stores, shopping centers, and inside other businesses and facilities where the public frequently gathers have helped to reduce branch construction costs and promote cross-selling of goods and financial services. Other branches have been opened in apartment complexes, senior citizen centers, and other customer-convenient locations as bankers come to realize they must adjust their service locations and service hours to conform to customer needs in an intensely competitive financial-services environment.4-17. What are POS terminals and where are they usually locatedPoint-of-sale terminals are set up to accommodate customer purchases of goods and services. These computer terminals normally are located in retail stores, gasoline stations, and similar places with a link to the banks’ own computer records. When a customer of the bank makes a purchase, the amount of the transaction is deducted from the customer's deposit account and added to the store's account. Because the customer immediately loses funds many bank customers have been hesitant to use the service as opposed to paying by check or credit card where payment is delayed for a few days. However, this depends on whether the POS terminal is an offline or online terminal. An offline terminal accumulates all transactions until the end of the day when all transactions are subtracted from a customer’s account. This type of terminal is les s costly for the bank to operate. An online terminal subtracts the transactions immediately from the customer’s account and reduces the chance of an overdraft occurring but is more expensive for the bank to operate. Consumer reluctance to use POS terminals appears to be fading and as fees for other services rise this reluctance will continue to disappear.4-18. What services do ATMs provide What are the principal limitations of ATMs as a service provider Should ATM carry fees WhyThe earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and verifying checking account balances, often at hours when the full-service branch offices were closed. Today, ATMs frequently provide a wide menu of old and new services, including bill paying, transfer of funds between accounts, and the purchase of tickets for travel and entertainment. Most authorities expect ATM usage to grow rapidly as these machines offer more services and as bankers increasingly move to restrict customer access to more costly human tellers and other bank personnel, often by charging extra fees for personal service.ATMs do have some significant limitations that bankers will have to work to overcome. They break down and need to be replaced, sometimes quite frequently and annoyingly for customers, and as technology changes often become quickly outdated. Customer activity around ATMs, particularly at night, has invited criminals to steal money and injure customers, sometimes creating liability for banks. Moreover, not all customers make use of these facilities due to a preference for personalized service, fear of crime, or unfamiliarity with how the machines work. Customer education and better service pricing are two important tools that could help with these problem areas in the future. In addition, ATMs do not rank high in their ability to sell peripheral services. Some banks have found that there has been a sharp decline in their ability to sell other services. Finally, ATMs are not necessarily profitable for all banks. Because they are available 24 hours, some customers may make more frequent and smaller withdrawals from the machine than they would with a human teller, driving up the costs. In addition, these same customers will often still demand a human teller to deposit their pay check, making the bank keep both tellers and ATM machines.Whether ATM should carry a fee is rather controversial. Recently, two of the largest ATM networks have decided to let owners of ATMs charge non-customers a surcharge. Several regional have begun to charge fees as well. These fees reflect the usage of ATMs. About 85% of all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming deposits. In addition, in many places, ATM usage has declined as customers pass over ATMs in favor of credit and debit cards, onsite terminals and the internet.4-19. What are self-service terminals and what advantages do they have for financial institutions and their customersSelf-service terminals include ATMs and other computer-based limited-service facilities that permit a customer to call up information about his or her account and recent transactions with the institution or information about different services that the customer might be interested in purchasing. Many are accessible 24 hours a day or are easier to get to rather than wait for the help of personnel. They can save on resources by saving on staff time. Many institutions are adding telephones and video screens so that customers with problems can dial up an employee day or night with problems. This is also saving money because they can avoid duplication of staff at each branch.4-20. What financial services are currently available from banks on the internet What problems have been encountered in trying to offer internet servicesCustomers can make payments, check on account balances, move funds between accounts and get applications for loans, deposits and other services. In addition banks can advertise on the web. Some of the problems include pro tecting customers’ privacy and heading off crime. In addition, the web does not make it easy for a bank to get to know their customers personally. The cost may also be prohibitive to some customers.4-21. How can financial firms better promote internet servicesThey need to emphasize the safety of their internet services. They need to promote their home page at every opportunity and update it frequently to keep customers’ interest. They need to survey customers about their satisfaction with the services and encourage dialogue via e-mail to resolve problems. They can also provide programs to download to act as screen savers (and advertisements) and also information about the institution and the services it provides. Problems4-1. A group of businessmen and women from the town of Mathews are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $ million to build along with another $700,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $510,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 6 percent annually after the first year, while expenses will grow an estimated 5 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimatesYear Revenues Op Expense Net Profits1 $510,000 $180,000 $330,0002 $540,600 $189,000 $351,6003 $573,036 $198,450 $374,5864 $607,418 $208,373 $399,0465 $643,863 $218,791 $425,0726 $682,495 $229,731 $452,7647 $723,445 $241,217 $482,2288 $766,851 $253,278 $513,5739 $812,863 $265,942 $546,92110 $861,634 $279,239 $582,39511 $913,332 $293,201 $620,13112 $968,132 $307,861 $660,27113 $1,026,220 $323,254 $702,96614 $1,087,793 $339,417 $748,37715 $1,153,061 $356,388 $796,67316 $1,222,245 $374,207 $848,03817 $1,295,579 $392,917 $902,66218 $1,373,314 $412,563 $960,75119 $1,455,713 $433,191 $1,022,52220 $1,543,056 $454,851 $1,088,205Initial Investment $3,900,000Required Rate of ReturnPresent Value of Future CashFlows $4,491,642Net Present Value of Investment $591,642Given the above information, the organizers are likely to proceed given that the net present value of this investment is positive. The return they are going to earn is greater than the 10% they need to earn.4-2. Andover Savings Bank is considering the establishment of a new branch office at the corner of Lafayette and Connecticut Avenues. The savings association’s Economics Department projects annual operating revenues of $ million from services sold to generate fee income and annual branching operating expenses of $880,000. The cost of procuring the property is $ million and branch construction will total an estimated $ million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Andover likely proceed with this branch office projectYear Revenues Op Expenses Net Profits1 $1,750,000 $880,000 $870,0002 $1,750,000 $880,000 $870,0003 $1,750,000 $880,000 $870,0004 $1,750,000 $880,000 $870,0005 $1,750,000 $880,000 $870,0006 $1,750,000 $880,000 $870,0007 $1,750,000 $880,000 $870,0008 $1,750,000 $880,000 $870,0009 $1,750,000 $880,000 $870,00010 $1,750,000 $880,000 $870,00011 $1,750,000 $880,000 $870,00012 $1,750,000 $880,000 $870,00013 $1,750,000 $880,000 $870,00014 $1,750,000 $880,000 $870,00015 $1,750,000 $880,000 $870,00016 $1,750,000 $880,000 $870,000Initial Investment $4,820,000Required Rate of ReturnPresent Value of Future CashFlows $6,067,368Net Present Value of Investment $1,247,368Andover is likely to proceed with this project because the net present value is positive. This means that the interest rate that Andover will earn on this project is higher than the 12% they need to earn. 4-3. Jackson Bank of Commerce estimates that building a new branch office in the newly developed Guidar residential township will yield an annual expected return of 13 percent with an estimated standard deviation of 5 percent. The bank’s marketing department estimates that cash flows from the proposed Guidar branch will be mildly correlated (with a correlation coefficient of + with the bank’s other sources of cash flow. The expected annual return from the bank's existing facilities and other assets is 10 percent with a standard deviation of 3 percent. The branch will represent just 10 percent of Jackson’s total assets. Will the proposed branch increase Sullivan's overall rate of return Its overall riskThe estimated total rate of return would be:E (R) = (13%) + (10%) = %The risk attached to this overall return rate would be:Thus % and the branch will slightly increase the bank's expected return but slightly decrease its overall risk. The bank should proceed with this project.4-4. The following statistics and estimates were compiled by First Savings Bank of Talbot regarding a proposed new branch office and the bank itself:Branch Office Expected Return 16%Standard Deviation of Return = 7%Ban k’s overall expected return= 10%Standard deviation of bank’s return= 3%Branch Asset Value as a Percentof Total Bank Assets = 15%Correlation of Cash Flows = +What will happen to the Talbot’s total expected return and overall risk if the proposed new branch is adoptedThe bank's total expected return is:E (R) = (16%) + (10%) = %The bank's risk exposure is:σ=And thus .0301 or 3.01%The proposed project raises the savings banks expected return slightly and does not affect the risk of the bank. This is a good project.4-5. First National Bank of Yukon is considering installing 3 ATMs in its westside branch. The new machines are expected to cost $48,000 apiece. Installation costs will amount to about $16,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the westside district these three machines are expected to handle 180,000 transactions per year. On average, each cash transaction is expected to save $ per transaction in check processing costs. If First National has a 12% cost of capital, should the bank proceed with this investment project Year Savings1 $57,600 (.32*180,000)2 $57,6003 $57,6004 $57,6005 $57,6006 $57,6007 $57,6008 $57,6009 $57,60010 $57,600Initial Investment 192000 (48,000*3+16,000*3)Required Rate of ReturnPresent Value of Future CashFlows $325,Net Present Value $133,The net present value of this project is positive. First National Bank of Yukon should add the ATM machines to the Westside.4-6. First State Security Bank is planning to set up its own web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring household bills, verification of account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own web page and Internet service menu How can the bank effectively differentiate itself from other banks currently present on the Internet How might the bank be able to involve its own customers in designing its web site and pricing its Internet service packageThe bank should remember that while the internet is a relatively low cost way of expanding and allows customers to find the bank rather than the bank having to find customers, there are serious concerns about privacy. In addition, the Internet is not limited by geography and while there are thousands of potential customers, there are also many financial institutions around the world competing for customer deposits and loans. The bank needs to be aware that there are many bank web pages out there and that they will need to invest in employees with the technical expertise to manage the new web site well. One of the first things the bank needs to do is to take steps to protect its customers and let its customers know what its privacy and security policies are. Another step the bank can take is to start with a customer survey to find out what its customers want and need from the bank’s Internet services. They can run this as a contest and give awa y some small items to the customer with the best ideas for the web page and Internet service. This should help get customers involved in the design and implementation of the web page and may help the bank start building an online customer base.。
Chapter 2The Impact of Government Policy and Regulation on the Financial-Services IndustryFill in the Blank Questions1. The _____________________ was created as part of the Glass Steagall Act. In the beginning itinsured deposits up to $2,500.Answer: FDIC2. The________________________ is the law that states that a bank must get approved from theirregulatory body in order to combine with another bank.Answer: Bank Merger Act3. One tool that the Federal Reserve uses to control the money supply is _________________ . TheFederal Reserve will buy and sell T-bills when they are using this tool of monetary policy.Answer: open market operations4. The__________________________ was created in 1913 in response to a series of economicdepressions and failures. Its principal role is to serve as the lender of last resort and to stabilize the financial markets.Answer: Federal Reserve5. The __________________________ prevented banks from crossing state lines and made nationalbanks subject to the branching laws of their state. This act was later repealed by the Riegle Neal Interstate Banking law.Answer: McFadden-Pepper Act6. Because the FDIC levies fixed insurance premiums regardless of risk, this leads to a problem calledthe ____________________ among banks. The fixed premiums encourage all banks to accept greater risk.Answer: moral hazard7. In 1980, __________________________ was passed and lifted government ceilings on depositinterest rates in favor of free market interest rates.Answer: DIDMCA8. One tool that the Federal Reserve uses to control the money supply is _________________. TheFederal Reserve will change the interest rate they charge for short term loans when they are using this tool of monetary policy.Answer: changing the discount rate9. The first major federal banking law in the U.S. was the __________________________. This lawwas passed during the Civil War and set up a system for chartering national banks and created the OCC.Answer: National Banking Act10. The_________________________ was passed during the Great Depression. It separatedinvestment and commercial banks and created the FDIC.Answer: Glass-Steagall Act11. The__________________________ brought bank holding companies under the jurisdiction of theFederal Reserve.Answer: Bank Holding Company Act12. The__________________________ allows bank holding companies to acquire banks anywhere inthe United States. However, no one bank can control more than 30 percent of the deposits in any one state or more than 10 percent of the deposits across the country.Answer: Riegle-Neal Interstate Banking Act13. The allows banks to affiliate with insurance companies and securitiesfirms either through a holding company or as a subsidiary.Answer: Gramm-Leach-Bliley Act (Financial Services Modernization Act)14. Customers of financial-service companies may _____________________ of having their privateinformation shared with a third party such as a telemarketer. However, in order to do this they must tell the financial-services company in writing that they do not want their personal informationshared with outside parties.Answer: opt out15. The federal bank regulatory agency which examines the most banks is the ______________.Answer: FDIC16. The _________________ requires financial service companies to report suspicious activity incustomer accounts to the Treasury Department.Answer: U.S. Patriot Act17. The central bank of the new European Union is known as the _______________________.Answer: European Central Bank or ECB18. The _____________________ Act prohibits banks and other publicly owned firms frompublishing false or misleading financial performance information.Answer: Sarbanes-Oxley19.One of the main roles of the Federal Reserve today is . They have three tools thatthey use today to carry out this role; open market operations, the discount rate and legal reserverequirements.Answer: monetary policy20.The is the center of authority and decision making within the FederalReserve. It consists of seven members appointed by the president for terms not exceeding 14 years.Answer: Board of Governors21.The main regulators of insurance companies are .Answer: state insurance commissions22.Federal Credit Unions are regulated and examined by .Answer: the National Credit Union Administration.23.The makes it easier for victims of identity theft to file fraud alertsand allows the public to apply for a free credit report once a year.Answer: Fair and Accurate Credit Transactions Act (FACT Act)24.The makes it faster and less costly for banks to clear checks. Itallows for banks to electronically send check images instead of shipping paper checks across thecountry.Answer: Check 21 Act25.The was created by the National Banking Act and is part of theTreasury Department. It is the primary regulator of National Banks.Answer: Office of the Comptroller of the Currency (OCC)26.The _________________________ proposes various regulations applying to the financial markets-out” bill granted the US Treasury the means to to combat the recent credit crisis. This “bailpurchase troubled loans, allowed the FDIC to temporarily increase deposit insurance, andpermitted the government to inject additional capital into the banking system.Answer: The Emergency Economic Stabilization Act of 2008True/False QuestionsT F 27. Federal Reserve Act authorized the creation of the Federal Deposit Insurance Corporation.Answer: FalseT F 28. In the United States, fixed fees charged for deposit insurance, regardless of how risky a bank is, led to a problem known as moral hazard.Answer: TrueT F 28. Government-sponsored deposit insurance typically encourages individual depositors to monitor their banks' behavior in accepting risk.Answer: FalseT F 29. The Federal Reserve changes reserve requirements frequently because the affect of these changes is so small.Answer: FalseT F 30. The Bank Merger Act and its amendments requires that Bank Holding Companies be under the jurisdiction of the Federal Reserve.Answer: FalseT F 31. National banks cannot merge without the prior approval of the Comptroller of the Currency.Answer: TrueT F 32. The Truth in Lending (or Consumer Credit Protection) Act was passed by the U.S.Congress to outlaw discrimination in providing bank services to the public.Answer: FalseT F 33. The federal law that states individuals and families cannot be denied a loan merely because of their age, sex, race, national origin or religious affiliation is known as the CompetitiveEquality in Banking Act.Answer: FalseT F 34. Under the terms of the 1994 Riegle-Neal Interstate Banking law bank holding companies can acquire a bank anywhere inside the United States, subject to Federal Reserve Boardapproval.Answer: TrueT F 35. The 1994 federal interstate banking bill does not limit the percentage of statewide or nationwide deposits that an interstate banking firm is allowed to control.Answer: FalseT F 36. The term "regulatory dialectic" refers to the dual system of banking regulation in the United States and selected other countries where both the federal or central governmentand local governments regulate banks.Answer: FalseT F 37. The moral hazard problem of banks is caused by the fixed insurance premiums paid by banks and causes banks to accept greater risk.Answer: TrueT F 38. When the Federal Reserve buys T-bills through its open market operations, it causes the growth of bank deposits and loans to decrease.Answer: FalseT F 39. When the Federal Reserve increases the discount rate it generally causes other interest rates to decrease.Answer: FalseT F 40. The National Bank Act (1863) created the Federal Reserve which acts as the lender of last resort.Answer: FalseT F 41. FIRREA (1989) allowed bank holding companies to acquire nonblank depository institutions and, if desired, convert them into branch offices.Answer: TrueT F 42. The Sarbanes-Oxley Act allows banks, insurance companies, and securities firms to form Financial Holding Companies (FHCs).Answer: FalseT F 43. The Gramm-Leach-Bliley Act of 1999 essentially repeals the Glass-Steagall Act passed in the 1930s.Answer: TrueT F 44. Passed in 1977, the Equal Credit Opportunity Act prohibits banks from discriminating against customers merely on the basis of the neighborhood in which they live.Answer: FalseT F 45. The tool used by the Federal Reserve System to influence the economy and behavior ofbanks is known as moral hazard.Answer: FalseT F 46. One of the principal reasons for government regulation of financial firms is to protect the safety and soundness of the financial system.Answer: TrueMultiple Choice Questions47.Banks are regulated for which of the reasons listed below?A) Banks are leading repositories of the public's savings.B) Banks have the power to create money.C) Banks provide businesses and individuals with loans that support consumption and investmentspending.D) Banks assist governments in conducting economic policy, collecting taxes and dispensinggovernment payments.E) All of the above.Answer: E48.An institutional arrangement in which federal and state authorities both have significant bankregulatory powers is referred to as:A) Balance of PowerB) FederalismC) Dual Banking SystemD) Cooperative RegulationE) Coordinated ControlAnswer: C49.The law that set up the federal banking system and provided for the chartering of national bankswas the:A) National Bank ActB) McFadden-Pepper ActC) Glass-Steagall ActD) Bank Merger ActE) Federal Reserve ActAnswer: A50.The federal law that prohibited federally supervised commercial banks from offering investmentbanking services on privately issued securities is known as:A) The Glass-Steagall ActB) The Bank Merger ActC) The Depository Institutions Deregulation and Monetary Control ActD) The Federal Reserve ActE) None of the AboveAnswer: A51.The Gramm-Leach-Bliley Act (Financial Services Modernization Act) calls for linkinggovernment supervision of the financial-services firm to the types of activities that the firmundertakes. For example the insurance portion of the firm would be regulated by state insurance commissions and the banking portion of the firm would be regulated by banking regulators. This approach to government supervision of financial services is known as:A) Consolidated regulation and supervision.B) Functional regulation.C) Services oversight.D) Umbrella supervision and regulation.E) None of the above.Answer: B52.The Federal Reserve policy tool under which the Fed attempts to bring psychological pressure tobear on individuals and institutions to conform to the Fed's policies, using letters, phone calls,and speeches, is known as:A) Margin requirementsB) Moral suasionC) Discount window supervisionD) Conference and compromiseE) None of the above.Answer: B53.The 1994 law that allowed bank holding companies to acquire banks anywhere in the U.S. is:A) The Glass-Steagall ActB) The Federal Deposit Insurance Corporation Improvement ActC) The National Bank ActD) The Riegle-Neal Interstate Banking and Branching Efficiency Act.E) None of the above.Answer: D54.The federal law that allowed the Federal Reserve to set margin requirements is:A) The National Banking Act.B) The McFadden-Pepper Act.C) The Glass Steagall Act.D) The Federal Reserve Act.E) None of the above.Answer: C55.Of the principal reasons for regulating banks, what was the primary purpose of the NationalBanking Act (1863)?A) Protection of the public's savingsB) Control of the money supplyC) Providing support for government activitiesD) Maintaining confidence in the banking systemE) Preventing banks from realizing monopoly powers56.Of the principal reasons for regulating banks, what was the primary purpose of the Federal ReserveAct of 1913?A) Protection of the public's savingsB) Control of the money supplyC) Preventing banks from realizing monopoly powersD) Ensuring an adequate and fair supply of loansE) None of the above.Answer: B57.The law that allows lifted government deposit interest ceilings and allowed them to pay acompetitive interest rate is:A) The National Banking Act.B) The Glass Steagall Act.C) The Bank Merger Act.D) DIDMCAE) None of the above.Answer: D58.The law that allows banks to affiliate with insurance companies and security brokerage firms toform financial services conglomerates isA) The National Banking ActB) The Glass Steagall ActC) The Garn St. Germain ActD) The Riegle Neal Interstate Banking ActE) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: E59.Of the principal reasons for regulating banks, what was the primary purpose of the Truth inLending Law?A) Protection of the public's savingsB) Control of the money supplyC) Preventing banks from realizing monopoly powersD) Ensuring an adequate and fair supply of loansE) None of the above.Answer: D60.Which of the following is an unresolved issue in the new century?A) What should be done about the regulatory safety net set up to protect small depositors?B) If financial institutions are allowed to take on more risk, how can taxpayers be protected frompaying the bill when more institutions fail?C) Does functional regulation actually work?D) Should regulators allow the mixing of banking and commerce?E) All of the above are unresolved issues61.The law that made bank and nonbank depository institutions more alike in the services they couldoffer and allowed banks and thrifts to more fully compete with other financial institutions is:A) The National Banking ActB) The Federal Reserve ActC) The Garn-St. Germain ActD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: C62.The law that allowed bank holding companies to acquire nonbank depository institutions andconvert them to branches is:A) The National Banking ActB) The Garn-St. Germain ActC) FIRREAD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) None of the AboveAnswer: C63.The equivalent of the Federal Reserve System in Europe is known as the:A) European UnionB) Bank of LondonC) Basle GroupD) European Central BankE) Swiss Bank CorporationAnswer: D64.The new financial organization created by Gramm-Leach-Bliley is theA) Financial Holding CompanyB) Bank Holding CompanyC) European Central BankD) Financial Service CorporationE) Financial Modernization OrganizationAnswer: A65.The act which requires financial institutions to share information about customer identities withgovernment agencies is:A) The Sarbanes-Oxley ActB) The U.S. Treasury Department ActC) The 9/11 ActD) The USA Patriot ActE) The Gramm-Leach-Bliley ActAnswer: D66.The 1977 law that prevents banks from “redlining” certain neighborhoods, refusing to serve those areas is:A) The National Banking ActB) The Garn-St. Germain ActC) FIRREAD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) Community Reinvestment Act (CRA)Answer: Emon minimum capital requirements on banks in leading industrialized nations that are basedon the riskiness of their assets is imposed by:A) The National Banking ActB) FIRREAC) The International Banking ActD) The Basel AgreementE) None of the AboveAnswer: D68.The fastest growing crime in the U.S. is:A) Financial statement misrepresentationB) Bank robberiesC) Individual privacy violationsD) Credit card fraudE) Identity theftAnswer: E69.The oldest federal bank agency is the:A) OCCB) FDICC) FRSD) FHCE) BHCAnswer: A70.The federal agency that regulates the most banks is the:A) OCCB) FDICC) FRSD) FHCE) BHCAnswer: B71.Which federal banking act requires that financial service providers establish the identity of anycustomers opening new accounts?A) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: B72.Which federal banking act prohibits publishing false or misleading information about the financialperformance of a public company and requires top corporate officers to vouch for the accuracy of their company’s financial statements?A) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: A73.Which federal banking act reduces the need for banks to transport paper checks across the country?A) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: C74.Which federal banking act forces more individuals to repay at least part of what they owe and willpush higher-income borrowers into more costly forms of bankruptcy?A) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: E75.Which federal banking act requires the Federal Trade Commission to make it easier for victims ofidentity theft to make theft reports and requires credit bureaus to help victims resolve theproblem?A) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: D76.The _________ allows adequately capitalized bank holding companies to acquire banks in anystate.A)Riegle-Neal Interstate Banking and Branching Efficiency ActB)Competitive Equality Banking Act25C)Financial Institutions Reform, Recovery and Enforcement ActD)Federal Deposit Insurance Corporation Improvement ActE)Depository Institutions Deregulation and Monetary Control ActAnswer: A77.One of the earliest theories regarding the impact of regulation on banks was developed by GeorgeStigler. He contends that:A) Firms in regulated industries actually seek out regulations because they bring monopolisticrents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulatedfirms.D) Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E) None of the aboveAnswer: A78.Samual Peltzman had an opposing view to George Stigler on the impact of regulation on banks. Hecontends that:A) Firms in regulated industries actually seek out regulations because they bring monopolisticrents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulatedfirms.D) Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E) None of the aboveAnswer: B79.There is an important debate raging today regarding whether banks should be regulated at all.George Benston contends that:A) Firms in regulated industries actually seek out regulations because they bring monopolisticrents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulatedfirms.D) Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E) None of the aboveAnswer: D80.The European Central Bank has the main goal of:A) Ensuring the economy grows at an adequate rate.B) Keeping unemployment low.C) Ensuring price stability.D) Ensuring an adequate and fair supply of loans.E) All of the aboveAnswer: C26Test Bank, Chapter 281.Which of the following has become the principal tool of central bank monetary policy today?A) Open market operationsB) Changing the discount rateC) Changing reserve requirementsD) Using moral suasionE) None of the aboveAnswer: A82.The Federal Reserve buys Treasury Bills in the open market. This will tend to:A) Cause interest rates in the market to riseB) Cause interest rates in the market to fallC) Cause reserves held at the Federal Reserve to decreaseD) Cause a decrease in the growth of deposits and loansE) All of the aboveAnswer: B83.Which federal banking act extends deposit insurance coverage on qualified retirement accountsfrom $100,000 to $250,000 and authorizes the FDIC to periodically increase deposit insurancecoverage to keep up with inflation?A) Sarbanes-Oxley ActB) The Gramm-Leach-Bliley ActC) Check 21 ActD) The FACT ActE) Federal Deposit Insurance Reform ActAnswer: E84.The Financial Services Regulatory Relief Act of 2006 does the following:A) Adds selected new service powers to depository institutionsB) Loosens regulations on depository institutionsC) Grants the Federal Reserve authority to pay interest on depository institutions’D) All of the aboveE) None of the aboveAnswer: D85.The Emergency Economic Stabilization Act passed in 2008 during the global credit crisis allowedthe following:A) An emergency sale of “bad assets”B) Temporary increase of FDIC deposit insurance to $250,000 for all depositsC) Injections of capital by the government into banks and other qualified lendersD) Closer surveillance of the mortgage market participants, such as brokers and lendersE) All of the aboveAnswer: E27。
商业银行管理ROSE7e课后答案chapter_CHAPTER 10THE INVESTMENT FUNCTION IN BANKING AND FINANCIAL SERVICES MANAGEMENTGoal of This Chapter: The purpose of this chapter is to discover the types of securities that financial institutions acquire for their investment portfolio and to explore the factors that a manager should consider in determining what securities a financial institution should buy or sell.Key Topics in This ChapterNature and Functions of InvestmentsInvestment Securities Available: Advantages and DisadvantagesMeasuring Expected ReturnsTaxes, Credit, and Interest Rate RisksLiquidity, Prepayment, and Other RisksInvestment Maturity StrategiesMaturity Management T oolsChapter OutlineI.Introduction.Th.Role.Performe.b.Investmen.Securitie.i.Ban.P ortfoliosII.Investmen.Instrument.Availabl.t.Bank.an.Othe.Financia.Fir msIII.Popula.Money-Marke.InstrumentsA.Treasur.BillsB.Short-Ter.Treasur.Note.an.BondsC.Federa.Agenc.SecuritiesD.Certificate.o.DepositE.Internationa.Eurocurrenc.DepositsF.Bankers.Acceptancesmercia.PaperH.Short-Ter.Municipa.ObligationsIV.Popula.Capita.Marke.InstrumentsA.Treasur.Note.an.BondsB.Municipa.Note.an.BondsC.Corporat.Note.an.BondsIII.Othe.Investmen.Instrument.Develope.Mor.RecentlyA.Structure.NotesB.Securitize.AssetsC.Strippe.SecuritiesIV.Investmen.Securitie.Actuall.Hel.b.BanksV.Factor.Affectin.th.Choic.o.Investmen.SecuritiesA.Expecte.Rat.o.ReturnB.Ta.Exposureernmen.Bonds2.Ban.Qualifie.Bonds3.Ta.Swappin.Tool4.Th.Portfoli.Shiftin.ToolC.Interest-Rat.RiskD.Credi.o.Defaul.RiskE.Busines.RiskF.Liquidit.RiskG.Cal.RiskH.Prepaymen.RiskI.Inflatio.RiskJ.Pledgin.RequirementsVI.Investmen.Maturit.Strategiesdde.o.Spaced-Maturit.PolicyB.Th.Front-En.Loa.Maturit.PolicyC.Th.Back-En.Loa.Maturit.PolicyD.Th.Barbel.StrategyE.Th.Rat.Expectation.ApproachVII.Maturit.Managemen.ToolsA.Th.Yiel.CurveB.DurationVIII.Summar.o.th.ChapterConcept Checks10-1.Wh.d.bank.an.institution.choos.t.devot..significan.portio.o.thei. asset.t.investmen.securities?pl emen.t.th.advantage.loan.provide.Investment.generall.hav.les.cre di.ris.tha.loans.allo.th.ban.o.thrif.institutio.t.diversif.int.differen.lo calitie.tha.mos.o.it.loan.permit.provid.additiona.liqui.reserve.i.cas .an.regulatio.t.bac .governmen.deposits.hel.t.stabiliz.ban.incom.ove.th.busines.cycle .an.ai.bank.i.reducin.thei.exposur.t.taxes.10-2.Wha.ke.role.d.investment.pla.i.th.managemen.o..ban.o.othe.de positor.institution?See answer to 10-110-3.Wha.ar.th.principa.mone.marke.an.capita.marke.instrument.ava ilabl.t.institution.today.Wha.ar.thei.mos.importan.characteristics?Bank.purchas..wid.rang.o.investmen.securities.Th.principa.m one.marke.instrument.availabl.t.bank.toda.ar.Treasur.bills.federa. agenc.securities.CD'.issue.b.othe.depositor.institutions.Eurodolla. mercia.paper.an.short-mo.characteristic.o.mos.thes.instrument.i.thei.safet.an.hig.marketability.Capita.marke.instrument. ern men.note.an.bonds.mortgage-backe.securities.an.corporat.note.an.bonds.Th.characteristic.o.th es.securitie.i.thei.lon.ru.incom.potential.10-4.Wha.type.o.investmen.securitie.d.bank.prefe.th.most.Ca.yo.exp lai.why?Commercia.bank.clearl.prefe.thes.majo.type.o.investmen.sec urities.Unite.State.Treasur.securities.federa.agenc.securities.an.st ernmen.(municipal.bond.an.notes.The.hol.smal.am ount.o.equitie.an.othe.deb.securitie.(mainl.corporat.note.an.bon ds).The.pic.thes.type.becaus.the.ar.bes.suite.t.mee.th.objective.o.. bank.investmen.portfolio.suc.a.ta.sheltering.reducin.overal.ris.ex posure..sourc.o.liquidit.an.naturall.generatin.incom.a.wel.a.divers ifyin.thei.assets.10-5.Wha.ar.securitize.assets.Wh.hav.the.grow.s.rapidl.i.recen.years?Securitize.asset.ar.loan.tha.ar.place.i..poo.and.a.th.loan.gener at.interes.an.principa.income.tha.incom.i.passe.o.t.th.holder.o.sec uritie.representin.a.interes.i.th.loa.pool.Thes.loan-backe.securitie.ar.attractiv.t.man.bank.becaus.o.thei.highe.yield.a n.frequen.federa.guarantee.(i.th.case.fo.example.o.mos.home-mortgage-backe.securities.a.wel.a.thei.relativel.hig.liquidit.an.marketability 10-6.Wha.specia.risk.d.securitize.asset.presen.t.institution.investin.i.t hem?Securitize.asset.ofte.carr.substantia.interest-rat.ris.an.prepaymen.risk.whic.arise.whe.certai.loan.i.th.securitized-asse.poo.ar.pai.of.earl.b.th.borrower.(usuall.becaus.interes.rate.ha v.falle.an.ne.loan.ca.b.substitute.fo.th.ol.loan.a.cheape.loa.rates.o. ar.defaulted.Prepaymen.ris.ca.significantl.decreas.th.value.o.secu ritie.backe.b.loan.an.chang.thei.effectiv.maturities.10-7.Wha.ar.structure.note.an.strippe.securities.Wha.unusua.feature.d.the.contain?uall.ar.package.investment.assemble.b.secu rit.dealer.tha.offe.customer.flexibl.yield.i.orde.t.protec.thei.custo mers.investment.agains.losse.du.t.inflatio.an.changin.interes.rate ernmen.o.federa.agenc.sec urities.Strippe.securitie.consis.o.eithe.principa.payment.o.interes.pa yment.fro..deb.security.Th.expecte.cas.flo.fro..Treasur.bon.o.mort gage-backe.securit.i.separate.int..strea.o.principa.payment.an..strea.o.i nteres.payments.eac.o.whic.ma.b.sol.a..separat.securit.maturin.o. th.da.th.paymen.i.due.Som.o.thes.strippe.payment.ar.highl.sensit iv.t.change.i.interes.rates.10-8.Ho.i.th.expecte.yiel.o.mos.bond.determined?Fo.mos.bonds.thi.require.th.calculatio.o.th.yiel.t.maturit.(YT M.i.th.bon.i.t.b.hel.t.maturit.o.th.planne.holdin.perio.yiel.(HPY.bet wee.poin.o.purchas.an.poin.o.sale.YT.i.th.expecte.rat.o.retur.o..bo n.hel.unti.it.maturit.dat.i.reached.base.o.th.bond'.purchas.price.p romise.interes.payments.andredemptio.valu.a.maturity.HP.i..rat.o.discoun.bringin.th.curre n.pric.o..bon.i.lin.wit.it.strea.o.expecte.cas.inflow.an.it.expecte.sal. pric.a.th.en.o.th.bank'.holdin.period.10-ernmen.bon.i.expecte.t.matur.i.tw.year.an.ha..curren.pric.o .$950.wha.i.th.bond'.YT.i.i.ha..pa.valu.o.$1,00.an..promise.coupo.r at.o.1.percent.Suppos.thi.bon.i.sol.on.yea.afte.purchas.fo..pric.o.$ 970.Wha.woul.thi.investor'.holdin.perio.yiel.be?The relevant formula is:$950 = 221Y TM) 1(1000$Y TM) (1$100 Y TM) 1(100$+++++ Using a financial calculator we get:YTM = 12.99%If the bond is sold after one year, the formula entries change to:$950 = 11Y TM) (1$970 Y TM) 1(100$+++and the YTM is:YTM = 12.63%10-10.Wha.form.o.ris.affec.investments?Th.followin.form.o.ris.affec.investments.interest-rat.risk.credi.risk.busines.risk.liquidit.risk.prepaymen.risk.cal.risk. an.inflatio.risk.Interest-rat.ris.capture.th.sensitivit.o.th.valu.o.investment.t.interest-rat.movements.whil.credi.ris.reflectsth.ris.o.defaul.o.eithe.interes.o.principa.payments.Busines.ris. refer.t.th.impac.o.credi.condition.an.th.economy.whil.liquidit.ris.f ocuse.o.th.pric.stabilit.an.marketabilit.o.investments.Prepaymen. ris.i.specifi.t.certai.type.o.investment.an.focuse.o.th.fac.tha.som.l oan.whic.th.securitie.ar.base.o.ca.b.pai.of.early.Cal.ris.refer.t.th.ear l.retiremen.o.securitie.an.inflatio.ris.refer.t.thei.possibl.los.o.purch asin.power.。
ISO15765-3（20PP）道路车辆——控制局域网络诊断——第3部分：一元化诊断服务实施（CAN的UDS）道路车辆——控制器局域网（CAN）的诊断——第3部分：一元化诊断服务实施（CAN的UDS）1范围这部分ISO15765协议按照ISO14229-1，描述了在ISO11898定义的控制器局域网中统一诊断服务（UDS）的实施。
它给所有汽车连接至CAN网络服务器及外部测试设备提供诊断服务及服务器存储器编程的需求。
它对汽车内部CAN总线架构无任何要求。
2参考的标准下述的参考文档对于该文档的应用是必不可少的。
3术语，定义和缩略词为编撰该文档目的，这些术语和定义已在ISO14229-1，ISO15765-1及ISO15765-2中给出，以下缩略词术语同样适用。
DA目标地址ID标识符DLC数据长度码GW网关LSB最低有效位MSB最高有效位NA网络地址SA源地址SM子网掩码TOS服务类型4协定该部分ISO15765协议基于ISO14229-1的协定，该协议遵从使用到诊断服务的OSI服务协议。
5统一诊断服务（UDS）对照OSI模型的应用见图16应用层及会话层6.1应用层服务该部分ISO15765协议使用ISO14229-1的客户机-服务器式的应用层服务。
该系统具有测试、检测、监视，诊断及汽车服务器在线编程的功能。
6.2应用层协议该部分ISO15765协议使用ISO14229-1应用层协议。
6.3应用层诊断会话管理定时重要——任何一个服务器端产生的<N_Result>不等于N_OK的N_USData.indication的指示服务，服务器应用层都不应该有一个应答信息。
6.3.1概况下述的是应用层及会话层的定时参数及它们如何在客户机-服务器模式中如何处理的。
图1OSI模型中，基于CAN的UDS实施下述的几种通信会话方式需区别开：a)物理的通信在如下期间1）默认会话方式2）非默认的会话方式——需进行会话处理b)功能的通信在如下期间1）默认的会话方式2）非默认的会话方式——需进行会话处理所有的情况下，请求服务器否定应答信息的扩展的定时应答，包括应答码78heG应当予以考虑。
商业银行管理第2章习题答案Chapter 2Analyzing Bank PerformanceChapter Objectives1.Introduce bank financial statements, including the basic balance sheet and income statement, and discuss the interrelationship between them.2.Provide a framework for analyzing bank performance over time and relative to peer banks. Introduce key financial ratios that can be used to evaluate profitability and the different types of risks faced by banks. Focus on the trade-off between bank profitability and risk.3.Identify performance measures that differentiate between small, independent banks (specialty banks) and larger banks that are part of multibank holding companies or financial holding companies.4. Distinguish between types of bank risk; credit, liquidity, interest rate, capital, operational, and reputational.5. Describe the nature of and meaning of regulatory CAMELS ratings for banks.6.Provide applications of data analysis to sample banks’ financial information.7.Describe performance characteristics of different-sized banks.8. Describe how banks can manipulate financial information to ‘window-dress’ performance.Key Concepts1. Bank managers must balance banking risks and returns because there is a fundamental trade-off between profitability,liquidity, asset quality, market risk and solvency. Decisions that increase banking risk must offer above average profits. The more liquid a bank is and the more equity capital used to fund operations, the less profitable is a bank, ceteris paribus.2. Banks face five basic types of risk in day-to-day operations: credit risk, liquidity risk, market risk, capital/solvency risk, and operational risk. Market risk encompasses interest rate risk, foreign exchange risk and price risk. Each type of risk refers to the potential variation in a ba nk's net income or market value of stockholders’ equity resulting from problems that affect that part of the bank's activities.3. Banks also face risks in the areas of country risk associated with loans or other activity with foreign government units and off-balance sheet activities, which create contingent liabilities. More recently, banks have focused on reputation risk. For example, from 2002-2005 Citigroup, JP Morgan Chase, and Bank of America found that even though they continued to report strong pro fits, they experienced strong criticism for 1) their roles in facilitating strategies to disguise Enron’s true financial status, 2) problems in sub-prime lending programs via the Associates Corp. and their own internal finance company activities, 3) problems with underwriting subsidiaries with analyst conflicts between stock reports and the firm’s investment banking relationships; facilitating market timing of stock trades to their detriment of their own mutual fund holders, 4) lack of supervision of trading groups, and 5) facilitating improper borrowing at Parmalat.4. A bank's return on equity (ROE) can be decomposed in terms of the duPont system of financial ratio analysis. This examination of historical balance sheet and income statementdata enables an analyst to evaluate the comparative strengths and weaknesses of performance over time and versus peer banks. The Uniform Bank Performance Report (UBPR) data reflect the basic ratios from this return on equity model.5. Different-sized commercial banks exhibit different operating characteristics and thus performance measures. Small banks typically report a higher return on assets (ROA) than large banks because they earn higher gross yields on assets and pay less interest on liabilities.6. High performance banks generally benefit from lower interest and non-interest expense and limit credit risk so that loan losses are relatively low. They also operate with above average stockholders' equity.7. Many banks can successfully "window-dress" performance by manipulating the reporting of financial data. They may accelerate revenue recognition and defer expenses or selectively alter when they take securities gains or losses and time when to charge off loans or report loans as non-performing. As such, they may inappropriately smooth earnings with provisions for loan losses or by other means. Analysts must be careful when evaluating extraordinary transactions that have one-time gain or loss features.Answers to End of Chapter Questions1. For a large bank, assets consist approximately of marketable securities (20%), loans (70%), and other assets (10%). Liabilities consist of core deposits (40%-60%), noncore, purchased liabilities (20%-40%), and other liabilities (5 %-10%) as a fraction of assets. Small banks typically obtain more funds in the form of core deposits and less in the form of noncore, purchased liabilities. Small banks often invest more in securitiesas well. Of course, the actual percentages for any bank depend on that bank’s business strategy, mark et competition, and ownership.2. A bank's interest income consists of interest earned on loans and securities while noninterest income includes revenues from deposit service charges, trust department fees, fees from nonbank subsidiaries, etc. Interest expense consists of interest paid on interest-bearing core deposits and noncore liabilities while noninterest expense is comprised of overhead costs, personnel costs, and other costs. A bank’s net interest income equals its interest income minus interest expense. Note that interest income may be calculated on a tax-equivalent basis in which tax-exempt interest is converted to its pre-tax equivalent.A bank’s burden is defined as its noninteres t expense minus noninterest income. This is often quoted as a fract ion of total assets. A bank’s efficiency ratio is calculated as noninterest expense divided by the sum of net interest income and noninterest income. The denominator effectively measures net operating revenue after subtracting interest expense. The efficiency ratio measure the noninterest cost per $1of operating revenue generated. Analysts often interpret the efficiency ratio as a measure of a bank’s ability to control overhead relative to its ability to generate noninterest income (and overall revenue).A lower number is presumably better because it reflects better cost control compared with revenue generation.3. Balance sheet accounts:a. Increase liability: money market deposit account (+$5,000)Increase asset: federal funds sold (+$5,000)b. Decrease asset: real estate loanIncrease asset: mortgage loanc. Increase equity: common stock (common and preferred capital)Increase asset: commercial loans4. Income statementInterest on U.S. Treasury & agency securities $44,500Interest on municipal bonds 60,000Interest and fees on loans 189,700Interest income = $294,200Interest paid on interest-checking accounts $33,500Interest paid on time deposits 100,000Interest paid on jumbo CDs 101,000Interest expense = $234,500Net interest income = $59,700Provisions for loan losses = $ 18,000Net interest income after provisions = $41,700Fees received on mortgage originations $23,000Service charge receipts 41,000Trust department income 15,000Non-interest income = $79,000Employee salaries and benefits $145,000Occupancy expense 22,000Non-interest expense = $167,000Income before income taxes -$46,300Income taxes 15,742Net income = -$30,558Cash dividends declared 2,500Retained earnings = -$33,058This assumes that expenses associated with the purchase of the new computer are included in occupancy expense. If not, the computer expense (depreciation) will increase the loss for theperiod. Also, the bank can receive a tax refund from prior tax payments if the bank made a taxable profit within recent years.5. The primary risks faced by banks are credit risk, liquidity risk, interest rate risk, foreign exchange risk (the latter two represent market risk), operational risk, reputational risk, and capital solvency. In general, promised, or expected, returns should be higher for banks that assume increased risk. There should also be greater volatility in returns over time.a. Credit risk: Net loan charge-offs/LoansHigh risk - high ratio; Low risk - low ratioHigh risk manifests itself in occasional high charge-offs, which requires above average provisions for loan lossses to replenish the loan loss reserve. Thus, net income is volatile over time.b. Liquidity risk: Core deposits/AssetsHigh risk - low ratio; Low risk - high ratioHigh risk manifests itself in less stable funding as a bank relies more on noncore, purchased liabilities thatfluctuate over time. These noncore liabilities are also higher cost, which raises interest expense.c. Interest rate risk: (|Repriceable assets-repriceable liabilities|)/AssetsHigh risk - high ratio; Low risk - low ratioHigh risk banks do not closely match the amount of repriceable assets and repriceable liabilities. Largedifferences suggest that net interest income may vary sharply over time as the level of interest rates changes.d. Foreign exchange risk: Assets denominated in a foreign currency minus liabilities denominated in the same foreign currency.High risk – a large difference; Low risk – a small difference High risk manifests itself when exchange rates change adversely and the value of the bank’s net position of assets versus liabilities denominated in a currency changes sharply.e. Operational risk: total assets/number of employeesHigh risk – low ratio; Low risk – high ratioHigh risk manifests itself when the bank operates at low productivity measured by more employees per amount of assetsf. Capital/solvency risk: Stockholders’ equity/AssetsHigh risk - low ratio; Low risk - high ratioHigh risk manifests itself because fewer assets must go into default before a bank is insolvent and can be closed down by regulators.g. Reputational risk is difficult to measure ex ante. It is more observable by announced problems and issues.6. Equity multiplierBank L: Equity/Assets = 0.06 indicates Assets/Equity = 16.67X Bank S: Equity/Assets = 0.10 indicates Assets/Equity = 10X If each bank earns 1.5% on assets (ROA = 0.015), then the ROEs will equal 25% (Bank L) and 15% (Bank S). If, instead, each bank reports a loss with ROA = -0.012, then the ROEs will equal -20% (Bank L) and -15% (Bank S). When banksare profitable, financial leverage has the positive effect of increasing ROE; when banks report losses, financial leverage increases the magnitude of loss in terms of a negative ROE.7. ROE= net income/stockholders' equityROA = net income/total assetsEM = total assets/stockholders' equityER = total operating expense/total assetsAU = total revenue/total assetsBalance sheet figures should be measured as averages over the period of time the income number is generated.ROE = ROA x EM ROA = AU – ER – TAXwhere TAX = applicable income tax/total assets.8. Profitability ratios differ across banks of different size as measured by assets. The primary reasons are that different size banks have different asset and liability compositions and engage in different amounts of off-balance sheet activities. Typically, small banks report higher net interest margins because their average asset yields are relatively high while their average cost of funds is relatively low. This reflects loans to higher risk borrowers, on average, and proportionately more funding from lower cost core deposits. ROEs, in turn, are often lower because small banks operate with more capital relative to assets, that is with lower equity multipliers, so that even with comparable ROAs the ROEs are lower. Large banks ROAs are increasing faster over time because large banks operate with lower efficiency ratios as they have been more successful in generating fee income.9. CAMELSa. C =capital adequacy: equity/assetsb. A = asset quality: nonperforming loans/loans; loan charge-offs/loansc. M = management: no single ratio is good, although all ratios indicate overall strategyd. E = earnings: aggregate profit ratios; ROE, ROA, net interest margin, burden, efficiencye. L = liquidity: core deposits/assets; noncore, purchased liabilities/assets; marketable securities/assetsf. S = sensitivity to market risk; |repriceable assets-repriceable liabilities|/assets; difference in assets and liabilitiesdenominated in the same currency; size of trading positions in commodities, equities and other tradeable assets.10. Lowest to highest liquidity risk: 3-month T-bills, 5-year Treasury bond, 5-year municipal bond (if high quality and from a known issuer), 4-year car loan with monthly payments (receive some principal monthly, may be saleable), 1-year construction loan, 1-year loan to individual, pledged 3-month T-bill. As stated, the 3-month T-bill that is pledged as collateral is illiquid unless the bank can change its collateral status.11. Comparative credit riska. loan to a comer grocery store representing a little known borrower with uncertain financialsb. loan collateralized with inventory (work in process) because the collateral is less liquid and more difficult to value;this assumes that the receivables are still viable and not too aged.c. normally the Ba-rated municipal bond, unless the agency bond is an "exotic" mortgage backed security, because the agency bond carries an implied guarantee in that Freddie Mac is a quasi-public borrower.d. 1-year car loan because the student loan is typically government guaranteed12. For the balance sheet: high core deposits/assets; high equity/assets; low noncore, purchased liabilities/assets; high investment securities/assets; high agriculture loans/assets (the value refers to that for small banks); For the income statement: net interest margin (high); burden/assets (high), efficiency ratio (high); (the descriptor in parentheses refers to the relationship for small banks versus larger banks).13. Extending a loana. the new loan is typically not classified as nonperforming because no payments are past dueb. often a bank recognizes that the loan is in the problem stage and the borrower renegotiates the terms in its favor;rationale is that the borrower may default if the loan is not restructured. Note that this restructuring gives theappearance that asset quality is higher.c. the primary risk is that the bank is throwing more money down a sink hole and will never recover any of its loan.14. Dividend payment: For: the loss is temporary and stockholders expect the dividend payment. Failure to make the payment will sharply lower the stock price because stockholders will be alienated. Against: the bank has not generated sufficient cash to make the payment from normal operations. By paying the cash dividend, the bank is self-liquidating. The cash dividend will lower the bank’s capital. What normally decides the issue is whether the loss is truly temporary or more permanent. Management typically errs by assuming that losses are temporary, and thus continues to make dividend payments when it should be reducing or eliminating them.15.Liquidity risk:a.Securities classified as held-to-maturity cannot be sold unless there has been an unusual change in the underlying credit quality of the security issuer. A high fraction indicates low liquidity because few securities (just 5% of the total) can be sold.b. A low core deposit base indicates a bank that relies proportionately more on noncore, volatile liabilities that are less stable and more likely to leave the bank if rates change. This makes a bank’s funding sources less reliable and the banksubject to greater liquidity risk.c. A bank that holds long-term securities (8 years is long term) has assumed significant price risk even if the securities can be readily sold because they are classified as available-for-sale. Such securities will fall in value if interest rates rise. This indicates high liquidity risk.d.Assuming that $10 million in securities is sufficient, the fact that none are pledged makes them more liquid and is indicative of lower liquidity risk than if any securities were pledged.Problems1. Community National Bank (CNB)1. Profitability analysis for 2004 using UBPR figures:RATIO Community National Bank Peer BanksROE 8.67% 11.72%ROA 0.63 1.09EM 13.97X 10.67XAU 5.91 6.23ER 4.94 4.73TAX 0.34 0.41a.Aggregate profitability for CNB is substantially lower measured both by both ROE and ROA. Because CNB has less equity relative to assets, it has greater financial leverage. Thus, the greater financial leverage increases CNB’s ROE relative to peer banks. The fact that its ROE is lower, despite the greater leverage, indicates that the higher risk does not produce higher overall profitability. CNB has assumed a riskier profile with its greater financial leverage in that fewer assets can default before the bank is insolvent. CNB’s ROA is lower because it earns a lower average yield on assets (AU), pays more in operatingexpense (ER), offset somewhat by the fact that it pays less in taxes (TAX).b.Risk ComparisonCredit risk: same net charge-offs, much lower nonperforming (more than 90 days past due) and nonaccrual loans, higher provisions for loan losses (.30% versus 0.18%); loan loss reserve is a greater fraction of total loans and leases and a much greater fraction of noncurrent loans. Overall, the ratios indicate below-average risk. Of course, these figures represent only one year of data.Liquidity risk: lower equity to assets suggests higher liquidity risk from a funding perspective, higher available for sale securities and lower pledged securities suggests lower liquidity risk from the asset sale perspective; very high core deposits, low noncore funding (liabilities), low loans and leases and high ST securities suggest lowerliquidity risk. Overall, liquidity risk appears lower because the bank has a strong core deposit base, fewer loans and more securities can be readily sold. Still, the bank might have difficulty borrowing if loans exhibit low qualityand deposit outflows arise. Conclusion: below-average liquidity risk.Capital Risk: low capital to asset ratios; low equity to assets indicate above average capital risk; bank pays less out in dividends and its growth rate in equity capital is lower. Overall, the bank exhibits greater capital risk. Thissituation is offset by the bank’s apparent higher quality assets.Operational risk: low assets to employees ratio, high personnel expense to employees and high efficiency ratioindicate high operational risk. Of course, these data do not capture the likelihood of fraud and other potentialoperational problems.c.Recommendations:1)Impro ve the bank’s capital position; slow asset growth and pursue greater profits.2)Evaluate credit risk carefully; ensure that loans are adequately diversified and that any default of a single loan or type of loans cannot place the bank’s capital at risk to where regulators will restrict the bank’s activiti es. Slow loan growth until capital base is at target. Implement a formal credit risk review process.3)Improve operating efficiency. Review noninterest expense sources and cut costs where possible.4)The first t wo suggestions will have the impact of lowering the bank’s earnings, ceteris paribus. Therefore,management should focus on growing sources of noninterest income that currently are not being pursued.2.Citibank UBPRa.In 2004, Citibank’s ROE equaled 15.26% while its ROA equaled 1.49% versus peers’ figures of 14.58% and 1.31%, respectively. Citibank’s equity multiplier (EM = ROE/ROA) equaled approximately 10.24X versus 11.13X for peers. Citibank’s AU is higher at 8.83% (5.25% + 3.58%) versus 7.69% (4.46% + 3.23%) at peers. Citibank clearly generated higher gross revenues from both interest and noninterest sources. Citibank’s expense ratio (ER), in turn, equaled 6.27% while ER for peers was much lower for each type of expense and in total at 4.23%. Based on the profit figures alone, Citibank appears to be a high performance bank and achieves that by generating greaterrelative revenues.b.Citibank’s credit risk (as evidenced only by the ratios provided) appears high as net losses to loans is higher than Peers (1.58% versus 0.25%), as is noncurrent loans and leases as a fraction of loans (1.78% versus 0.59%). The loss allowance (reserve) is a higher fraction of loans, but a much smaller fraction of net losses (charge-offs) andnoncurrent loans indicating that more reserves might be appropriate.c.Citibank’s liquidity risk appears high as the bank has a lower equity to asset (tier 1 leverage capital) ratio and relies much more on noncore liabilities (noncore fund dependence). With its greater credit risk, you might expect it to operate with greater equity capital. Similarly, the bank is growing at a fast pace which generally increases overall risk because management cannot easily control risk from growth.d.Recommendations:Carefully assess credit risk; realign portfolio where appropriate.Increase the loan loss reserve.Slow loan growth and/or shift loans to less risky classes.Line up additional sources of liquidity.Review pricing of loans and deposits; identify sources of fees/noninterest income to see if they are sustainable.。
《商业银行管理学》课后习题及题解第一章商业银行管理学导论习题一、判断题1. 《金融服务现代化法案》的核心内容之一就是废除《格拉斯－斯蒂格尔法》。
2. 政府放松金融管制与加强金融监管是相互矛盾的。
3. 商业银行管理的最终目标是追求利润最大化。
4. 在金融市场上，商业银行等金融中介起着类似于中介经纪人的角色。
5. 商业银行具有明显的企业性质，所以常用于企业管理的最优化原理如边际分享原理、投入要素最优组合原理、规模经济原理也适用于商业银行。
6. 金融市场的交易成本和信息不对称决定了商业银行在金融市场中的主体地位。
7. 企业价值最大化是商业银行管理的基本目标。
8. 商业银行管理学研究的主要对象是围绕稀缺资源信用资金的优化配置所展开的各种业务及相关的组织管理问题。
9. 商业银行资金的安全性指的是银行投入的信用资金在不受损失的情况下能如期收回。
二、简答题1. 试述商业银行的性质与功能。
2. 如何理解商业银行管理的目标？3. 现代商业银行经营的特点有哪些？4. 商业银行管理学的研究对象和内容是什么？5. 如何看待“三性”平衡之间的关系？三、论述题1. 论述商业银行的三性目标是什么，如何处理三者之间的关系。
2. 试结合我国实际论述商业银行在金融体系中的作用。
第一章习题参考答案一、判断题1.√2.×3.×4.√5.×6.√7.×8.√9.√二、略；三、略。
第二章商业银行资本金管理习题一、判断题1. 新巴塞尔资本协议规定，商业银行的核心资本充足率仍为4％。
2. 巴塞尔协议规定，银行附属资本的合计金额不得超过其核心资本的50%。
3. 新巴塞尔资本协议对银行信用风险提供了两种方法：标准法和内部模型法。
4. 资本充足率反映了商业银行抵御风险的能力。
5. 我国国有商业银行目前只能通过财政增资的方式增加资本金。
6. 商业银行计算信用风险加权资产的标准法中的风险权重由监管机关规定。
二、单选题1. 我国《商业银行资本充足率管理办法》规定，计入附属资本的长期次级债务不得超过核心资本的。
CHAPTER 4CREATING AND MANAGING SERVICE OUTLETS:NEW CHARTERS, BRANCHES, AND ELECTRONIC FACILITIESGoal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities.Key Topics in This Chapter•Chartering New Financial Service Institutions•Performance of New Banks•Establishing Full Service Branches•In-Store Branching•Establishing Limited Service Facilities•ATMs and Telephone Centers•The Internet and Online BankingChapter OutlineI. IntroductionA. The Importance of Convenience and Timely Access to CustomersB. Service Options Available Today1. Chartering New (De Novo) Financial Institutions2. Establishing New Full-Service Branches3. Setting Up Limited-Service FacilitiesII.Chartering a New Bank or Other Financial Service InstitutionsIII.The Bank Chartering Process in the United StatesA. The Chartering Authorities in the U.S.B. Benefits of Applying for a National CharterC. Benefits of Applying for a State CharterIV. Questions Regulators Usually Ask the Organizers of a New BankV. Factors Weighing on the Decision to Seek a New Bank CharterA. External Factors1. Level of Economic Activity2. Growth of Local Economic Activity3. The Need for a New Bank4. Strength and Character of Local Competition in Supplying FinancialServicesB. Internal Factors1. Qualifications and Contacts of the Organizers2. Management Quality3. Pledging of Capital and Funds to Cover the Cost of Filing a CharterApplication and Getting UnderwayVI. Volume and Characteristics of New Bank ChartersA. Numbers of New ChartersB. Characteristics of New Charter MarketsVII. How Well Do New Banks PerformA. New Bank Financial PerformanceB. Pro-Competitive Effects on Service Offerings and Service PricingVIII. Establishing Full-Service Branch Offices: Choosing Locations and Designing New BranchesA. Advantages of Full-Service BranchesB. Trends in the Design of New BranchesC. Desirable Sites for New BranchesD. Expected Rate of ReturnE. Geographic DiversificationF. Branch RegulationG. The Changing Role of BranchesH. In-Store BranchingIX. Establishing and Monitoring Automated Limited-Service FacilitiesX. Point-of-Sale TerminalsXI. Automated Tellers (ATMs)A. History of ATMsB. ATM ServicesC. Fee Structures for ATM UsageD. Customer Service Limitations of ATMsE. Example of the ATM Capital-Budgeting DecisionXII. Home and Office Online BankingA. Telephone Banking and Call CentersB. Internet Banking1. Services Provided Through the Internet2. Challenges in Providing Internet Services3. The Net and Customer Privacy and SecurityXIII. Financial Service Facilities of the FutureXIV. Summary of the ChapterConcept Checks4-1. Why is the physical presence of a bank still important to many bank customers despite recent advances in long-distance communications technologyMany customers still prefer the personal attention and personal service that contact with bank employees provides. Moreover, for those services where problems can arise that require detailed information and explanation-for example, when a checking account is overdrawn and checks begin to bounce-the customer needs quick access and, often, the personal attention to his or her problem on the part of one or more employees.4-2. Why is the creation (chartering) of new banks closely regulated What about nonblank financial firmsThe creation of new banks is regulated to insure the safety and soundness of existing banks and to avoid excessive numbers of bank failures. The same arguments are usually made for non-bank financial firms. Financial-Service firms hold the public’s savings, are the heart of the payment system and create money. The failure of these firms could disrupt the economy and too many could mean in excessive growth in the money supply and inflation.4-3. What do you see as the principal benefits and costs of government regulation of the number of financial service charters issuedWhile control over the entry of new banks may reduce the number of failures, it also limits competition, so that the public may receive a smaller volume or lower quality of services at excessive prices.4-4. Who charters new banks in the United States New thrift institutionsNew banks are chartered by the banking commissions of the individual states or, at the federal level, by the Comptroller of the Currency. Thrift institutions are chartered by the states or at the federal level by the Office of Thrift Supervision.4-5. What key role does the FDIC play in the chartering processThe FDIC exercises some control over state bank charter activity as well as federal charters because most states insist that their new banks qualify for federal deposit insurance before they can open for business.4-6. What are the advantages of having a national bank charter A state bank charterThe benefits of a national charter are:a.)It brings prestige due to stricter regulations and may help attract more customersb.)In times of trouble the technical assistance given may be better ensuring a betterchance of long run survivalThe benefits of a state charter are:a.)It may be easier and less costly to get a state charterb.)The bank does not have to join the Federal Reserve and therefore avoids buying andholding low yield stock of the Federal Reservec.)Many states let a bank lend more to one borrowerd.)State chartered banks may be able to make types of loans that a nationally charteredbank cannot4-7. What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter Why might this required information be importantThe Comptroller of the Currency asks for information on the number of competing banks and bank-like institutions in the service area of the proposed bank. More competitive market situations limit the profit potential and perhaps the growth potential of a new bank. Also requested is information about shopping centers, retail and wholesale business activity, recent population growth, traffic counts, and personal income levels - all viewed as indicators of potential demand for banking services in the service area of the proposed new bank. Applicants must also provide background information on the organizers and proposed management of a new bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to manage the public's funds as well as their own.4-8. Why do you think the organizers of a new financial firm are usually expected to put together and submit to the chartering authority a detailed business plan, including marketing, management, and financial componentsThis demonstrates to regulators that the organizers of the bank have the expertise, experience and skills necessary to be successful in managing the new bank. If the organizers of a bank do not know where they are going, they are unlikely to be successful. In addition, it demonstrates whether the organizers of the new bank have a realistic picture of the community they are planning on serving and whether the organizers have a realistic view of the profit potential in the new bank. 4-9. What are the key factors the organizers of a new financial firm should consider before deciding to seek a charterWhile a variety of factors are examined by different business people interested in establishing a new bank, most look at some or all of the following factors.1. External Factorsa. The level of local economic activity.b. Growth of local economic activity.c. The need for a new bank.d. The strength and character of local competition in supplying financialservices.2. Internal Factorsa. Qualifications and contacts of the new bank's organizers.b. Management quality.c. Pledging of capital and funds to cover the cost of filing a charter applicationand begin operations.4-10. Where are most new banks chartered in the United StatesNew charters tend to be concentrated in large urban areas where expected rates of return on the organizers investments are likely to be the highest. As the population increases relative to the number of financial firms, the number of new charters increases. The success of local banksalready in the area suggests that new financial firms would also be successful. Places where the concentration ratio for new banks has increased tend to have fewer new bank charters.4-11. How well do most new banks perform for the public and for their ownersMost new banks succeed, especially those whose organizers can bring in new deposits and loan accounts during the first year of the bank's operation. Most are profitable within two to three years of opening. There is some evidence that newly charted banks are financially ‘fragile’ and more prone to failure than existing banks. They appear to be more vulnerable to real estate crises than established banks. New banks tend to under perform their competitors until they have been around for a while and new banks are more closely supervised than established banks.4-12. Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial servicesThe chartering of a new financing corporation is normally a lengthy and expensive process, requiring the completion of elaborate federal or state application forms, while the branch application process is normally far simpler and less costly. Moreover, with the increase in the number of failures in recent years regulatory-imposed capital requirements for new charters have increased substantially, while new branch offices usually carry significantly lower capital requirements. Moreover, branch offices themselves are often much less elaborate and costly to build and maintain than are the headquarters' facility of a new institution where some duplicate facilities can be eliminated (for example, checking processing, credit analysis, and records departments).4-13. What factors are often considered in evaluating possible sites for new branch offices Bankers first need to decide the goals and objectives of a new facility. Often this means assessing whether the proposed new branch is aimed at selling one or more particular services, such as deposits or loans, and also deciding how closely correlated cash flows and returns from the new branch office may be with cash flows and returns from the other facilities operated by the bank. If returns or cash flows through the proposed new institution are negatively correlated or display low positive correlation with the institution's other facilities, they may be able to lower the variance of its returns or cash flows by proceeding to establish the new office.Other considerations revolve around the economic strength of the proposed branch officesite-whether there is adequate traffic volume, large numbers of stores and shops, older or younger age populations who often require slightly different menus of services, recent area population growth, density and income, the occupational and residential makeup of the proposed new branch area, a large enough population to generate enough customers to breakeven and the number and size of facilities operated by competitors. Generally, for branches designed to attract and hold deposits key factors to consider usually revolve around individual and family incomes, concentrations of retail stores and shops, older-than-average residents, and homeowners rather than renters. For branch facilities emphasizing credit services residential areas with substantial new construction activity, heavy traffic flow, and high concentrations of stores and shopping centers are typically desirable for consumer and retail loan demand, while central city office locations are often chosen as locations for commercial loan facilities.4-14. What changes are occurring in the design of, and the roles played by, branch offices Please explain why these changes are occurring.Bank branches are increasingly becoming selling platforms in which more and more fee-based services are attractively and prominently advertised in order to maximize the fee-income generating potential of each branch. Moreover, branches are becoming increasingly automated to reduce personnel and other operating costs and improve speed, efficiency, and accuracy in handling a growing service volume. Branch design has come to reflect these trends with automated facilities placed at easy access points, along with information booths to speedily direct customers to the service areas they need. Human tellers may be placed deeper inside branch facilities so that customers must pass by other service departments and conspicuous advertising in order to encourage customers to become aware of and avail themselves of other bank services.4-15. What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches What advantages and what problems can the closing of a branch office createThe opening of new branch offices must be approved by a bank's or thr ift’s principal federal or state supervisor. Closing a branch office has become much more complicated in recent years as the result of several new laws and regulations. For example, the FDIC Improvement Act requires 90 days advance notice of branch closings to both customers and the principal supervisory agency and a posting on the branch site at least 30 days prior to closing. Banks and thrifts must also make an "affirmative effort" to reach all segments of their communities without discrimination under the terms of the Community Reinvestment Act which raises the danger of customer protests against closings if it appears the bank is under-serving certain groups of customers. Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S. banks and thrifts from branching expansion when they have a poor record of serving all segments of their communities. Closing selected branch offices can reduce operating costs and divert resources from less profitable to more profitable uses. However, they risk alienating good customer relationships unless it can serve those same customers with its remaining facilities.4-16. What new and innovative sites have been selected for new branch offices in recent years Why have these sites been chosen by financial firms Do you have any ideas about other sites that you believe should be consideredRapid increases in new branches located in grocery stores, shopping centers, and inside other businesses and facilities where the public frequently gathers have helped to reduce branch construction costs and promote cross-selling of goods and financial services. Other branches have been opened in apartment complexes, senior citizen centers, and other customer-convenient locations as bankers come to realize they must adjust their service locations and service hours to conform to customer needs in an intensely competitive financial-services environment.4-17. What are POS terminals and where are they usually locatedPoint-of-sale terminals are set up to accommodate customer purchases of goods and services. These computer terminals normally are located in retail stores, gasoline stations, and similar places with a link to the banks’ own computer records. When a customer of the bank makes a purchase, the amount of the transaction is deducted from the customer's deposit account and added to the store's account. Because the customer immediately loses funds many bank customers have been hesitant to use the service as opposed to paying by check or credit card where payment is delayed for a few days. However, this depends on whether the POS terminal is an offline or online terminal. An offline terminal accumulates all transactions until the end of the day when all transactions are subtracted from a customer’s account. This ty pe of terminal is less costly for the bank to operate. An online terminal subtracts the transactions immediately from the customer’s account and reduces the chance of an overdraft occurring but is more expensive for the bank to operate. Consumer reluctance to use POS terminals appears to be fading and as fees for other services rise this reluctance will continue to disappear.4-18. What services do ATMs provide What are the principal limitations of ATMs as a service provider Should ATM carry fees WhyThe earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and verifying checking account balances, often at hours when the full-service branch offices were closed. Today, ATMs frequently provide a wide menu of old and new services, including bill paying, transfer of funds between accounts, and the purchase of tickets for travel and entertainment. Most authorities expect ATM usage to grow rapidly as these machines offer more services and as bankers increasingly move to restrict customer access to more costly human tellers and other bank personnel, often by charging extra fees for personal service.ATMs do have some significant limitations that bankers will have to work to overcome. They break down and need to be replaced, sometimes quite frequently and annoyingly for customers, and as technology changes often become quickly outdated. Customer activity around ATMs, particularly at night, has invited criminals to steal money and injure customers, sometimes creating liability for banks. Moreover, not all customers make use of these facilities due to a preference for personalized service, fear of crime, or unfamiliarity with how the machines work. Customer education and better service pricing are two important tools that could help with these problem areas in the future. In addition, ATMs do not rank high in their ability to sell peripheral services. Some banks have found that there has been a sharp decline in their ability to sell other services. Finally, ATMs are not necessarily profitable for all banks. Because they are available 24 hours, some customers may make more frequent and smaller withdrawals from the machine than they would with a human teller, driving up the costs. In addition, these same customers will often still demand a human teller to deposit their pay check, making the bank keep both tellers and ATM machines.Whether ATM should carry a fee is rather controversial. Recently, two of the largest ATM networks have decided to let owners of ATMs charge non-customers a surcharge. Several regional have begun to charge fees as well. These fees reflect the usage of ATMs. About 85% of all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming deposits. In addition, in many places, ATM usage has declined as customers pass over ATMs in favor of credit and debit cards, onsite terminals and the internet.4-19. What are self-service terminals and what advantages do they have for financial institutions and their customersSelf-service terminals include ATMs and other computer-based limited-service facilities that permit a customer to call up information about his or her account and recent transactions with the institution or information about different services that the customer might be interested in purchasing. Many are accessible 24 hours a day or are easier to get to rather than wait for the help of personnel. They can save on resources by saving on staff time. Many institutions are adding telephones and video screens so that customers with problems can dial up an employee day or night with problems. This is also saving money because they can avoid duplication of staff at each branch.4-20. What financial services are currently available from banks on the internet What problems have been encountered in trying to offer internet servicesCustomers can make payments, check on account balances, move funds between accounts and get applications for loans, deposits and other services. In addition banks can advertise on the web. Some of th e problems include protecting customers’ privacy and heading off crime. In addition, the web does not make it easy for a bank to get to know their customers personally. The cost may also be prohibitive to some customers.4-21. How can financial firms better promote internet servicesThey need to emphasize the safety of their internet services. They need to promote their home page at every opportunity and update it frequently to keep customers’ interest. They need to survey customers about their satisfaction with the services and encourage dialogue via e-mail to resolve problems. They can also provide programs to download to act as screen savers (and advertisements) and also information about the institution and the services it provides.Problems4-1. A group of businessmen and women from the town of Mathews are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.2 million to build along with another $700,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $510,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 6 percent annually after the first year, while expenses will grow an estimated 5 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimatesYear Revenues Op Expense Net Profits1 $510,000 $180,000 $330,0002 $540,600 $189,000 $351,6003 $573,036 $198,450 $374,5864 $607,418 $208,373 $399,0465 $643,863 $218,791 $425,0726 $682,495 $229,731 $452,7647 $723,445 $241,217 $482,2288 $766,851 $253,278 $513,5739 $812,863 $265,942 $546,92110 $861,634 $279,239 $582,39511 $913,332 $293,201 $620,13112 $968,132 $307,861 $660,27113 $1,026,220 $323,254 $702,96614 $1,087,793 $339,417 $748,37715 $1,153,061 $356,388 $796,67316 $1,222,245 $374,207 $848,03817 $1,295,579 $392,917 $902,66218 $1,373,314 $412,563 $960,75119 $1,455,713 $433,191 $1,022,52220 $1,543,056 $454,851 $1,088,205Initial Investment $3,900,000Required Rate of Return 0.10Present Value of Future CashFlows $4,491,642Net Present Value of Investment $591,642Given the above information, the organizers are likely to proceed given that the net present value of this investment is positive. The return they are going to earn is greater than the 10% they need to earn.4-2. Andover Savings Bank is considering the establishment of a new branch office at the corner of Lafayette and Connecticut Avenues. The savings association’s Economics Department projects annual operating revenues of $1.75 million from services sold to generate fee income and annual branching operating expenses of $880,000. The cost of procuring the property is $2.5 million and branch construction will total an estimated $2.32 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Andover likely proceed with this branch office projectYear Revenues Op Expenses Net Profits1 $1,750,000 $880,000 $870,0002 $1,750,000 $880,000 $870,0003 $1,750,000 $880,000 $870,0004 $1,750,000 $880,000 $870,0005 $1,750,000 $880,000 $870,0006 $1,750,000 $880,000 $870,0007 $1,750,000 $880,000 $870,0008 $1,750,000 $880,000 $870,0009 $1,750,000 $880,000 $870,00010 $1,750,000 $880,000 $870,00011 $1,750,000 $880,000 $870,00012 $1,750,000 $880,000 $870,00013 $1,750,000 $880,000 $870,00014 $1,750,000 $880,000 $870,00015 $1,750,000 $880,000 $870,00016 $1,750,000 $880,000 $870,000Initial Investment $4,820,000Required Rate of Return 0.12Present Value of Future CashFlows $6,067,368Net Present Value of Investment $1,247,368Andover is likely to proceed with this project because the net present value is positive. This means that the interest rate that Andover will earn on this project is higher than the 12% they need to earn. 4-3. Jackson Bank of Commerce estimates that building a new branch office in the newly developed Guidar residential township will yield an annual expected return of 13 percent with an estimated standard deviation of 5 percent. The bank’s marketing department estimates that cash flows from the proposed Guidar branch will be mildly correlated (with a correlation coefficient of +0.3) with the bank’s other sources of cash flow. The expected annual return from the bank's existing facilities and other assets is 10 percent with a standard deviation of 3 percent. The branch will represent just 10 percent of Jackson’s total assets. Will the proposed branch increase Sullivan's overall rate of return Its overall riskThe estimated total rate of return would be:E (R) = 0.10 (13%) + 0.90 (10%) = 10.3%The risk attached to this overall return rate would be:Thus ?? 2.89% and the branch will slightly increase the bank's expected return but slightly decrease its overall risk. The bank should proceed with this project.4-4. The following statistics and estimates were compiled by First Savings Bank of Talbot regarding a proposed new branch office and the bank itself:Branch Office Expected Return 16%Standard Deviation of Return = 7%Ban k’s overall expected return= 10%Standard deviation of bank’s return= 3%Branch Asset Value as a Percentof Total Bank Assets = 15%Correlation of Cash Flows = + 0.27What will happen to the Talbot’s total expected return and overall risk if the proposed new branch is adoptedThe bank's total expected return is:E (R) = 0.15 (16%) + 0.85 (10%) = 10.9%The bank's risk exposure is:σ=And thus .0301 or 3.01%The proposed project raises the savings banks expected return slightly and does not affect the risk of the bank. This is a good project.4-5. First National Bank of Yukon is considering installing 3 ATMs in its westside branch. The new machines are expected to cost $48,000 apiece. Installation costs will amount to about $16,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the westside district these three machines are expected to handle 180,000 transactions per year. On average, each cash transaction is expected to save $0.32 per transaction in check processing costs. If First National has a 12% cost of capital, should the bank proceed with this investment project Year Savings1 $57,600 (.32*180,000)2 $57,6003 $57,6004 $57,6005 $57,6006 $57,6007 $57,6008 $57,6009 $57,60010 $57,600Initial Investment 192000 (48,000*3+16,000*3)Required Rate of Return 0.12Present Value of Future CashFlows $325,452.85Net Present Value $133,452.85The net present value of this project is positive. First National Bank of Yukon should add the ATM machines to the Westside.4-6. First State Security Bank is planning to set up its own web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring household bills, verification of account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own web page and Internet service menu How can the bank effectively differentiate itself from other banks currently present on the Internet How might the bank be able to involve its own customers in designing its web site and pricing its Internet service packageThe bank should remember that while the internet is a relatively low cost way of expanding and allows customers to find the bank rather than the bank having to find customers, there are serious concerns about privacy. In addition, the Internet is not limited by geography and while there are thousands of potential customers, there are also many financial institutions around the world competing for customer deposits and loans. The bank needs to be aware that there are many bank web pages out there and that they will need to invest in employees with the technical expertise to manage the new web site well. One of the first things the bank needs to do is to take steps to protect its customers and let its customers know what its privacy and security policies are. Another step the bank can take is to start with a customer survey to find out what its customers want and need from the bank’s Internet services. They can run this as a contest and give away some small items to the customer with the best ideas for the web page and Internet service. This should help get customers involved in the design and implementation of the web page and may help the bank start building an online customer base.。
CHAPTER 4CREATING AND MANAGING SERVICE OUTLETS:NEW CHARTERS, BRANCHES, AND ELECTRONIC FACILITIESGoal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities.Key Topics in This ChapterChartering New Financial Service InstitutionsPerformance of New BanksEstablishing Full Service BranchesIn-Store BranchingEstablishing Limited Service FacilitiesATMs and Telephone CentersThe Internet and Online BankingChapter OutlineI. IntroductionA. The Importance of Convenience and Timely Access to CustomersB. Service Options Available Today1. Chartering New (De Novo) Financial Institutions2. Establishing New Full-Service Branches3. Setting Up Limited-Service FacilitiesII.Chartering a New Bank or Other Financial Service InstitutionsIII.The Bank Chartering Process in the United StatesA. The Chartering Authorities in the U.S.B. Benefits of Applying for a National CharterC. Benefits of Applying for a State CharterIV. Questions Regulators Usually Ask the Organizers of a New BankV. Factors Weighing on the Decision to Seek a New Bank CharterA. External Factors1. Level of Economic Activity2. Growth of Local Economic Activity3. The Need for a New Bank4. Strength and Character of Local Competition in SupplyingFinancial ServicesB. Internal Factors1. Qualifications and Contacts of the Organizers2. Management Quality3. Pledging of Capital and Funds to Cover the Cost of Filinga Charter Application and Getting UnderwayVI. Volume and Characteristics of New Bank ChartersA. Numbers of New ChartersB. Characteristics of New Charter MarketsVII. How Well Do New Banks Perform?A. New Bank Financial PerformanceB. Pro-Competitive Effects on Service Offerings and Service Pricing VIII. Establishing Full-Service Branch Offices: Choosing Locations and Designing New BranchesA. Advantages of Full-Service BranchesB. Trends in the Design of New BranchesC. Desirable Sites for New BranchesD. Expected Rate of ReturnE. Geographic DiversificationF. Branch RegulationG. The Changing Role of BranchesH. In-Store BranchingIX. Establishing and Monitoring Automated Limited-Service Facilities X. Point-of-Sale TerminalsXI. Automated Tellers (ATMs)A. History of ATMsB. ATM ServicesC. Fee Structures for ATM UsageD. Customer Service Limitations of ATMsE. Example of the ATM Capital-Budgeting DecisionXII. Home and Office Online BankingA. Telephone Banking and Call CentersB. Internet Banking1. Services Provided Through the Internet2. Challenges in Providing Internet Services3. The Net and Customer Privacy and SecurityXIII. Financial Service Facilities of the FutureXIV. Summary of the ChapterConcept Checks4-1. Why is the physical presence of a bank still important to many bank customers despite recent advances in long-distance communications technology?Many customers still prefer the personal attention and personal service that contact with bank employees provides. Moreover, for those services where problems can arise that require detailed information and explanation-for example, when a checking account is overdrawn and checks begin to bounce-the customer needs quick access and, often, the personal attention to his or her problem on the part of one or more employees.4-2. Why is the creation (chartering) of new banks closely regulated? What about nonblank financial firms?The creation of new banks is regulated to insure the safety and soundness of existing banks and to avoid excessive numbers of bank failures. The same arguments are usually made for non-bank financial firms. Financial-Service firms hold the public’s savings, are the heart of the payment system and create money. The failure of these firms could disrupt the economy and too many could mean in excessive growth in the money supply and inflation.4-3. What do you see as the principal benefits and costs of government regulation of the number of financial service charters issued?While control over the entry of new banks may reduce the number of failures, it also limits competition, so that the public may receive a smaller volume or lower quality of services at excessive prices.4-4. Who charters new banks in the United States? New thrift institutions? New banks are chartered by the banking commissions of the individual states or, at the federal level, by the Comptroller of the Currency. Thrift institutions are chartered by the states or at the federal level by the Office of Thrift Supervision.4-5. What key role does the FDIC play in the chartering process?The FDIC exercises some control over state bank charter activity as well as federal charters because most states insist that their new banks qualify for federal deposit insurance before they can open for business.4-6. What are the advantages of having a national bank charter? A state bank charter?The benefits of a national charter are:a.)It brings prestige due to stricter regulations and may helpattract more customersb.)In times of trouble the technical assistance given may be betterensuring a better chance of long run survivalThe benefits of a state charter are:a.)It may be easier and less costly to get a state charterb.)The bank does not have to join the Federal Reserve and thereforeavoids buying and holding low yield stock of the Federal Reservec.)Many states let a bank lend more to one borrowerd.)State chartered banks may be able to make types of loans thata nationally chartered bank cannot4-7. What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter? Why might this required information be important?The Comptroller of the Currency asks for information on the number of competing banks and bank-like institutions in the service area of the proposed bank. More competitive market situations limit the profit potential and perhaps the growth potential of a new bank. Also requested is information about shopping centers, retail and wholesale business activity, recent population growth, traffic counts, and personal income levels - all viewed as indicators of potential demand for banking services in the service area of the proposed new bank. Applicants must also provide background information on the organizers and proposed management of a new bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to manage the public's funds as well as their own.4-8. Why do you think the organizers of a new financial firm are usually expected to put together and submit to the chartering authority a detailed business plan, including marketing, management, and financial components? This demonstrates to regulators that the organizers of the bank have the expertise, experience and skills necessary to be successful in managing the new bank. If the organizers of a bank do not know where they are going, they are unlikely to be successful. In addition, it demonstrates whether the organizers of the new bank have a realistic picture of the community they are planning on serving and whether the organizers have a realistic view of the profit potential in the new bank.4-9. What are the key factors the organizers of a new financial firm should consider before deciding to seek a charter?While a variety of factors are examined by different business people interested in establishing a new bank, most look at some or all of the following factors.1. External Factorsa. The level of local economic activity.b. Growth of local economic activity.c. The need for a new bank.d. The strength and character of local competition insupplying financial services.2. Internal Factorsa. Qualifications and contacts of the new bank's organizers.b. Management quality.c. Pledging of capital and funds to cover the cost of filinga charter application and begin operations.4-10. Where are most new banks chartered in the United States?New charters tend to be concentrated in large urban areas where expected rates of return on the organizers investments are likely to be the highest. As the population increases relative to the number of financial firms, the number of new charters increases. The success of local banks already in the area suggests that new financial firms would also be successful. Places where the concentration ratio for new banks has increased tend to have fewer new bank charters.4-11. How well do most new banks perform for the public and for their owners?Most new banks succeed, especially those whose organizers can bring in new deposits and loan accounts during the first year of the bank's operation. Most are profitable within two to three years of opening. There is some evidence that newly c harted banks are financially ‘fragile’ and more prone to failure than existing banks. They appear to be more vulnerable to real estate crises than established banks. New banks tend to under perform their competitors until they have been around for a while and new banks are more closely supervised than established banks.4-12. Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial services?The chartering of a new financing corporation is normally a lengthy and expensive process, requiring the completion of elaborate federal or state application forms, while the branch application process is normally far simpler and less costly. Moreover, with the increase in the number of failures in recent years regulatory-imposed capital requirements for new charters have increased substantially, while new branch offices usually carry significantly lower capital requirements. Moreover, branch offices themselves are often much less elaborate and costly to build and maintainthan are the headquarters' facility of a new institution where some duplicate facilities can be eliminated (for example, checking processing, credit analysis, and records departments).4-13. What factors are often considered in evaluating possible sites for new branch offices?Bankers first need to decide the goals and objectives of a new facility. Often this means assessing whether the proposed new branch is aimed at selling one or more particular services, such as deposits or loans, and also deciding how closely correlated cash flows and returns from the new branch office may be with cash flows and returns from the other facilities operated by the bank. If returns or cash flows through the proposed new institution are negatively correlated or display low positive correlation with the institution's other facilities, they may be able to lower the variance of its returns or cash flows by proceeding to establish the new office.Other considerations revolve around the economic strength of the proposed branch office site-whether there is adequate traffic volume, large numbers of stores and shops, older or younger age populations who often require slightly different menus of services, recent area population growth, density and income, the occupational and residential makeup of the proposed new branch area, a large enough population to generate enough customers to breakeven and the number and size of facilities operated by competitors. Generally, for branches designed to attract and hold deposits key factors to consider usually revolve around individual and family incomes, concentrations of retail stores and shops, older-than-average residents, and homeowners rather than renters. For branch facilities emphasizing credit services residential areas with substantial new construction activity, heavy traffic flow, and high concentrations of stores and shopping centers are typically desirable for consumer and retail loan demand, while central city office locations are often chosen as locations for commercial loan facilities.4-14. What changes are occurring in the design of, and the roles played by, branch offices? Please explain why these changes are occurring.Bank branches are increasingly becoming selling platforms in which more and more fee-based services are attractively and prominently advertised in order to maximize the fee-income generating potential of each branch. Moreover, branches are becoming increasingly automated to reduce personnel and other operating costs and improve speed, efficiency, and accuracy in handling a growing service volume. Branch design has come to reflect these trends with automated facilities placed at easy access points, along with information booths to speedily direct customers to the service areas they need. Human tellers may be placed deeper inside branch facilities so that customers mustpass by other service departments and conspicuous advertising in order to encourage customers to become aware of and avail themselves of other bank services.4-15. What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches? What advantages and what problems can the closing of a branch office create?The opening of new branch offices must be approved b y a bank's or thrift’s principal federal or state supervisor. Closing a branch office has become much more complicated in recent years as the result of several new laws and regulations. For example, the FDIC Improvement Act requires 90 days advance notice of branch closings to both customers and the principal supervisory agency and a posting on the branch site at least 30 days prior to closing. Banks and thrifts must also make an "affirmative effort" to reach all segments of their communities without discrimination under the terms of the Community Reinvestment Act which raises the danger of customer protests against closings if it appears the bank is under-serving certain groups of customers. Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S. banks and thrifts from branching expansion when they have a poor record of serving all segments of their communities.Closing selected branch offices can reduce operating costs and divert resources from less profitable to more profitable uses. However, they risk alienating good customer relationships unless it can serve those same customers with its remaining facilities.4-16. What new and innovative sites have been selected for new branch offices in recent years? Why have these sites been chosen by financial firms? Do you have any ideas about other sites that you believe should be considered? Rapid increases in new branches located in grocery stores, shopping centers, and inside other businesses and facilities where the public frequently gathers have helped to reduce branch construction costs and promotecross-selling of goods and financial services. Other branches have been opened in apartment complexes, senior citizen centers, and other customer-convenient locations as bankers come to realize they must adjust their service locations and service hours to conform to customer needs in an intensely competitive financial-services environment.4-17. What are POS terminals and where are they usually located?Point-of-sale terminals are set up to accommodate customer purchases of goods and services. These computer terminals normally are located in retail stores, gasoline stations, and similar places with a link to the banks’own computer records. When a customer of the bank makes a purchase, the amount of the transaction is deducted from the customer's deposit account and added to the store's account. Because the customer immediately loses funds many bank customers have been hesitant to use the service as opposed to paying by check or credit card where payment is delayed for a few days. However, this depends on whether the POS terminal is an offline or online terminal. An offlineterminal accumulates all transactions until the end of the day when all transactions are subtracted from a custome r’s account. This type of terminal is less costly for the bank to operate. An online terminal subtracts the transactions immediately from the customer’s account and reduces the chance of an overdraft occurring but is more expensive for the bank to operate. Consumer reluctance to use POS terminals appears to be fading and as fees for other services rise this reluctance will continue to disappear.4-18. What services do ATMs provide? What are the principal limitations of ATMs as a service provider? Should ATM carry fees? Why?The earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and verifying checking account balances, often at hours when the full-service branch offices were closed. Today, ATMs frequently provide a wide menu of old and new services, including bill paying, transfer of funds between accounts, and the purchase of tickets for travel and entertainment. Most authorities expect ATM usage to grow rapidly as these machines offer more services and as bankers increasingly move to restrict customer access to more costly human tellers and other bank personnel, often by charging extra fees for personal service.ATMs do have some significant limitations that bankers will have to work to overcome. They break down and need to be replaced, sometimes quite frequently and annoyingly for customers, and as technology changes often become quickly outdated. Customer activity around ATMs, particularly at night, has invited criminals to steal money and injure customers, sometimes creating liability for banks. Moreover, not all customers make use of these facilities due to a preference for personalized service, fear of crime, or unfamiliarity with how the machines work. Customer education and better service pricing are two important tools that could help with these problem areas in the future. In addition, ATMs do not rank high in their ability to sell peripheral services. Some banks have found that there has been a sharp decline in their ability to sell other services. Finally, ATMs are not necessarily profitable for all banks. Because they are available 24 hours, some customers may make more frequent and smaller withdrawals from the machine than they would with a human teller, driving up the costs. In addition, these same customers will often still demand a human teller to deposit their pay check, making the bank keep both tellers and ATM machines.Whether ATM should carry a fee is rather controversial. Recently, two of the largest ATM networks have decided to let owners of ATMs chargenon-customers a surcharge. Several regional have begun to charge fees as well. These fees reflect the usage of ATMs. About 85% of all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming deposits. In addition, in many places, ATM usage has declined as customers pass over ATMs in favor of credit and debit cards, onsite terminals and the internet.4-19. What are self-service terminals and what advantages do they have for financial institutions and their customers?Self-service terminals include ATMs and other computer-basedlimited-service facilities that permit a customer to call up informationabout his or her account and recent transactions with the institution or information about different services that the customer might be interested in purchasing. Many are accessible 24 hours a day or are easier to get to rather than wait for the help of personnel. They can save on resources by saving on staff time. Many institutions are adding telephones and video screens so that customers with problems can dial up an employee day or night with problems. This is also saving money because they can avoid duplication of staff at each branch.4-20. What financial services are currently available from banks on the internet? What problems have been encountered in trying to offer internet services?Customers can make payments, check on account balances, move funds between accounts and get applications for loans, deposits and other services. In addition banks can advertise on the web. Some of the problems include protecting customers’ privacy and heading off crime. In addition, the web does not make it easy for a bank to get to know their customers personally. The cost may also be prohibitive to some customers.4-21. How can financial firms better promote internet services?They need to emphasize the safety of their internet services. They need to promote their home page at every opportunity and update it frequently to keep customers’ interest. They need to surve y customers about their satisfaction with the services and encourage dialogue via e-mail to resolve problems. They can also provide programs to download to act as screen savers (and advertisements) and also information about the institution and the services it provides.Problems4-1. A group of businessmen and women from the town of Mathews are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.2 million to build along with another $700,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $510,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 6 percent annually after the first year, while expenses will grow an estimated 5 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?Year Revenues Op Expense Net Profits1$510,000$180,000$330,0002$540,600$189,000$351,6003$573,036$198,450$374,5864$607,418$208,373$399,0465$643,863$218,791$425,0726$682,495$229,731$452,7647$723,445$241,217$482,2288$766,851$253,278$513,5739$812,863$265,942$546,92110$861,634$279,239$582,39511$913,332$293,201$620,13112$968,132$307,861$660,27113$1,026,220$323,254$702,96614$1,087,793$339,417$748,37715$1,153,061$356,388$796,67316$1,222,245$374,207$848,03817$1,295,579$392,917$902,66218$1,373,314$412,563$960,75119$1,455,713$433,191$1,022,52220$1,543,056$454,851$1,088,205Initial Investment$3,900,000Required Rate of Return0.10Present Value of FutureCash Flows$4,491,642Net Present Value ofInvestment$591,642Given the above information, the organizers are likely to proceed given that the net present value of this investment is positive. The return they are going to earn is greater than the 10% they need to earn.4-2. Andover Savings Bank is considering the establishment of a new branch office at the corner of Lafayette and Connecticut Avenues. The savings association’s Economics Department projects annual operati ng revenues of $1.75 million from services sold to generate fee income and annual branching operating expenses of $880,000. The cost of procuring the property is $2.5 million and branch construction will total an estimated $2.32 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Andover likely proceed with this branch office project?Year Revenues Op Expenses Net Profits1$1,750,000$880,000$870,000 2$1,750,000$880,000$870,000 3$1,750,000$880,000$870,000 4$1,750,000$880,000$870,0005$1,750,000$880,000$870,0006$1,750,000$880,000$870,0007$1,750,000$880,000$870,0008$1,750,000$880,000$870,0009$1,750,000$880,000$870,00010$1,750,000$880,000$870,00011$1,750,000$880,000$870,00012$1,750,000$880,000$870,00013$1,750,000$880,000$870,00014$1,750,000$880,000$870,00015$1,750,000$880,000$870,00016$1,750,000$880,000$870,000Initial Investment$4,820,000Required Rate of Return0.12Present Value of FutureCash Flows$6,067,368Net Present Value ofInvestment$1,247,368Andover is likely to proceed with this project because the net present value is positive. This means that the interest rate that Andover will earn on this project is higher than the 12% they need to earn.4-3. Jackson Bank of Commerce estimates that building a new branch office in the newly developed Guidar residential township will yield an annual expected return of 13 percent with an estimated standard deviation of 5 percent. The bank’s marketing department estimates that cash flows from the proposed Guidar branch will be mildly correlated (with a correlation coefficient of +0.3) with the bank’s other sources of cash flow. The expected annual return from the bank's existing facilities and other assets is 10 percent with a standard deviation of 3 percent. The branch will represent just 10 percent of Jackson’s total assets. Will the proposed branch increase Sullivan's overall rate of return? Its overall risk?The estimated total rate of return would be:E (R) = 0.10 (13%) + 0.90 (10%) = 10.3%The risk attached to this overall return rate would be:Thus ? ? 2.89% and the branch will slightly increase the bank's expected return but slightly decrease its overall risk. The bank should proceed with this project.4-4. The following statistics and estimates were compiled by First Savings Bank of Talbot regarding a proposed new branch office and the bank itself: Branch Office Expected Return 16%Standard Deviation of Return = 7%Ban k’s overall expected return= 10%Standard deviation of bank’s return= 3%Branch Asset Value as a Percentof Total Bank Assets = 15%Correlation of Cash Flows = + 0.27What will happen to the Talbot’s total expected return and overall risk if the proposed new branch is adopted?The bank's total expected return is:E (R) = 0.15 (16%) + 0.85 (10%) = 10.9%The bank's risk exposure is:And thus .0301 or 3.01%σ=The proposed project raises the savings banks expected return slightly and does not affect the risk of the bank. This is a good project.4-5. First National Bank of Yukon is considering installing 3 ATMs in its westside branch. The new machines are expected to cost $48,000 apiece. Installation costs will amount to about $16,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the westside district these three machines are expected to handle 180,000 transactions per year. On average, each cash transaction is expected to save $0.32 per transaction in check processing costs. If First National has a 12% cost of capital, should the bank proceed with this investment project?Year Savings1$57,600(.32*180,000)2$57,6003$57,6004$57,6005$57,6006$57,6007$57,6008$57,6009$57,60010$57,600Initial Investment192000(48,000*3+16,000*3)Required Rate of Return0.12Present Value of FutureCash Flows$325,452.85Net Present Value$133,452.85The net present value of this project is positive. First National Bank of Yukon should add the ATM machines to the Westside.4-6. First State Security Bank is planning to set up its own web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring household bills, verification of account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own web page and Internet service menu? How can the bank effectively differentiate itself from other banks currently present on the Internet? How might the bank be able to involve its own customers in designing its web site and pricing its Internet service package?The bank should remember that while the internet is a relatively low cost way of expanding and allows customers to find the bank rather than the bank having to find customers, there are serious concerns about privacy. In addition, the Internet is not limited by geography and while there are thousands of potential customers, there are also many financial institutions around the world competing for customer deposits and loans. The bank needs to be aware that there are many bank web pages out there and that they will need to invest in employees with the technical expertise to manage the new web site well. One of the first things the bank needs to do is to take steps to protect its customers and let its customers know what its privacy and security policies are. Another step the bank can take is to start with a customer survey to find out what its customers want and need from the bank’s Internet services. They can run this as a contest and give away some small items to the customer with the best ideas for the web page and Internet service. This should help get customers involved in the design and implementation of the web page and may help the bank start building an online customer base.。
CHAPTER 2THE IMPACT OF GOVERNMENT POLICY AND REGULATION ON BANKING AND THE FINANCIAL SERVICES INDUSTRYGoal of This Chapter: This chapter is devoted to a study of the complex regulatory environment that governments around the world have created for banks and other financial service firms in an effort to safeguard the public’s savings, bring stability to the financial system, and prevent abuse of financial service customers.Key Topics Presented in This Chapter∙The Principal Reasons for Bank and Nonbank Financial-Services Regulation∙Major Bank and Nonbank Regulators and Laws∙The Riegle-Neal and Gramm-Leach-Bliley (GLB) Acts∙Key Regulatory Issues Left Unresolved∙The Central Banking System∙Organization and Structure of the Federal Reserve System and Leading Central Banks of Europe and Asia∙Industry Impact of Central Bank Policy ToolsChapter OutlineI. Introduction: Nature and Importance of Bank RegulationII. Banking RegulationA. Pros and Cons of Strict Rules1. To protect the public's savings2. To control the money supply3. To ensure adequate supply of loans and to ensure fairness4. To maintain confidence in the system5. To avoid monopoly powers6. To provide support for government activities7. To support special sectors of the economyB. The Impact of Regulation -The Arguments for Strict Rules versus Lenient Rules III. Major Banking Laws-Where and When the Rules OriginatedA. Meet the “Parents”: The Legislation That Created Today’s Bank Regulatorsa. National Currency and Bank Acts (1863-64)b. The Federal Reserve Act (1913)c. The Banking Act of 1933 (Glass-Steagall)d. Establishing the FDIC under Glass-Steagalle. Criticisms of the FDIC and Responses Via New Legislationf. Raising the FDIC Insurance LimitB. Instilling Social Graces and Morales-Social Responsibility LawsC. Legislation Aimed at Allowing Interstate Banking: Where Can the “Kids” Play?D. The Gramm-Leach-Bliley Act (1999): What Are Acceptable Activities forPlaytime?E. Telling the Truth and Not Stretching It-The Sarbanes-Oxley Accounting StandardsAct (2002)IV. The 21st Century Issues in an Array of New Laws, Regulations and Regulatory StrategiesA. The FACT ActB. Check 21C. New Bankruptcy RulesD. Federal Deposit Insurance ReformE. New Regulatory Strategies in a New Century and Unresolved Regulatory Issues V. The Regulation of Nonbank Financial-Service FirmsA.Regulating Thrift (Savings) Industry1.Credit Unions2.Savings and Loans and Savings Banks3.Money Market Funds4.Life and Property/Casualty Insurance Companies5.Finance Companies6.Mutual Funds7.Security Brokers and Dealers8.Financial ConglomeratesB.Are Regulations Really Necessary in the Financial Services Sector?VI. The Central Banking System: It’s Impact on Banks and the Decisions and Policies of Financial InstitutionsA. Organizational Structure of the Federal Reserve SystemB. The Central Bank's Principal Task -- Making and Implementing Monetary Policy1.The Open Market Policy Tool of Central Banking2.Other Central Bank Policy Tools3. A Final Note on Central Banking’s Impact of Financial FirmsVII. Summary of the ChapterConcept Checks2-1. What key areas or functions of a bank or other financial firm are regulated today? Among the most important areas of banking subject to regulation are the adequacy of a bank's capital, the quality of its loans and security investments, its liquidity position, fund-raising options, services offered, and its ability to expand through branching and the formation of holding companies.2-2. What are the reasons for regulating each of the key areas or functions named above? These areas are regulated, first of all (and primarily), to protect the safety of the depositors' funds so that the public has some assurance that its savings and transactions balances are secure. Thus, bank failure is viewed as something to be minimized. There is also a concern for maintaining competition and for insuring that the public has reasonable and fair access to banking services, especially credit and deposit services.Not all of the areas listed above probably should be regulated. Minimizing the risk of bank failure serves to shelter some poorly managed banks. The public would probably be better served in the long run by allowing inefficient banks to fail rather than propping them up. Moreover, regulation may serve to distort the allocation of resources in banking, such as by restricting price competitionthrough legal interest-rate ceilings and anti-branching laws which leads to overbuilding of physical facilities. The result is a waste of scarce resources.2-3. What is the principal role of the Comptroller of Currency?The Comptroller of the Currency charters and supervises the activities of national banks through its policy-setting and examinations.2-4. What is the principal job performed by the FDIC?The Federal Deposit Insurance Corporation (FDIC) insures the deposits of bank customers, up to a total of $100,000 per account owner, in banks that qualify for a certificate of federal insurance coverage. The FDIC is a primary federal regulator (examiner) of state-chartered, non-member banks. It is also responsible for liquidating the assets of banks declared insolvent by their federal or state chartering agency.2-5. What key roles does the Federal Reserve System perform in the banking and financial system?The Federal Reserve System supervises and examines the activities of state-chartered banks that choose to become members of its system and qualify for Federal Reserve membership and regulates the acquisitions and activities of bank holding companies. However, the Fed's principal responsibility is monetary policy -- the control of money and credit growth in order to achieve broad economic goals.2-6What is the Glass-Steagall Act and Why Was It Important in banking history?The Glass-Steagall Act, passed by the U.S. Congress in 1933, was one of the most comprehensive pieces of banking legislation in American history. It created the Federal Deposit Insurance Corporation to insure smaller-size bank deposits, imposed interest-rate ceilings on bank deposits, broadened the branching powers of national banks to include statewide branching if state banks possessed similar powers, and separated commercial banking from investment banking, thereby removing commercial banks from underwriting the issue and sale of corporate stocks and bonds in the public market.There are many people who feel that banks should have some limitations on their investment banking activities. These analysts focus on two main areas. First, they suggest that this service may cause problems for customers using other bank services. For example, a bank may require a customer getting a loan to purchase securities of a company it is underwriting. This potential conflict of interest concerns some analysts. The second concern deals with whether the bank can gain effective control over an industrial organization. This could make the bank subject to additional risks or may give unaffiliated industrial organizations a competitive disadvantage. Today, banks can underwrite securities as part of the Gramm-Leach Bliley Act (Financial Services Modernization Act). However, congress built in several protections to make sure that the bank does not take advantage of customers. In addition, banks are prevented from affiliating with industrial firms under this law.2-7. Why did the federal insurance system run into serious problems in the 1980s and 1990s? Can the current federal insurance system be improved? In what ways?The FDIC, which insures U.S. bank deposits up to $100,000, was not designed to deal with system-wide failures or massive numbers of failing banks. Yet, the 1980s ushered in more bank closings than in any period since the Great Depression of the 1930s, bringing the FDIC to the brink of bankruptcy. Also, the FDIC's policy of charging the same insurance fees to all banks regardless of their risk exposure encouraged more banks to gamble and accept substantial failure risk. The recent FDIC Improvement Act legislation has targeted this last area, with movement toward a risk-based insurance schedule and greater insistence on maintaining adequate long-term bank capital.2-8. How did the Equal Credit Opportunity Act and the Community Reinvestment Act address discrimination?The Equal Credit Opportunity Act stated that individuals could not be denied a loan because of their age, sex, race, national origin or religious affiliation or because they were recipients of public welfare. The Community Reinvestment Act prohibited banks from discriminating against customers based on the neighborhood in which they lived.2-9. How does the FDIC deal with most failures?Most bank failures are handled by getting another bank to take over the deposits and clean assets of the failed institution -- a process known as purchase and assumption. Those that are small or in such bad shape that no suitable bids are received from other banks are closed and the insured depositors are paid off -- a deposit payoff approach. Larger failures may sometimes be dealt with by open-bank assistance where the FDIC loans money to the troubled bank and may order a change in management as well. Large failing money-center banks may also be taken over and operated as "bridge banks" by the FDIC until disposed of.2-10. What changes have occurred in the U.S. banks’ authority to c ross state lines?In 1994 the Riegle-Neal Interstate Banking and Efficiency Act was passed. This law is complicated but allows bank holding companies with adequate capital to acquire banks or bank holding companies anywhere in U.S. territory. No bank holding company can control more than 10% of the deposits at the national level and more than 30% of the deposits at the state level. Bank holding companies are also not allowed to cross state lines solely for the purpose of collecting deposits. Banks must adequately support their local communities by providing loans there. Bank holding companies are also allowed to offer a number of interstate services without necessarily having branches in the state by allowing affiliated banks to act as agents for the bank holding in other states. This law also allows foreign banks to branch in the U.S. under the same rules as domestic banks.2-11. How have bank failures influenced recent legislation?Recent bank failures have caused huge losses to federal insurance reserves and damaged public confidence in the banking system. Recent legislation has tried to address these issues by providing regulators with new tools to deal with the failures, such as the bridge bank device, and by granting banks, through regulation, somewhat broader service powers and more avenues for geographic expansion through branch offices and holding companies in order to help reduce their risk exposure. In addition, the increase in bank failures has focused attention on the insurance premiums banks pay and through the FDIC Improvement Act allowed the FDIC to move towards risk based insurance premiums.2-12. What changes in banking regulation did the Gramm-Leach-Bliley (Financial Services Modernization) Act bring about? Why?The most important aspect of the law is to allow U.S. bank, insurance companies and securities companies to affiliate with each other either through a holding company structure or through a bank subsidiary. The purpose of this law is to allow these companies to diversify their service offerings and reduce their overall risk. In addition it is thought that this seems to offer customers the convenience of one stop shopping.2-13. What new regulatory issues remain to be resolved now that interstate banking is possible and security and insurance services are allowed to co-mingle with banking?There are several key issues that remain to be resolved. One issue is concerned with what we should do about the governmental safety net. We need to balance risk taking by financial firms with safety for depositors. Another aspect of this issue is how to protect taxpayers if financial firms are allowed to take on more risk. Another issue that needs to be resolved is what to do about financial conglomerates. We need to be sure that the financial conglomerate does not use the resources of the bank to prop another aspect of their business. In addition, regulators need to be better trained to adequately regulate the more complex organizations and functional regulation needs to be reviewed periodically to make sure it is working. A third area that needs to be resolved is whether banking and commerce should be mixed. Should a bank sell cars along with credit cards and other financial services?2-14 Why must we be concerned about privacy in the sharing and use of financial-service customer’s information? Can the financial system operate efficiently if the sharing of nonpublic financial information is forbidden? How far, in your opinion, should we go in regulating who gets access to private information?It is important to be concerned about how private information is shared because it is possible to misuse the information. For example, if an individual’s medical condition is known to the bank through its insurance division, the bank may deny a loan based on this confidential information.They can also share this information with outside parties unless the customer states in writing that this information cannot be shared. On the other hand, there could be much duplication of effort if no sharing information is allowed. This would lead to inefficiencies and higher costs to consumers. In addition, sharing of information would allow targeting of services to particular customer needs. At this point, no one is quite sure what information and how it will be shared. It appears that there will eventually be a compromise between customers’ needs for privacy and the financial-services company’s need for to share that information.2-15. Why were the Sarbanes-Oxley, Bank Secrecy and USA Patriot Acts enacted in the United States? What impact are these new laws and their supporting regulations likely to have on the financial-services sector?The Bank Secrecy Act requires any cash transaction of $10,000 or more be reported to the government and was passed to prevent money laundering by criminal organizations.The USA Patriot Act was enacted after the attacks of September 11 and is designed to find and prosecute terrorists. It was a series of amendments to the Bank Secrecy Act. It requires banks and financial service providers to establish the identity of any customer opening or changing accounts in the United States. Many banks are however concerned about the cost of compliance.The Sarbanes-Oxley Accounting Standards Act came as a response to the disclosure of manipulation of corporate financial reports and questionable dealings among leading commercial firms, banks and accounting firms. It prohibits false or misleading information about the financial performance of banks and other financial service providers and generally tries to enforce higher standards in the accounting profession.2-16 Explain how the FACT, Check 21, 2005 Bankruptcy and 2006 FDIC Insurance Reform acts are likely to affect the revenues and costs of financial firms and their service to customers. FACT requires the FTC to make it easier for individuals victimized by identity theft to file a theft report and requires credit bureaus to help victims resolve the problems. This should make it easier for customers to handle identity theft problems and may reduce costs to the financial institutions that serve these customers. Financial institutions should be able to spend less on reimbursing customers for theft problems and perhaps the instances of identity theft will also be reduced at the same time.Check 21 allows financial institutions to send substitute checks to other banks to clear checks rather than the checks themselves. The substitute checks can be electronic images that can be transferred in an instant at a much lower cost to other institutions. This should reduce costs to institutions as they do not have to have an employee physically transfer checks anymore. In addition, financial institutions should know more quickly whether a check is good and this should reduce fraud and other costs associated with bad checks.2005 Bankruptcy Law requires that all higher income borrowers to pay back at least a portion of the money they have borrowed to the bank. Higher income borrowers will be required to make payment plans rather than have all of their debts forgiven. This should lower bad debt costs to financial institutions and may lower borrowing costs for all borrowers.Federal Deposit Insurance Reform raises the deposit insurance limits for certain retirement accounts and allows regulators to periodically adjust deposit insurance limits for inflation. This should allow investors to put more money into insured deposit accounts and may allow banks to have a more stable and reliable source of funds for loans and other investments. This will probably have the effect of increasing bank revenues and/or reducing expenses for the bank.For all of these new laws, the effect should be to make the bank more profitable because of higher revenues or lower expenses. At the same time these new laws allow financial institutions to better serve their customers.2-17.In what ways is the regulation of nonbank financial institutions different from the regulation of banks in the United States? How are they similar?Most nonbank financial institutions are considered “vested with the public interest” and therefore, face as close supervision from federal and state supervisors as banks do. However, some institutions are solely regulated at the federal level while others are only regulated at the state level.2-18. Which financial service firms are regulated primarily at the federal level and which at theSome regulators and experts are concerned because they feel that state regulators might not have the expertise to deal with the new more complex financial firm that exists today. They are also concerned because the new ‘functional’ regulation is not neces sarily coordinated between different regulatory agencies. Only time will tell if this functional regulatory structure is effective. 2-19. Can you make a case for having only one regulatory agency for financial service firms? Yes a case can easily be made for financial service firms. Problems in one area such as security brokerage services or insurance may eventually lead to problems in the traditional banking area or visa versa. One regulatory agency might be more likely to find these overlapping problems and prevent them before they cause the collapse of the entire organization. In addition, one regulatory agency may be able to better identify and prevent the inherent conflicts of interest that exist when a large financial conglomerate is formed.2-20. What is monetary policy?Monetary policy consists of regulation and control over the growth of money and credit in an attempt to pursue broad economic goals such as full employment, avoidance of inflation, and sustainable economic growth. Its principal tools are open market operations, changes in the discount (lending) rate, and changes in reserve requirements behind deposits.2-21. What services does the Federal Reserve System provide to depository institutions? Many services needed by banks are provided by the Federal Reserve Banks. Among the most important services provided by the Fed are checking clearing, the wiring of funds, shipments of currency and coin, loans from the Reserve banks to qualified depository institutions, and the supplying of information concerning economic and financial trends and issues. The Fed began charging for its services in order to help recover the added costs of deregulation which made more institutions eligible for Federal Reserve services and also to encourage the private marketplace to develop and offer similar services (such as check clearing and wire transfers).2-22. How does the Federal Reserve affect the banking and financial system through open market operations (OMO)? Why is OMO the preferred tool for many central banks around the globe?Open market operations consist of the buying and selling of securities by the central bank in an effort to influence and shape the course of interest rates and the growth of money and credit. Open-market operations, therefore, affect bank deposits -- their volume and growth -- as well as the volume of lending and the interest rates attached to bank borrowings and loans as well as the value of bank stock. OMO is the preferred tool, because it is also the Central Bank’s most flexible tool. It can be used every day and any mistakes can be quickly reversed.2-23 What is a primary dealer and why are they important?A primary dealer is a dealer in U.S. Treasury Bills and other securities that meets the Federal Reserve System requirements for trading directly with the Fed’s trading desk inside the New York Federal Reserve. It is through these trades with primary dealers that the Federal Reserve carries out its monetary policy objectives and influences the economy including the supply of money and credit and interest rates. Primary dealers have an integral role to play in the economy of the U.S. 2-24. How can changes in the central bank loan discount rate and reserve requirements affect the operations of depository institutions? What happens to the legal reserves of the banking system when the Fed grants loans through the discount window? How about when these loans are repaid? What are the effects of an increase in reserve requirements?The Discount Window is the department in each Federal Reserve Bank that receives requests to borrow reserves from banks and other depository institutions which are eligible to obtain credit from the Fed for short periods of time. The rate charged on such loans is called the discount rate. Reserve requirements are the amount of vault cash and deposits at the Federal Reserve banks that depository institutions raising funds from sources of reservable liabilities (such as checking accounts, business CDs, and borrowings of Eurodollars from abroad) must hold. If the Fed loans $200 million in reserves from the discount window, total reserves will rise by the amount of the discount window loan, but then will fall when the loan is repaid. Increasing reserve requirement means that depository institutions must keep more vault cash and reserves with the Federal Reserve for each deposit account they hold. This would have the effect of making less money available for loans. Since this has a multiplicative effect on the economy it can have a severe effect on the total amount of loans made and on the growth of the money supply that results.2-25. How did the Federal Reserve change the policy and practice of the discount window recently? Why was this change made?The Fed created two new loan types, primary and secondary credit, which replaced the existing adjustment and extended credit. Primary credit is extended to sound borrowing institutions at a rate slightly higher than the federal funds rate. Secondary credit is extended to institutions that do not qualify for primary credit for temporary funding needs at a rate slightly above the prime rate. These changes were implemented to encourage greater use of the discount window and to bring greater stability the federal funds rate and to the money market as a whole.2-26. How does the structure of the European Central Bank (ECB) appear to be similar to the structure of the Federal Reserve System? How are these two powerful and influential central banks different from one another?Like the Fed the ECB consists of a governing board and a policy making council and just like the Fed’s board of governors works with the 12 regional Federal Reserve banks the ECB has a cooperative arrangement with each EU member nation’s central bank. The policy menu of the ECB however is a lot simpler than its counterpart at the Fed. The central goal is price stability, which is largely achieved through open market operations and reserve requirements.Problems2-1. For each of the actions described explain which government agency or agencies a financialmanager must deal with and what banking laws are involved:A. Chartering a new bank.B. Establishing new bank branch offices.C. Forming a bank or financial holding company.D. Completing a bank merger.E. Making holding company acquisitions of nonbank businesses.A. For chartering a new bank in the United States either the state banking commission of thestate where the bank is to be headquartered must be consulted or the Comptroller of theCurrency must be sent an application for a national charter. The National Banking Actgoverns national charters while state charters are governed by rules laid down in statebanking statutes.B. Requests for new branch offices must also be made of the bank's chartering agency -- eitherthe state banking commission for state-chartered banks or the Comptroller of the Currencyfor national banks in the United States.C. Requests for holding company formation must be submitted to the Federal Reserve Boardor, for certain routine transactions, to the Federal Reserve Bank in the district. Some statesrequire their banking commissions to be notified if a holding company acquires a bankwithin the state's borders.D. The Bank Merger Act requires the approval of a bank's principal federal supervisoryagency for a proposed merger even if the bank is state chartered. Mergers involvingnational banks must be approved by the Comptroller of the Currency and by the statebanking commission if a bank has a state charter of incorporation. The merger must also bereviewed by other federal agencies that have supervisory responsibility for a bank, such asthe FDIC or the Federal Reserve, and by the U.S. Department of Justice.E. Request for acquisitions of nonbank businesses must be approved by the Federal ReserveBoard. For some more routine transactions, the Federal Reserve Bank in the distract canmake the decision.2-2. See if you can develop a good case for and against the regulation of financial institutions inthe following areas:A. Restrictions on the number of new financial-service institutions allowed to enterthe industry each year.B. Restrictions on which depository institutions are eligible forgovernment-sponsored deposit insurance.C. Restrictions on the ability of financial firms to underwrite debt and equitysecurities issued by their business customers.D. Restrictions on the geographic expansion of banks and other financial firms such aslimits on branching and holding company acquisitions across county, state, andinternational borders.E. Regulations on the bank failure process, defining when banks and other financialfirms are to be allowed to fail and how their assets are to be liquidated.A. Restricting entry into the banking industry limits competition and, to some extent, protectssome banks from failure, reducing the risk of depositor loss. On the other hand, limiting new firms props up some financial-service firms that should be allowed to fail if the system is to be as efficient as it can be.B. Restrictions on which banks can get deposit insurance also limits competition butencourages some banks to take on more risk because most depositors are protected by the insurance. Restricting which institutions are eligible for deposit insurance may limit the losses to the federal agency providing that insurance but may also limit that federalagency’s ability to monitor and control the money supply and the economy as a result. C. Limits on underwriting securities reduce a bank's revenue potential and will probablyresult in losing some of the largest corporate customers to foreign banks who face morelenient regulations. On the hand, underwriting securities is inherently risky and limiting this may limit the risk of the bank. It may also prevent the conflicts of interest that arise when a bank makes loans and underwrites securities at the same time.D. Limiting a bank's ability to expand geographically exposes it to greater risk of economicfluctuations within its local market area and makes it more prone to failure. On the other hand, allowing a bank to expand geographically may concentrate power in the hands of a few large institutions that make it more likely that service costs will rise for all customers.E. Protecting banks from failure inevitably involves sheltering some inefficient and poorlymanaged institutions that waste resources and fail to serve customers effectively. It alsotends to make the average customer less vigilant about the quality and risk of a particular bank's services and operations because deposits are insured and bank failure seems to most customers to be a relatively remote possibility. On the other hand, it makes customersmore confident in the system as a whole and makes a bank run less likely.2-3. Consider the issue of whether or not the government should provide a system of deposit insurance. Should it be wholly or partly subsidized by the taxpayers? What portion of the cost should be borne by depository institutions? by the depositors? Should riskier depository institutions pay higher deposit insurance premiums? Explain how you would determine exactly how big an insurance premium each bank should pay each year.。
CHAPTER 4CREATING AND MANAGING SERVICE OUTLETS:NEW CHARTERS, BRANCHES, AND ELECTRONIC FACILITIESGoal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities.Key Topics in This Chapter•Chartering New Financial Service Institutions•Performance of New Banks•Establishing Full Service Branches•In-Store Branching•Establishing Limited Service Facilities•ATMs and Telephone Centers•The Internet and Online BankingChapter OutlineI. IntroductionA. The Importance of Convenience and Timely Access to CustomersB. Service Options Available Today1. Chartering New (De Novo) Financial Institutions2. Establishing New Full-Service Branches3. Setting Up Limited-Service FacilitiesII.Chartering a New Bank or Other Financial Service InstitutionsIII.The Bank Chartering Process in the United StatesA. The Chartering Authorities in the U.S.B. Benefits of Applying for a National CharterC. Benefits of Applying for a State CharterIV. Questions Regulators Usually Ask the Organizers of a New BankV. Factors Weighing on the Decision to Seek a New Bank CharterA. External Factors1. Level of Economic Activity2. Growth of Local Economic Activity3. The Need for a New Bank4. Strength and Character of Local Competition in Supplying FinancialServicesB. Internal Factors1. Qualifications and Contacts of the Organizers2. Management Quality3. Pledging of Capital and Funds to Cover the Cost of Filing a CharterApplication and Getting UnderwayVI. Volume and Characteristics of New Bank ChartersA. Numbers of New ChartersB. Characteristics of New Charter MarketsVII. How Well Do New Banks Perform?A. New Bank Financial PerformanceB. Pro-Competitive Effects on Service Offerings and Service PricingVIII. Establishing Full-Service Branch Offices: Choosing Locations and Designing New BranchesA. Advantages of Full-Service BranchesB. Trends in the Design of New BranchesC. Desirable Sites for New BranchesD. Expected Rate of ReturnE. Geographic DiversificationF. Branch RegulationG. The Changing Role of BranchesH. In-Store BranchingIX. Establishing and Monitoring Automated Limited-Service FacilitiesX. Point-of-Sale TerminalsXI. Automated Tellers (ATMs)A. History of ATMsB. ATM ServicesC. Fee Structures for ATM UsageD. Customer Service Limitations of ATMsE. Example of the ATM Capital-Budgeting DecisionXII. Home and Office Online BankingA. Telephone Banking and Call CentersB. Internet Banking1. Services Provided Through the Internet2. Challenges in Providing Internet Services3. The Net and Customer Privacy and SecurityXIII. Financial Service Facilities of the FutureXIV. Summary of the ChapterConcept Checks4-1. Why is the physical presence of a bank still important to many bank customers despite recent advances in long-distance communications technology?Many customers still prefer the personal attention and personal service that contact with bank employees provides. Moreover, for those services where problems can arise that require detailed information and explanation-for example, when a checking account is overdrawn and checks begin to bounce-the customer needs quick access and, often, the personal attention to his or her problem on the part of one or more employees.4-2. Why is the creation (chartering) of new banks closely regulated? What about nonblank financial firms?The creation of new banks is regulated to insure the safety and soundness of existing banks and to avoid excessive numbers of bank failures. The same arguments are usually made for non-bank financial firms. Financial-Service firms hold the public’s savings, are the heart of the payment system and create money. The failure of these firms could disrupt the economy and too many could mean in excessive growth in the money supply and inflation.4-3. What do you see as the principal benefits and costs of government regulation of the number of financial service charters issued?While control over the entry of new banks may reduce the number of failures, it also limits competition, so that the public may receive a smaller volume or lower quality of services at excessive prices.4-4. Who charters new banks in the United States? New thrift institutions?New banks are chartered by the banking commissions of the individual states or, at the federal level, by the Comptroller of the Currency. Thrift institutions are chartered by the states or at the federal level by the Office of Thrift Supervision.4-5. What key role does the FDIC play in the chartering process?The FDIC exercises some control over state bank charter activity as well as federal charters because most states insist that their new banks qualify for federal deposit insurance before they can open for business.4-6. What are the advantages of having a national bank charter? A state bank charter?The benefits of a national charter are:a.)It brings prestige due to stricter regulations and may help attract more customersb.)In times of trouble the technical assistance given may be better ensuring a betterchance of long run survivalThe benefits of a state charter are:a.)It may be easier and less costly to get a state charterb.)The bank does not have to join the Federal Reserve and therefore avoids buying andholding low yield stock of the Federal Reservec.)Many states let a bank lend more to one borrowerd.)State chartered banks may be able to make types of loans that a nationally charteredbank cannot4-7. What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter? Why might this required information be important?The Comptroller of the Currency asks for information on the number of competing banks and bank-like institutions in the service area of the proposed bank. More competitive market situations limit the profit potential and perhaps the growth potential of a new bank. Also requested is information about shopping centers, retail and wholesale business activity, recent population growth, traffic counts, and personal income levels - all viewed as indicators of potential demand for banking services in the service area of the proposed new bank. Applicants must also provide background information on the organizers and proposed management of a new bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to manage the public's funds as well as their own.4-8. Why do you think the organizers of a new financial firm are usually expected to put together and submit to the chartering authority a detailed business plan, including marketing, management, and financial components?This demonstrates to regulators that the organizers of the bank have the expertise, experience and skills necessary to be successful in managing the new bank. If the organizers of a bank do not know where they are going, they are unlikely to be successful. In addition, it demonstrates whether the organizers of the new bank have a realistic picture of the community they are planning on serving and whether the organizers have a realistic view of the profit potential in the new bank. 4-9. What are the key factors the organizers of a new financial firm should consider before deciding to seek a charter?While a variety of factors are examined by different business people interested in establishing a new bank, most look at some or all of the following factors.1. External Factorsa. The level of local economic activity.b. Growth of local economic activity.c. The need for a new bank.d. The strength and character of local competition in supplying financialservices.2. Internal Factorsa. Qualifications and contacts of the new bank's organizers.b. Management quality.c. Pledging of capital and funds to cover the cost of filing a charter applicationand begin operations.4-10. Where are most new banks chartered in the United States?New charters tend to be concentrated in large urban areas where expected rates of return on the organizers investments are likely to be the highest. As the population increases relative to the number of financial firms, the number of new charters increases. The success of local banksalready in the area suggests that new financial firms would also be successful. Places where the concentration ratio for new banks has increased tend to have fewer new bank charters.4-11. How well do most new banks perform for the public and for their owners?Most new banks succeed, especially those whose organizers can bring in new deposits and loan accounts during the first year of the bank's operation. Most are profitable within two to three years of opening. There is some ev idence that newly charted banks are financially ‘fragile’ and more prone to failure than existing banks. They appear to be more vulnerable to real estate crises than established banks. New banks tend to under perform their competitors until they have been around for a while and new banks are more closely supervised than established banks.4-12. Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial services?The chartering of a new financing corporation is normally a lengthy and expensive process, requiring the completion of elaborate federal or state application forms, while the branch application process is normally far simpler and less costly. Moreover, with the increase in the number of failures in recent years regulatory-imposed capital requirements for new charters have increased substantially, while new branch offices usually carry significantly lower capital requirements. Moreover, branch offices themselves are often much less elaborate and costly to build and maintain than are the headquarters' facility of a new institution where some duplicate facilities can be eliminated (for example, checking processing, credit analysis, and records departments).4-13. What factors are often considered in evaluating possible sites for new branch offices? Bankers first need to decide the goals and objectives of a new facility. Often this means assessing whether the proposed new branch is aimed at selling one or more particular services, such as deposits or loans, and also deciding how closely correlated cash flows and returns from the new branch office may be with cash flows and returns from the other facilities operated by the bank. If returns or cash flows through the proposed new institution are negatively correlated or display low positive correlation with the institution's other facilities, they may be able to lower the variance of its returns or cash flows by proceeding to establish the new office.Other considerations revolve around the economic strength of the proposed branch officesite-whether there is adequate traffic volume, large numbers of stores and shops, older or younger age populations who often require slightly different menus of services, recent area population growth, density and income, the occupational and residential makeup of the proposed new branch area, a large enough population to generate enough customers to breakeven and the number and size of facilities operated by competitors. Generally, for branches designed to attract and hold deposits key factors to consider usually revolve around individual and family incomes, concentrations of retail stores and shops, older-than-average residents, and homeowners rather than renters. For branch facilities emphasizing credit services residential areas with substantial new construction activity, heavy traffic flow, and high concentrations of stores and shopping centers are typically desirable for consumer and retail loan demand, while central city office locations are often chosen as locations for commercial loan facilities.4-14. What changes are occurring in the design of, and the roles played by, branch offices? Please explain why these changes are occurring.Bank branches are increasingly becoming selling platforms in which more and more fee-based services are attractively and prominently advertised in order to maximize the fee-income generating potential of each branch. Moreover, branches are becoming increasingly automated to reduce personnel and other operating costs and improve speed, efficiency, and accuracy in handling a growing service volume. Branch design has come to reflect these trends with automated facilities placed at easy access points, along with information booths to speedily direct customers to the service areas they need. Human tellers may be placed deeper inside branch facilities so that customers must pass by other service departments and conspicuous advertising in order to encourage customers to become aware of and avail themselves of other bank services.4-15. What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches? What advantages and what problems can the closing of a branch office create?The opening of new branch off ices must be approved by a bank's or thrift’s principal federal or state supervisor. Closing a branch office has become much more complicated in recent years as the result of several new laws and regulations. For example, the FDIC Improvement Act requires 90 days advance notice of branch closings to both customers and the principal supervisory agency and a posting on the branch site at least 30 days prior to closing. Banks and thrifts must also make an "affirmative effort" to reach all segments of their communities without discrimination under the terms of the Community Reinvestment Act which raises the danger of customer protests against closings if it appears the bank is under-serving certain groups of customers. Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S. banks and thrifts from branching expansion when they have a poor record of serving all segments of their communities. Closing selected branch offices can reduce operating costs and divert resources from less profitable to more profitable uses. However, they risk alienating good customer relationships unless it can serve those same customers with its remaining facilities.4-16. What new and innovative sites have been selected for new branch offices in recent years? Why have these sites been chosen by financial firms? Do you have any ideas about other sites that you believe should be considered?Rapid increases in new branches located in grocery stores, shopping centers, and inside other businesses and facilities where the public frequently gathers have helped to reduce branch construction costs and promote cross-selling of goods and financial services. Other branches have been opened in apartment complexes, senior citizen centers, and other customer-convenient locations as bankers come to realize they must adjust their service locations and service hours to conform to customer needs in an intensely competitive financial-services environment.4-17. What are POS terminals and where are they usually located?Point-of-sale terminals are set up to accommodate customer purchases of goods and services. These computer terminals normally are located in retail stores, gasoline stations, and similar places with a link to the banks’ own computer records. When a customer of the bank makes a purchase, the amount of the transaction is deducted from the customer's deposit account and added to the store's account. Because the customer immediately loses funds many bank customers have been hesitant to use the service as opposed to paying by check or credit card where payment is delayed for a few days. However, this depends on whether the POS terminal is an offline or online terminal. An offline terminal accumulates all transactions until the end of the day when all transactions are su btracted from a customer’s account. This type of terminal is less costly for the bank to operate. An online terminal subtracts the transactions immediately from the customer’s account and reduces the chance of an overdraft occurring but is more expensive for the bank to operate. Consumer reluctance to use POS terminals appears to be fading and as fees for other services rise this reluctance will continue to disappear.4-18. What services do ATMs provide? What are the principal limitations of ATMs as a service provider? Should ATM carry fees? Why?The earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and verifying checking account balances, often at hours when the full-service branch offices were closed. Today, ATMs frequently provide a wide menu of old and new services, including bill paying, transfer of funds between accounts, and the purchase of tickets for travel and entertainment. Most authorities expect ATM usage to grow rapidly as these machines offer more services and as bankers increasingly move to restrict customer access to more costly human tellers and other bank personnel, often by charging extra fees for personal service.ATMs do have some significant limitations that bankers will have to work to overcome. They break down and need to be replaced, sometimes quite frequently and annoyingly for customers, and as technology changes often become quickly outdated. Customer activity around ATMs, particularly at night, has invited criminals to steal money and injure customers, sometimes creating liability for banks. Moreover, not all customers make use of these facilities due to a preference for personalized service, fear of crime, or unfamiliarity with how the machines work. Customer education and better service pricing are two important tools that could help with these problem areas in the future. In addition, ATMs do not rank high in their ability to sell peripheral services. Some banks have found that there has been a sharp decline in their ability to sell other services. Finally, ATMs are not necessarily profitable for all banks. Because they are available 24 hours, some customers may make more frequent and smaller withdrawals from the machine than they would with a human teller, driving up the costs. In addition, these same customers will often still demand a human teller to deposit their pay check, making the bank keep both tellers and ATM machines.Whether ATM should carry a fee is rather controversial. Recently, two of the largest ATM networks have decided to let owners of ATMs charge non-customers a surcharge. Several regional have begun to charge fees as well. These fees reflect the usage of ATMs. About 85% of all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming deposits. In addition, in many places, ATM usage has declined as customers pass over ATMs in favor of credit and debit cards, onsite terminals and the internet.4-19. What are self-service terminals and what advantages do they have for financial institutions and their customers?Self-service terminals include ATMs and other computer-based limited-service facilities that permit a customer to call up information about his or her account and recent transactions with the institution or information about different services that the customer might be interested in purchasing. Many are accessible 24 hours a day or are easier to get to rather than wait for the help of personnel. They can save on resources by saving on staff time. Many institutions are adding telephones and video screens so that customers with problems can dial up an employee day or night with problems. This is also saving money because they can avoid duplication of staff at each branch.4-20. What financial services are currently available from banks on the internet? What problems have been encountered in trying to offer internet services?Customers can make payments, check on account balances, move funds between accounts and get applications for loans, deposits and other services. In addition banks can advertise on the web. Some of the problems include protecting customers’ privacy and heading off crime. In addition, the web does not make it easy for a bank to get to know their customers personally. The cost may also be prohibitive to some customers.4-21. How can financial firms better promote internet services?They need to emphasize the safety of their internet services. They need to promote their home page at every opportunity and update it frequently to keep customers’ interest. They need to survey customers about their satisfaction with the services and encourage dialogue via e-mail to resolve problems. They can also provide programs to download to act as screen savers (and advertisements) and also information about the institution and the services it provides. Problems4-1. A group of businessmen and women from the town of Mathews are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.2 million to build along with another $700,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $510,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 6 percent annually after the first year, while expenses will grow an estimated 5 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?Year Revenues Op Expense Net Profits1 $510,000 $180,000 $330,0002 $540,600 $189,000 $351,6003 $573,036 $198,450 $374,5864 $607,418 $208,373 $399,0465 $643,863 $218,791 $425,0726 $682,495 $229,731 $452,7647 $723,445 $241,217 $482,2288 $766,851 $253,278 $513,5739 $812,863 $265,942 $546,92110 $861,634 $279,239 $582,39511 $913,332 $293,201 $620,13112 $968,132 $307,861 $660,27113 $1,026,220 $323,254 $702,96614 $1,087,793 $339,417 $748,37715 $1,153,061 $356,388 $796,67316 $1,222,245 $374,207 $848,03817 $1,295,579 $392,917 $902,66218 $1,373,314 $412,563 $960,75119 $1,455,713 $433,191 $1,022,52220 $1,543,056 $454,851 $1,088,205Initial Investment $3,900,000Required Rate of Return 0.10Present Value of Future CashFlows $4,491,642Net Present Value of Investment $591,642Given the above information, the organizers are likely to proceed given that the net present value of this investment is positive. The return they are going to earn is greater than the 10% they need to earn.4-2. Andover Savings Bank is considering the establishment of a new branch office at the corner of Lafayette and Connecticut Avenues. The savings association’s Economics Department projects annual operating revenues of $1.75 million from services sold to generate fee income and annual branching operating expenses of $880,000. The cost of procuring the property is $2.5 million and branch construction will total an estimated $2.32 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Andover likely proceed with this branch office project?Year Revenues Op Expenses Net Profits1 $1,750,000 $880,000 $870,0002 $1,750,000 $880,000 $870,0003 $1,750,000 $880,000 $870,0004 $1,750,000 $880,000 $870,0005 $1,750,000 $880,000 $870,0006 $1,750,000 $880,000 $870,0007 $1,750,000 $880,000 $870,0008 $1,750,000 $880,000 $870,0009 $1,750,000 $880,000 $870,00010 $1,750,000 $880,000 $870,00011 $1,750,000 $880,000 $870,00012 $1,750,000 $880,000 $870,00013 $1,750,000 $880,000 $870,00014 $1,750,000 $880,000 $870,00015 $1,750,000 $880,000 $870,00016 $1,750,000 $880,000 $870,000Initial Investment $4,820,000Required Rate of Return 0.12Present Value of Future CashFlows $6,067,368Net Present Value of Investment $1,247,368Andover is likely to proceed with this project because the net present value is positive. This means that the interest rate that Andover will earn on this project is higher than the 12% they need to earn. 4-3. Jackson Bank of Commerce estimates that building a new branch office in the newly developed Guidar residential township will yield an annual expected return of 13 percent with an estimated standard deviation of 5 percent. The bank’s marketing department estimates that cash flows from the proposed Guidar branch will be mildly correlated (with a correlation coefficient of +0.3) with the bank’s other sources of cash flow. The expected annual return from the bank's existing facilities and other assets is 10 percent with a standard deviation of 3 percent. The branch will represent just 10 percent of Jackson’s total assets. Will the proposed branch increase Sullivan's overall rate of return? Its overall risk?The estimated total rate of return would be:E (R) = 0.10 (13%) + 0.90 (10%) = 10.3%The risk attached to this overall return rate would be:Thus ?? 2.89% and the branch will slightly increase the bank's expected return but slightly decrease its overall risk. The bank should proceed with this project.4-4. The following statistics and estimates were compiled by First Savings Bank of Talbot regarding a proposed new branch office and the bank itself:Branch Office Expected Return 16%Standard Deviation of Return = 7%Ban k’s overall expected return= 10%Standard deviation of bank’s return= 3%Branch Asset Value as a Percentof Total Bank Assets = 15%Correlation of Cash Flows = + 0.27What will happen to the Talbot’s total expected return and overall risk if the proposed new branch is adopted?The bank's total expected return is:E (R) = 0.15 (16%) + 0.85 (10%) = 10.9%The bank's risk exposure is:σ=And thus .0301 or 3.01%The proposed project raises the savings banks expected return slightly and does not affect the risk of the bank. This is a good project.4-5. First National Bank of Yukon is considering installing 3 ATMs in its westside branch. The new machines are expected to cost $48,000 apiece. Installation costs will amount to about $16,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the westside district these three machines are expected to handle 180,000 transactions per year. On average, each cash transaction is expected to save $0.32 per transaction in check processing costs. If First National has a 12% cost of capital, should the bank proceed with this investment project? Year Savings1 $57,600 (.32*180,000)2 $57,6003 $57,6004 $57,6005 $57,6006 $57,6007 $57,6008 $57,6009 $57,60010 $57,600Initial Investment 192000 (48,000*3+16,000*3)Required Rate of Return 0.12Present Value of Future CashFlows $325,452.85Net Present Value $133,452.85The net present value of this project is positive. First National Bank of Yukon should add the ATM machines to the Westside.4-6. First State Security Bank is planning to set up its own web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring household bills, verification of account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own web page and Internet service menu? How can the bank effectively differentiate itself from other banks currently present on the Internet? How might the bank be able to involve its own customers in designing its web site and pricing its Internet service package?The bank should remember that while the internet is a relatively low cost way of expanding and allows customers to find the bank rather than the bank having to find customers, there are serious concerns about privacy. In addition, the Internet is not limited by geography and while there are thousands of potential customers, there are also many financial institutions around the world competing for customer deposits and loans. The bank needs to be aware that there are many bank web pages out there and that they will need to invest in employees with the technical expertise to manage the new web site well. One of the first things the bank needs to do is to take steps to protect its customers and let its customers know what its privacy and security policies are. Another step the bank can take is to start with a customer survey to find out what its customers want and need from the bank’s Internet services. They can run this as a contest and give away some small items to the customer with the best ideas for the web page and Internet service. This should help get customers involved in the design and implementation of the web page and may help the bank start building an online customer base.。
CHAPTER 2THE IMPACT OF GOVERNMENT POLICY AND REGULATION ON BANKING ANDTHE FINANCIAL SERVICES INDUSTRYGoal of This Chapter: This chapter is devoted to a study of the complex regulatory environment that governments around the world have created for banks and other financial service firms in an effort to safeguard the public’s savings, bring stability to the financial system, and prevent abuse of financial service customers.Key Topics Presented in This Chapter•The Principal Reasons for Bank and Nonbank Financial-Services Regulation•Major Bank and Nonbank Regulators and Laws•The Riegle-Neal and Gramm-Leach-Bliley (GLB) Acts•Key Regulatory Issues Left Unresolved•The Central Banking System•Organization and Structure of the Federal Reserve System and Leading Central Banks of Europe and Asia•Industry Impact of Central Bank Policy ToolsChapter OutlineI. Introduction: Nature and Importance of Bank RegulationII. Banking RegulationA. Pros and Cons of Strict Rules1. To protect the public's savings2. To control the money supply3. To ensure adequate supply of loans and to ensure fairness4. To maintain confidence in the system5. To avoid monopoly powers6. To provide support for government activities7. To support special sectors of the economyB. The Impact of Regulation -The Arguments for Strict Rules versus Lenient Rules III. Major Banking Laws-Where and When the Rules OriginatedA. Meet the “Parents”: The Legislation That Created Today’s Bank Regulatorsa. National Currency and Bank Acts (1863-64)b. The Federal Reserve Act (1913)c. The Banking Act of 1933 (Glass-Steagall)d. Establishing the FDIC under Glass-Steagalle. Criticisms of the FDIC and Responses Via New Legislationf. Raising the FDIC Insurance LimitB. Instilling Social Graces and Morales-Social Responsibility LawsC. Legislation Aimed at Allowing Interstate Banking: Where Can the “Kids” Play?D. The Gramm-Leach-Bliley Act (1999): What Are Acceptable Activities forPlaytime?E. Telling the Truth and Not Stretching It-The Sarbanes-Oxley Accounting StandardsAct (2002)IV. The 21st Century Issues in an Array of New Laws, Regulations and Regulatory StrategiesA. The FACT ActB. Check 21C. New Bankruptcy RulesD. Federal Deposit Insurance ReformE. New Regulatory Strategies in a New Century and Unresolved Regulatory Issues V. The Regulation of Nonbank Financial-Service FirmsA.Regulating Thrift (Savings) Industry1.Credit Unions2.Savings and Loans and Savings Banks3.Money Market Funds4.Life and Property/Casualty Insurance Companies5.Finance Companies6.Mutual Funds7.Security Brokers and Dealers8.Financial ConglomeratesB.Are Regulations Really Necessary in the Financial Services Sector?VI. The Central Banking System: It’s Impact on Banks and the Decisions and Policies of Financial InstitutionsA. Organizational Structure of the Federal Reserve SystemB. The Central Bank's Principal Task -- Making and Implementing Monetary Policy1.The Open Market Policy Tool of Central Banking2.Other Central Bank Policy Tools3. A Final Note on Central Banking’s Impact of Financial FirmsVII. Summary of the ChapterConcept Checks2-1. What key areas or functions of a bank or other financial firm are regulated today?Among the most important areas of banking subject to regulation are the adequacy of a bank's capital, the quality of its loans and security investments, its liquidity position, fund-raising options, services offered, and its ability to expand through branching and the formation of holding companies.2-2. What are the reasons for regulating each of the key areas or functions named above?These areas are regulated, first of all (and primarily), to protect the safety of the depositors' funds so that the public has some assurance that its savings and transactions balances are secure. Thus, bank failure is viewed as something to be minimized. There is also a concern for maintaining competition and for insuring that the public has reasonable and fair access to banking services, especially credit and deposit services.Not all of the areas listed above probably should be regulated. Minimizing the risk of bank failure serves to shelter some poorly managed banks. The public would probably be better served in the long run by allowing inefficient banks to fail rather than propping them up. Moreover, regulation may serve to distort the allocation of resources in banking, such as by restricting price competition through legal interest-rate ceilings and anti-branching laws which leads to overbuilding of physical facilities. The result is a waste of scarce resources.2-3. What is the principal role of the Comptroller of Currency?The Comptroller of the Currency charters and supervises the activities of national banks through its policy-setting and examinations.2-4. What is the principal job performed by the FDIC?The Federal Deposit Insurance Corporation (FDIC) insures the deposits of bank customers, up to a total of $100,000 per account owner, in banks that qualify for a certificate of federal insurance coverage. The FDIC is a primary federal regulator (examiner) of state-chartered, non-member banks. It is also responsible for liquidating the assets of banks declared insolvent by their federal or state chartering agency.2-5. What key roles does the Federal Reserve System perform in the banking and financial system?The Federal Reserve System supervises and examines the activities of state-chartered banks that choose to become members of its system and qualify for Federal Reserve membership and regulates the acquisitions and activities of bank holding companies. However, the Fed's principal responsibility is monetary policy -- the control of money and credit growth in order to achieve broad economic goals.2-6What is the Glass-Steagall Act and Why Was It Important in banking history?The Glass-Steagall Act, passed by the U.S. Congress in 1933, was one of the most comprehensive pieces of banking legislation in American history. It created the Federal Deposit Insurance Corporation to insure smaller-size bank deposits, imposed interest-rate ceilings on bank deposits, broadened the branching powers of national banks to include statewide branching if state banks possessed similar powers, and separated commercial banking from investment banking, thereby removing commercial banks from underwriting the issue and sale of corporate stocks and bonds in the public market.There are many people who feel that banks should have some limitations on their investment banking activities. These analysts focus on two main areas. First, they suggest that this service may cause problems for customers using other bank services. For example, a bank may require a customer getting a loan to purchase securities of a company it is underwriting. This potential conflict of interest concerns some analysts. The second concern deals with whether the bank can gain effective control over an industrial organization. This could make the bank subject to additional risks or may give unaffiliated industrial organizations a competitive disadvantage. Today, banks can underwrite securities as part of the Gramm-Leach Bliley Act (Financial Services Modernization Act). However, congress built in several protections to make sure that the bank does not take advantage of customers. In addition, banks are prevented from affiliating with industrial firms under this law.2-7. Why did the federal insurance system run into serious problems in the 1980s and 1990s? Can the current federal insurance system be improved? In what ways?The FDIC, which insures U.S. bank deposits up to $100,000, was not designed to deal with system-wide failures or massive numbers of failing banks. Yet, the 1980s ushered in more bank closings than in any period since the Great Depression of the 1930s, bringing the FDIC to the brink of bankruptcy. Also, the FDIC's policy of charging the same insurance fees to all banks regardless of their risk exposure encouraged more banks to gamble and accept substantial failure risk. The recent FDIC Improvement Act legislation has targeted this last area, with movement toward a risk-based insurance schedule and greater insistence on maintaining adequate long-term bank capital.2-8. How did the Equal Credit Opportunity Act and the Community Reinvestment Act address discrimination?The Equal Credit Opportunity Act stated that individuals could not be denied a loan because of their age, sex, race, national origin or religious affiliation or because they were recipients of public welfare. The Community Reinvestment Act prohibited banks from discriminating against customers based on the neighborhood in which they lived.2-9. How does the FDIC deal with most failures?Most bank failures are handled by getting another bank to take over the deposits and clean assets of the failed institution -- a process known as purchase and assumption. Those that are small or in such bad shape that no suitable bids are received from other banks are closed and the insured depositors are paid off -- a deposit payoff approach. Larger failures may sometimes be dealt with by open-bank assistance where the FDIC loans money to the troubled bank and may order a change in management as well. Large failing money-center banks may also be taken over and operated as "bridge banks" by the FDIC until disposed of.2-10. What changes have occurred in the U.S. banks’ authority to cross state lines?In 1994 the Riegle-Neal Interstate Banking and Efficiency Act was passed. This law is complicated but allows bank holding companies with adequate capital to acquire banks or bank holding companies anywhere in U.S. territory. No bank holding company can control more than 10% of the deposits at the national level and more than 30% of the deposits at the state level. Bank holding companies are also not allowed to cross state lines solely for the purpose of collecting deposits. Banks must adequately support their local communities by providing loans there. Bank holding companies are also allowed to offer a number of interstate services without necessarily having branches in the state by allowing affiliated banks to act as agents for the bank holding in other states. This law also allows foreign banks to branch in the U.S. under the same rules as domestic banks.2-11. How have bank failures influenced recent legislation?Recent bank failures have caused huge losses to federal insurance reserves and damaged public confidence in the banking system. Recent legislation has tried to address these issues by providing regulators with new tools to deal with the failures, such as the bridge bank device, and by granting banks, through regulation, somewhat broader service powers and more avenues for geographic expansion through branch offices and holding companies in order to help reduce their risk exposure. In addition, the increase in bank failures has focused attention on the insurance premiums banks pay and through the FDIC Improvement Act allowed the FDIC to move towards risk based insurance premiums.2-12. What changes in banking regulation did the Gramm-Leach-Bliley (Financial Services Modernization) Act bring about? Why?The most important aspect of the law is to allow U.S. bank, insurance companies and securities companies to affiliate with each other either through a holding company structure or through a bank subsidiary. The purpose of this law is to allow these companies to diversify their service offerings and reduce their overall risk. In addition it is thought that this seems to offer customers the convenience of one stop shopping.2-13. What new regulatory issues remain to be resolved now that interstate banking is possible and security and insurance services are allowed to co-mingle with banking?There are several key issues that remain to be resolved. One issue is concerned with what we should do about the governmental safety net. We need to balance risk taking by financial firms with safety for depositors. Another aspect of this issue is how to protect taxpayers if financial firms are allowed to take on more risk. Another issue that needs to be resolved is what to do about financial conglomerates. We need to be sure that the financial conglomerate does not use the resources of the bank to prop another aspect of their business. In addition, regulators need to be better trained to adequately regulate the more complex organizations and functional regulation needs to be reviewed periodically to make sure it is working. A third area that needs to be resolved is whether banking and commerce should be mixed. Should a bank sell cars along with credit cards and other financial services?2-14 Why must we be concerned about privacy in the sharing and use of financial-service customer’s information? Can the financial system operate efficiently if the sharing of nonpublic financial information is forbidden? How far, in your opinion, should we go in regulating who gets access to private information?It is important to be concerned about how private information is shared because it is possible to misuse the information. For example, if an individual’s medical condition is known to the bank through its insurance division, the bank may deny a loan based on this confidential information. They can also share this information with outside parties unless the customer states in writing that this information cannot be shared. On the other hand, there could be much duplication of effort if no sharing information is allowed. This would lead to inefficiencies and higher costs to consumers. In addition, sharing of information would allow targeting of services to particular customer needs. At this point, no one is quite sure what information and how it will be shared. It appears that there will eventually be a compromise between customers’ needs for privacy and the financial-services company’s need for to share that information.2-15. Why were the Sarbanes-Oxley, Bank Secrecy and USA Patriot Acts enacted in the United States? What impact are these new laws and their supporting regulations likely to have on the financial-services sector?The Bank Secrecy Act requires any cash transaction of $10,000 or more be reported to the government and was passed to prevent money laundering by criminal organizations.The USA Patriot Act was enacted after the attacks of September 11 and is designed to find and prosecute terrorists. It was a series of amendments to the Bank Secrecy Act. It requires banks and financial service providers to establish the identity of any customer opening or changing accounts in the United States. Many banks are however concerned about the cost of compliance.The Sarbanes-Oxley Accounting Standards Act came as a response to the disclosure of manipulation of corporate financial reports and questionable dealings among leading commercial firms, banks and accounting firms. It prohibits false or misleading information about the financial performance of banks and other financial service providers and generally tries to enforce higher standards in the accounting profession.2-16 Explain how the FACT, Check 21, 2005 Bankruptcy and 2006 FDIC Insurance Reform acts are likely to affect the revenues and costs of financial firms and their service to customers. FACT requires the FTC to make it easier for individuals victimized by identity theft to file a theft report and requires credit bureaus to help victims resolve the problems. This should make it easier for customers to handle identity theft problems and may reduce costs to the financial institutions that serve these customers. Financial institutions should be able to spend less on reimbursing customers for theft problems and perhaps the instances of identity theft will also be reduced at the same time.Check 21 allows financial institutions to send substitute checks to other banks to clear checks rather than the checks themselves. The substitute checks can be electronic images that can be transferred in an instant at a much lower cost to other institutions. This should reduce costs to institutions as they do not have to have an employee physically transfer checks anymore. In addition, financial institutions should know more quickly whether a check is good and this should reduce fraud and other costs associated with bad checks.2005 Bankruptcy Law requires that all higher income borrowers to pay back at least a portion of the money they have borrowed to the bank. Higher income borrowers will be required to make payment plans rather than have all of their debts forgiven. This should lower bad debt costs to financial institutions and may lower borrowing costs for all borrowers.Federal Deposit Insurance Reform raises the deposit insurance limits for certain retirement accounts and allows regulators to periodically adjust deposit insurance limits for inflation. This should allow investors to put more money into insured deposit accounts and may allow banks to have a more stable and reliable source of funds for loans and other investments. This will probably have the effect of increasing bank revenues and/or reducing expenses for the bank.For all of these new laws, the effect should be to make the bank more profitable because of higher revenues or lower expenses. At the same time these new laws allow financial institutions to better serve their customers.2-17.In what ways is the regulation of nonbank financial institutions different from the regulation of banks in the United States? How are they similar?Most nonbank financial instit utions are considered “vested with the public interest” and therefore, face as close supervision from federal and state supervisors as banks do. However, some institutions are solely regulated at the federal level while others are only regulated at the state level.2-18. Which financial service firms are regulated primarily at the federal level and which at the state level? Can you see problems in this type of regulatory structure?Some regulators and experts are concerned because they feel that state regulators might not have the expertise to deal with the new more complex financial firm that exists today. They are also concerned because the new ‘functional’ regulation is not ne cessarily coordinated between different regulatory agencies. Only time will tell if this functional regulatory structure is effective.2-19. Can you make a case for having only one regulatory agency for financial service firms?Yes a case can easily be made for financial service firms. Problems in one area such as security brokerage services or insurance may eventually lead to problems in the traditional banking area or visa versa. One regulatory agency might be more likely to find these overlapping problems and prevent them before they cause the collapse of the entire organization. In addition, one regulatory agency may be able to better identify and prevent the inherent conflicts of interest that exist when a large financial conglomerate is formed.2-20. What is monetary policy?Monetary policy consists of regulation and control over the growth of money and credit in an attempt to pursue broad economic goals such as full employment, avoidance of inflation, and sustainable economic growth. Its principal tools are open market operations, changes in the discount (lending) rate, and changes in reserve requirements behind deposits.2-21. What services does the Federal Reserve System provide to depository institutions?Many services needed by banks are provided by the Federal Reserve Banks. Among the most important services provided by the Fed are checking clearing, the wiring of funds, shipments of currency and coin, loans from the Reserve banks to qualified depository institutions, and the supplying of information concerning economic and financial trends and issues. The Fed began charging for its services in order to help recover the added costs of deregulation which made more institutions eligible for Federal Reserve services and also to encourage the private marketplace to develop and offer similar services (such as check clearing and wire transfers).2-22. How does the Federal Reserve affect the banking and financial system through open market operations (OMO)? Why is OMO the preferred tool for many central banks around the globe?Open market operations consist of the buying and selling of securities by the central bank in an effort to influence and shape the course of interest rates and the growth of money and credit. Open-market operations, therefore, affect bank deposits -- their volume and growth -- as well as the volume of lending and the interest rates attached to bank borrowings and loans as well as the value of bank stock. OMO is the preferred tool, because it is also the Central Bank’s most flexible tool. It can be used every day and any mistakes can be quickly reversed.2-23 What is a primary dealer and why are they important?A primary dealer is a dealer in U.S. Treasury Bills and other securities that meets the Federal Reserve System requirements for trading directly with the Fed’s trading desk inside the New York Federal Reserve. It is through these trades with primary dealers that the Federal Reserve carries out its monetary policy objectives and influences the economy including the supply of money and credit and interest rates. Primary dealers have an integral role to play in the economy of the U.S. 2-24. How can changes in the central bank loan discount rate and reserve requirements affect the operations of depository institutions? What happens to the legal reserves of the banking system when the Fed grants loans through the discount window? How about when these loans are repaid? What are the effects of an increase in reserve requirements?The Discount Window is the department in each Federal Reserve Bank that receives requests to borrow reserves from banks and other depository institutions which are eligible to obtain credit from the Fed for short periods of time. The rate charged on such loans is called the discount rate. Reserve requirements are the amount of vault cash and deposits at the Federal Reserve banks that depository institutions raising funds from sources of reservable liabilities (such as checking accounts, business CDs, and borrowings of Eurodollars from abroad) must hold. If the Fed loans $200 million in reserves from the discount window, total reserves will rise by the amount of the discount window loan, but then will fall when the loan is repaid. Increasing reserve requirement means that depository institutions must keep more vault cash and reserves with the Federal Reserve for each deposit account they hold. This would have the effect of making less money available for loans. Since this has a multiplicative effect on the economy it can have a severe effect on the total amount of loans made and on the growth of the money supply that results.2-25. How did the Federal Reserve change the policy and practice of the discount window recently? Why was this change made?The Fed created two new loan types, primary and secondary credit, which replaced the existing adjustment and extended credit. Primary credit is extended to sound borrowing institutions at a rate slightly higher than the federal funds rate. Secondary credit is extended to institutions that do not qualify for primary credit for temporary funding needs at a rate slightly above the prime rate. These changes were implemented to encourage greater use of the discount window and to bring greater stability the federal funds rate and to the money market as a whole.2-26. How does the structure of the European Central Bank (ECB) appear to be similar to the structure of the Federal Reserve System? How are these two powerful and influential central banks different from one another?Like the Fed the ECB consists of a governing board and a policy making council and just like the Fed’s board of governors works with the 12 regional Federal Reserve banks the ECB has a cooperative arrangement with each EU member nation’s central bank. The policy menu of the ECB however is a lot simpler than its counterpart at the Fed. The central goal is price stability, which is largely achieved through open market operations and reserve requirements.Problems2-1. For each of the actions described explain which government agency or agencies a financialmanager must deal with and what banking laws are involved:A. Chartering a new bank.B. Establishing new bank branch offices.C. Forming a bank or financial holding company.D. Completing a bank merger.E. Making holding company acquisitions of nonbank businesses.A. For chartering a new bank in the United States either the state banking commission of thestate where the bank is to be headquartered must be consulted or the Comptroller of theCurrency must be sent an application for a national charter. The National Banking Actgoverns national charters while state charters are governed by rules laid down in statebanking statutes.B. Requests for new branch offices must also be made of the bank's chartering agency -- eitherthe state banking commission for state-chartered banks or the Comptroller of the Currencyfor national banks in the United States.C. Requests for holding company formation must be submitted to the Federal Reserve Boardor, for certain routine transactions, to the Federal Reserve Bank in the district. Some statesrequire their banking commissions to be notified if a holding company acquires a bankwithin the state's borders.D. The Bank Merger Act requires the approval of a bank's principal federal supervisoryagency for a proposed merger even if the bank is state chartered. Mergers involvingnational banks must be approved by the Comptroller of the Currency and by the statebanking commission if a bank has a state charter of incorporation. The merger must also bereviewed by other federal agencies that have supervisory responsibility for a bank, such asthe FDIC or the Federal Reserve, and by the U.S. Department of Justice.E. Request for acquisitions of nonbank businesses must be approved by the Federal ReserveBoard. For some more routine transactions, the Federal Reserve Bank in the distract canmake the decision.2-2. See if you can develop a good case for and against the regulation of financial institutions inthe following areas:A. Restrictions on the number of new financial-service institutions allowed to enterthe industry each year.B. Restrictions on which depository institutions are eligible forgovernment-sponsored deposit insurance.C. Restrictions on the ability of financial firms to underwrite debt and equitysecurities issued by their business customers.D. Restrictions on the geographic expansion of banks and other financial firms such aslimits on branching and holding company acquisitions across county, state, andinternational borders.E. Regulations on the bank failure process, defining when banks and other financialfirms are to be allowed to fail and how their assets are to be liquidated.A. Restricting entry into the banking industry limits competition and, to some extent, protectssome banks from failure, reducing the risk of depositor loss. On the other hand, limiting new firms props up some financial-service firms that should be allowed to fail if the system is to be as efficient as it can be.B. Restrictions on which banks can get deposit insurance also limits competition butencourages some banks to take on more risk because most depositors are protected by the insurance. Restricting which institutions are eligible for deposit insurance may limit the losses to the federal agency providing that insurance but may also limit that federalagency’s ability to monitor and control the money supply and the economy as a result. C. Limits on underwriting securities reduce a bank's revenue potential and will probablyresult in losing some of the largest corporate customers to foreign banks who face morelenient regulations. On the hand, underwriting securities is inherently risky and limiting this may limit the risk of the bank. It may also prevent the conflicts of interest that arise when a bank makes loans and underwrites securities at the same time.D. Limiting a bank's ability to expand geographically exposes it to greater risk of economicfluctuations within its local market area and makes it more prone to failure. On the other hand, allowing a bank to expand geographically may concentrate power in the hands of a few large institutions that make it more likely that service costs will rise for all customers.E. Protecting banks from failure inevitably involves sheltering some inefficient and poorlymanaged institutions that waste resources and fail to serve customers effectively. It alsotends to make the average customer less vigilant about the quality and risk of a particular bank's services and operations because deposits are insured and bank failure seems to most customers to be a relatively remote possibility. On the other hand, it makes customersmore confident in the system as a whole and makes a bank run less likely.2-3. Consider the issue of whether or not the government should provide a system of deposit insurance. Should it be wholly or partly subsidized by the taxpayers? What portion of the cost should be borne by depository institutions? by the depositors? Should riskier depository institutions pay higher deposit insurance premiums? Explain how you would determine exactly how big an insurance premium each bank should pay each year.。
