1-11. What do you think the financial-services industry will look like 20 years from now? What are the implications of your projections for its management today?
 
There appears to be a trend toward continuing consolidation and convergence. There are likely to be fewer financial service providers in the future and many of these will be very large and provide a broad range of financial services under one roof. In addition, global expansion will continue and will be critical to the survival of many financial service providers. Management of financial service providers will have to be more technologically astute and be able to make a more diverse set of decisions including decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.
 

Problems and Projects

 
1-1.        You recently graduated from college with a business degree and accepted a position at a major corporation earning more than you could have ever dreamed. You want to (1) open a checking account for transaction purposes, (2) open a savings account for emergencies, (3) invest in an equity mutual fund for that far-off future called retirement, (4) see if you can find more affordable auto insurance, and (5) borrow funds to buy a condo, helped along by your uncle who said he was so proud of your grades that he wanted to give you $20,000 towards a down payment. (Is life good or what?) Make five lists of the financial service firms that could provide you each of these services.
 
(1) Financial service firms that provide checking account services include banks, fringe banks, credit unions, and savings and loan associations. Even securities brokers allow you to open checking accounts. Recently brokers such as Schwab have become more aggressive in offering interest-bearing online checkable accounts that often post higher interest rates than many banks are willing to pay. (2) To open a savings account, one could approach traditional commercial banks, savings associations, credit unions, online brokerages, and credit unions. (3) For a retirement fund, one could choose from a plethora of defined benefit and defined contribution schemes from private pension funds. Banks, trust departments, mutual funds, and insurance firms offer a variety of retirement investment options including equity mutual funds. (4) For affordable auto insurance, one could use a traditional insurer such as Prudential Insurance, State Farm, financial holding companies, or approach some of the newer discount insurers including Geico and Progressive. Alternatively, one could use a reverse auction service such as Esurance to get the best rate. (5) To borrow funds to buy a condo one could approach a traditional bank, savings associations that specialize in granting home mortgage loans, or financial companies such as

GMAC. A reverse-auction site such as LendingTree might also be useful in this exercise. The borrower is not limited to a mortgage loan for financing the purchase of a condo. Other lending mechanisms are available to finance such purchases. Using a search engine can help identify top financial institutions in each of these areas.
 
1-2.   Leading money center banks in the United States have accelerated their investment banking activities all over the globe in recent years, purchasing corporate debt securities and stock from their business customers and reselling those securities to investors in the open market. Is this a desirable move by banking organizations from a profit standpoint? From a risk standpoint? From the public interest point of view? How would you research these questions? If you were managing a corporation that had placed large deposits with a bank engaged in such activities, would you be concerned about the risk to your company's funds? Why or why not?
 
In the 1970's and early 1980's investment banking was so profitable that commercial bankers were lured into the investment banking business largely because of its greater profit potential than possessed by more traditional commercial banking activities. Later foreign banks, particularly the British and Japanese banking firms, began to attract away large corporate customers from U.S. banks, who were restrained by regulation from offering many investment banking services. Thus, U.S. banks ran into severe difficulty in simply trying to hold onto their traditional corporate credit and deposit accounts because they could not compete service-wise in the investment banking field. Today, banks are allowed to underwrite securities through either a subsidiary or through a holding company structure. This change occurred as part of the Gramm-Leach-Bliley Act (Financial Services Modernization Act).
 
Unfortunately, if investment banking is more profitable than traditional banking product lines, it is also more risky, consistent with the basic tenet of finance that risk and return are directly related. That is why the Federal Reserve Board has placed such strict limits on the type of organization that can offer these services. Currently, the underwriting of most corporate securities must be done through a subsidiary or as a separate part of the holding company so that, in theory at least, the bank is not responsible for any losses incurred. For this reason there may be little reason for depositors (including large corporate depositors) to be concerned about risk exposure from investment banking. Moreover, the ability to offer such services may make U.S. banks more viable in the long run which helps their corporate customers who depend upon them for credit.