Bank Management & Financial Services 9th Edition by Peter Rose solution manual
On the other hand, opponents of investment banking powers for bank operations inside the U.S. have some reasonable concerns that must be addressed. There are, for example, possible conflicts of interest. Information gathered in the investment banking division could be used to the detriment of customers purchasing other bank services. For example, a customer seeking a loan may be told that he or she must buy securities from the bank's investment banking division in order to receive a loan. Moreover, banks could gain effective control over some nonbank industrial corporations which might subject them to added risk exposure and place industrial firms not allied with banks at a competitive disadvantage. As a result the Gramm-Leach-Bliley Act has built in some protections to prevent this from happening.
1-3. The term bank has been applied broadly over the years to include a diverse set of financial-service institutions, which offer different financial-service packages. Identify as many of the different kinds of banks as you can. How do the banks you have identified compare to the largest banking group of all—the commercial banks? Why do you think so many different financial firms have been called banks? How might this confusion in terminology affect financial-service customers?
The general public tends to classify anything as a bank that offers some sort of financial service, especially deposit and loan services. Other institutions that are often referred to as a bank without being one are savings associations, credit unions, fringe banks, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies, and life and property/casualty insurance companies. All of these institutions offer some of the services that a commercial bank offers, but generally not the entire scope of services. Since providers of financial services are normally called banks by the general public they are able to take away business from traditional banks and it is of utmost importance for commercial banks to clarify their unique position among financial services providers.
1-4. What advantages can you see to banks affiliating with insurance companies? How might such an affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an affiliation? Can you cite any real-world examples of bank-insurer affiliations? How well do they appear to have worked out in practice?
Banks used to sell insurance services to their customers on a regular basis before the beginning of the Great Depression. Beginning with the Great Depression of the 1930s, U.S. banks were prohibited from acting as insurance agents or underwriting insurance policies out of fear that selling insurance would increase bank risk. However, the separation between banking and insurance changed dramatically as the new century dawned when the U.S. Congress removevd the legal barriers between the two industries, allowing banking companies to acquire control of insurance companies and, conversely, permitting insurers to acquire banks. Today, these two industries compete aggressively with each other, pursuing cross-industry mergers and acquisitions.
Before Glass-Steagall, banks used to sell insurance services to their customers on a regular basis.
In particular, banks would sell life insurance to loan customers to ensure repayment of the loan in case of death or disablement. The right to sell insurances to customers again benefits banks in allowing them to offer their customers complete financial packages from financing the home or car to insure it, from giving investment advice to selling life insurance policies and annuities for retirement planning. Generally, a bank customer who is already purchasing a service from a bank might feel compelled to purchase an insurance product, as well. On the other hand, insurance companies sometimes have a negative image, which makes it more difficult to sell certain insurance products. Combining their products with the trust that people generally have in banks will make it easier for them to sell their products.
The most prominent example of a bank-insurer affiliation is the merger of Citicorp and Traveler’s Insurance to Citigroup. However, given that Citigroup has sold Traveler’s Insurance indicates that the anticipated synergy effects did not materialize.
1-5. Explain the difference between consolidation and convergence. Are these trends in banking and financial services related? Do they influence each other? How?
Consolidation refers to increase in the size of financial institutions. The number of small, independently owned financial institutions is declining and the average size of individual banks, as well as securities firms, credit unions, finance companies, and insurance firms, has risen significantly.