Bank Management & Financial Services 8th Edition

Book Preface

As this book enters its eighth edition, the world that we know is changing rapidly and, in some cases, ominously. Financial firms and the services they offer are becoming increasingly internationalized and most financial-service providers are growing in size and complexity. Risk management has come to be the dominant subject that most financial managers are concerned with as the risks faced by financial institutions seem to grow almost daily. Indeed, the whole financial sector is threatened by significant risks at home and abroad, inside and outside the individual financial firm, and more and more financial-service providers are failing.

External risks to financial firms include wars, crime, poverty, environmental destruction, global warming, political revolution and strife, falling currency values, volatile equity markets, weakening economies, declining sales in key industries, inflation, increasing energy shortages, and a troubled home mortgage market. All of these external risks have had (and will continue to have) a profound effect on the services financial firms can offer and the profits and future growth they may hope for. Moreover, many financial-service providers today are caught in the middle of a geopolitical struggle as important countries like China, India, Korea, Japan, and Russia are knocking on the door of global leadership and demanding a growing economic and political role.

If the foregoing external risks were not enough, numerous internal risks (some of them old and some relatively new) have surfaced inside many financial firms. These include exposures to loss from such risk dimensions as credit risk, liquidity risk, market and price risk, interest rate risk, sovereign risk, operational risk, currency risk, off-balance-sheet risk, legal and compliance risks, strategic risk, reputation risk, and capital risk. Each of these types of risk is a major focus of attention in the pages of this book.

The successful manager of a financial-service institution today must understand the foregoing external and internal challenges and the strategies developed to deal with all of these threats. That is our purpose here—to examine the different risk exposures that confront financial-service providers today and to discover ways to deal with these challenges efficiently and effectively.

In addition to combating losses from risk exposure we must understand clearly the importance and key roles that financial institutions play in our lives and careers. These institutions are the principal means that we all draw upon to make payments for the goods and services we wish to buy. They are the vehicles through which we raise liquidity when emergency needs for cash arise. They are the principal repositories for our savings as we prepare for future spending and future financial challenges. They are the primary suppliers of credit which fuels spending and results in the creation of more jobs. These financial firms we will be studying are the principal sources for insurance protection and the purveyor of hedges to help us protect the value of the assets we hold and the income we receive. Finally, the financial-service providers we target in this book are major vehicles through which government economic policy (including monetary policy carried out by central banks) struggles in an attempt to stabilize the economy, avoid serious inflation, and reduce unemployment.

To be successful in our study we must learn about the key differences between one type of financial-service provider and another, and about the management principles and prac-tices that can be used to help strengthen these firms, offering better service to the public. No longer is our world populated by one type of financial institution. There are thousands of these firms, some of which we still call banks, insurance companies, security dealers and brokers, mutual funds, and so on. But with increasing frequency these institutions have invaded each other’s territory and taken on characteristics of their competitors. This so-called convergence trend leads to overlapping of services and confusion about what is actually happening in the financial sector.

Today larger banks control insurance and security affiliates. Many insurers own banks and serve as security brokers and dealers. Major security dealers have chartered banks and, in some cases, created insurance affiliates or departments. These convergences among different financial-service institutions make our study somewhat harder and raise questions about what is the appropriate business model in the financial sector today and for the future. Can all these financial-service providers succeed or are an increasing number doomed to disappointment and failure?

In addition to today’s confusion over which financial firm does what, we will also discover the great size and performance differences among different financial firms, which have aroused major questions and issues. A key question in this field today centers on the future of the thousands of smaller financial institutions that exist in almost every country. Can these so-called small-fry institutions really survive in a land of giants (Citigroup, Bank of America, J. P. Morgan Chase, Barclays PLC, Prudential, HSBC Holdings, etc.)? Can smaller financial institutions successfully face off against trillion-dollar financial-service companies? What is the optimal size and product mix for a financial firm, and how is that changing?

With all the sweeping changes that have dominated the financial world lately one must wonder at times: Why would anyone write a book about this daunting subject today? We must convey what we believe are the principles of sound financial management and what we think are the best practices for today’s financial firms and financial-service industries. We must offer analysis and advice for a wide range of financial institutions, whether they be among the giants or among the smallest service providers.

We admit that writing a book about bank and nonbank financial firms and financial services is a hard job. However difficult, though, we must reveal that it is also an exciting adventure. We have come to realize that to ignore this sector of the economy places us at something of a personal and professional peril. We must discover everything we can about these institutions because all of us, whether we become banking and financial-service managers or not, must rely on the services financial firms provide. We ignore this sector of our system at considerable risk.

We should also remind ourselves that, had we never thought about it before, the financial-services sector represents a possible significant career opportunity down the road as the current credit crisis ebbs. Financial services is becoming one of the more creative industries, less routine now that computer systems are available to handle most routine tasks. There is also a strong emphasis on sales promotion and serving the customers as fully as possible. A job in this dynamic, information-oriented sector poses a challenging and fascinating career possibility. The authors sincerely hope that the pages of this book will help you determine whether financial services just might be the exciting career opportunity you are searching for in the years ahead.