Bank Management & Financial Services 9th Edition

Book Preface

This book, now in its ninth edition, reaches all the way back to the beginning of the 1990s. So much has happened in this interval of more than 20 years. War and revolution have marked many parts of the globe, especially the Middle East, with no end on the hori, zon. Natural disasters from earthquakes, hurricanes, floods and tsunamis, volcanoes, and more have unleashed devastation and death in critical regions of our planet. Economic prosperity that marked so much of the 1990s turned into economic disas, ter in the opening decade of the new century. Jobs disappeared, living standards plum, meted, homes were lost, and countless businesses failed. The worst economic recession in nearly 80 years led to anger and demonstrations in the streets and the most stringent belt, tightening among families and business owners and managers that has been experienced since the Great Depression of the 1930s. Unquestionably, it is difficult to find and maintain a positive attitude and that most precious commodity, hope, under these circumstances. Yet that is what this book and many others like it are all about-how to turn trouble and turmoil into useful knowledge and from that knowledge hope that our world can be a happier and more fulfilling place. This book does not presume to tackle the broadest spectrum of knowledge. No book can really do that, even in the modern digital age. Instead it focuses on a much smaller but nevertheless important slice of our world-the financial-services sector served by thousands of small and large financial firms that develop and market tools to manage risk, pursue financial opportunities, and supply information vital to the making of informed financial decisions, accompanied by the hope of favorable outcomes. Much of this book is devoted to the banking sector, but also to other important financial institutions-credit unions, mutual and hedge funds, pension plans, insurance companies, finance companies, security brokers and dealers, and thousands of other financial-service providers. We explore what these institutions do for us and the risks they present. The heart of this edition, like those editions that have preceded it, is risk management. Managing risk has emerged into the dominant topic that most managers of financial, service firms must deal with in the modern world. Indeed, the taking on of significant risk marks the financial,services sector as much as any other sector of the economy. It is the fundamental task of banks and other financial firms to identify risk in its many forms and then develop and offer tools that are able to control that risk. Few activities are more important to us because the financial sector is, and always has been, continuously threat, ened by significant risks at home and abroad as well as inside and outside the individual financial firm. No better example can be found than the great credit crisis of 2007-2009 where large numbers of financial,service providers floundered and failed alongside others who somehow managed to survive. Often today we distinguish between external and internal risks. For example, 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 short, ages, 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 provid, ers 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 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 practices 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?

Vital New Areas Covered in the New Edition

Among the most important new issues we confront in the ninth edition are:

• A study of some of the new policy tools being considered to measure and possibly counter systemic risk in the economy, and perhaps prevent a future debacle similar to the 2007-2009 credit crisis.
• An effort to explore and understand the continuing fight in the home and commercial mortgage markets to combat declining property sales and construction activity, slow home foreclosures, aid struggling borrowers, and reduce the threat of a prolonged economic recession.
• A discussion of recent financial reform legislation and reregulation as possible efforts to head off yet another financial crisis surrounding the banking and financial sector and restore public confidence in the financial system. (Illustrated in the United States by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.)
• A tracking of the rise of new consumer protection laws and regulations that offer defense for the welfare of consumers by promoting greater disclosure of contract terms, improved transparency in the information consumers are receiving, and better education of the public so that financial-service customers can make informed decisions (Illustrated by the creation of the new Consumer Financial Protection Bureau inside the United States).
• Helping to understand the battle over the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 and its supporting regulations that seek to protect credit card users from excessive service fees and from the failure of card companies to adequately disclose changing contract terms, though the new rules may ultimately raise the cost of credit card services to card users.
• Exploring the current race to erect new international capital standards, known as Basel III, which propose heavier capital requirements and heavier use of equity capital, particularly by the globe’s largest international banks, to avoid bank failures and disruption in public confidence in the most prominent financial institutions.
• Examining the growing trends in branchless banking and mobile service delivery that have encouraged financial firms to develop electronic delivery systems, allowing the customer to access financial services wherever and whenever he or she wishes, though financial firms run the risk of depersonalization of services offered to the public.

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 (such as Citigroup, Bank of America, JP Morgan Chase, Barclays PLC, Prudential, and HSBC Holdings)? 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 non bank 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 personal and business 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 retreats. 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.