BFF5916 Suggested Tutorial Solutions – week 1

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BFF5916 Suggested Tutorial Solutions – week 1
  BFF5916 Suggested Tutorial Solutions – week 1 1. What is a bank? How does a bank differ from most other financial-service providers?      A bank can be defined by what economic function it performs, what services it offers its customers, or the legal basis for its existence.    Historically, banks have been offering a great range of financial services such as checking and debit accounts, credit cards, and savings plans.    However, banks today are rapidly expanding their service offerings to include investment banking (security underwriting), insurance protection, financial planning, advisory service for merging companies, risk-management services, and numerous other innovative financial products.    Other financial service providers offer some of the similar financial services offered by a bank but not all of them within one institution.    Although, many financial-service institutions are trying to be as similar to banks as possible in the services they offer.    Not only financial service industries but several industrial companies have stepped forward in recent decades to control a bank or a bank like firms. 2. Why are some banks reaching out to become one-stop financial-service conglomerates? Is this a good idea? •   Banks and various financial institutions are converging in terms of the services they offer and embracing each other’s innovations. •   There are two reasons that banks are increasingly becoming one-stop financial service conglomerates. •   The first reason is the increased competition from other types of financial institutions and the second reason is the erosion of the bank’s market share for providing traditional services. •   Due to these reasons, the banks demanded for a relief from traditional rules and lobbying for an expanded authority to reach new markets around globe. •   This has led the United States Congress to pass the Financial Services Modernization Act which has allowed banks to expand their role to be full service providers. •   It is a beneficial step as it has led the U.S. banks to stay in the competition and increase the market share by entering into various new industries like the securities and insurance industries.    3. Which businesses are banking’s closest and toughest competitors? What services do they offer that compete directly with banks’ services? •   Among a bank’s closest competitors 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 financial service providers are converging and embracing each other’s innovations. •   The Financial Services Modernization Act has allowed many of these financial service providers to offer the public one-stop shopping for financial services. 4. What is happening to banking’s share of the financial marketplace and why?    The Financial Services Modernization Act of 1999 allowed many of the banks’ closest competitors to offer a wide array of financial services thereby taking away market share from “traditional” banks.    Because of the relatively liberal government regulations, banks with quality management and adequate capital can become conglomerate financial-service providers.    The same will become true for security firms, insurers, and other financially oriented companies that wish to acquire bank affiliates.    Hence, the banks and their closest competitors are converging into one-stop shopping for financial services and this trend should continue in the future. 5. How have banking and the financial-services market changed in recent years? What powerful forces are shaping financial markets and institutions today?    Banking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the full force of the financial marketplace. However, under the new regulatory trend–reregulation, the government tightened the financial-services sector due to crises and market collapse in the previous few years.    At the same time, the number and variety of banking services has increased greatly due to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services and increase in returns on their money invested.     Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter countries overseas and attract away profitable domestic business and household accounts.    There has been service proliferation and greater competitive rivalry among financial firms that has led to a powerful trend— convergence.    The trends of convergence, consolidation, geographic expansion, and technological change will continue to proliferate in the future years.
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