商业银行管理Chap0课件14.ppt

1、Chapter FourteenInvestment Banking,Insurance,and Other Sources of Fee IncomeKey Topics The Ongoing Search for Fee Income Investment Banking Services Mutual Funds and Other Investment Products Trust Services and Insurance Products Benefits of Product-Line Diversification Economies of Scope and Scale

2、Information Flows and Customer PrivacyIntroduction Financial institutions have faced a struggle recently to attract the funds they need in order to make loans and investments and boost their revenues Whenever deposit growth slows,financial-service managers frequently are forced to pursue new sources

3、 of funds and new ways to generate revenue Important source of growth in future revenues fee income Revenues derived from charging customers for the particular services they useMonthly service charges on transaction accountsCommissions for providing insurance coverage for homes and businessesMembers

4、hip fees for accepting and using a particular credit or debit cardFees for providing financial advice to individuals and corporations“Swipe fees”at the point of saleIntroduction(continued)The drive among competing financial firms to generate more fee income as an increasingly important revenue sourc

5、e comes from several sources A desire to supplement traditional sources of funds(such as deposits)when these sources are inadequate An attempt to lower production costs by offering multiple services using the same facilities and resources(economies of scope)An effort to offset higher production cost

6、s by asking customers to absorb a larger share of the cost of both old and new financial services A desire to reduce overall risk to the financial-service providers cash flow by finding new sources of revenue not highly correlated with revenues from sales of traditional services A goal to promote cr

7、oss-selling of traditional and new services in order to further enhance revenue and net incomeSales of Investment Banking Services One banking service that has been prominent,but volatile,is investment banking Many leading U.S.banks recently either acquired or formed their own investment banking aff

8、iliates in order to serve corporations and governments around the world For example,JP Morgan Chases acquisition of Bear Stearns Leading investment banks in the world today:Citigroup JP Morgan Chase Morgan Stanley Goldman Sachs Credit Suisse UBS Nomura Securities Deutsche Bank Raymond James Banc of

9、America SecuritiesSales of Investment Banking Services(continued)Key Investment Banking Services Traditionally,the best-known and often the most profitable investment banking service is security underwritingThe purchase for resale of new stocks,bonds,and other financial instruments in the money and

10、capital markets on behalf of clients who need to raise new moneyOne of the most profitable underwriting services initial public offerings(IPOs)Leveraged buyouts(LBOs)Involve the acquisition of a company,usually by a small group of investors,and typically are funded by large amounts of debt Recently,

11、many investment banks jumped into the hedge fund businessSales of Investment Banking Services(continued)Examples of client questions that investment bankers can assist in answering:Should we(the investment banks clients)attempt to raise new capital?If so,how much,where,and how do we go about this fu

12、nd-raising task?Should our company enter new market areas at home or abroad?If so,how can we best accomplish this market-expansion strategy?Does our company need to acquire or merge with other firms?Which firms and how?And when is the best time to do so?Should we sell our company to another firm?If

13、so,what is our company worth?And how do we find the right buyer?Sales of Investment Banking Services(continued)With passage of the Gramm-Leach-Bliley(GLB)Act of 1999,the full range of investment banking services was opened up for adequately capitalized and well-managed commercial banking firms Resea

14、rch studies suggest that investment banking revenue and profitability are positively,but not highly,correlated with commercial banking revenues and profitability There may be some significant product-line diversification effects It is not yet clear that the benefits alleged from this new service dim

15、ension have offset the costs and risks involvedSales of Investment Banking Services(continued)Investment banks today are wrestling with the question of what kind of financial firm they need to be in the future What mix of services should they be offering to achieve high and sustained profitability?A

16、 few commercial bankinvestment bank combinations have shown promise for the future,despite ongoing struggles to fend off losses following a huge mortgage market meltdown in 20072009 Recently both investment banks and commercial banks have been under intense pressure to raise large amounts of new cap

17、ital Many observers anticipate more mergers It is not clear that future commercial bank-investment bank combinations will consistently turn out well One likely outcome is greater government regulationSelling Investment Products to Consumers In recent years many of the largest business and household

18、depositors have moved their funds out of deposits at banks and thrift institutions into investment products Stocks,bonds,mutual funds,annuities,and similar financial instruments Mutual Fund Investment Products One of the most popular of the investment products Each share in a mutual fund permits an

19、investor to receive a pro rata share of any dividends or other forms of income generated by a pool of stocks,bonds,or other securities the fund holds If a mutual fund is liquidated,each investor receives a portion of the net asset value(NAV)of the fund after its liabilities are paid off,based on the

20、 number of shares each investor holds Proprietary funds versus nonproprietary fundsSelling Investment Products to Consumers(continued)Annuity Investment Products Annuities are a hedge against living too long and outlasting ones savings Fixed annuities promise a customer who contributes a lump sum of

21、 savings a fixed rate of return over the life of the annuity contract Variable annuities allow investors to invest a lump sum of money in a basket of stocks,mutual funds,or other investments under a tax-deferred agreement,but there may be no promise of a guaranteed rate of return Recently a new type

22、 of annuity contract has appeared,the equity-index annuityCombines the features of both fixed and variable annuities One advantage for financial firms selling this service is that annuities often carry substantial annual fees One significant disadvantage with annuities sold through depository instit

23、utions is they typically compete with selling depositsSelling Investment Products to Consumers(continued)Several problems and risks are associated with sales of investment products Current U.S.regulations require that customers must be told orally(and sign a document indicating they were so informed

24、)that investment products are:1.Not insured by the Federal Deposit Insurance Corporation(FDIC)2.Not a deposit or other obligation of a depository institution and not guaranteed by the offering institution3.Subject to investment risks,including possible loss of principalTrust Services as a Source of

25、Fee Income Trust services is the management of property owned by customers,such as securities,land,buildings,and other assets Among the oldest nondeposit services that banks and some of their closest competitors offer parts of the financial firm Trust departments often generate large deposits becaus

26、e they manage property for their customers Deposits placed in a bank by a trust department must be fully secured Popular kinds of trusts:Living trusts Testamentary trusts Irrevocable trusts Charitable trusts Indenture trusts Establishment of fiduciary relationship is critical Sales of Insurance-Rela

27、ted Products Banks can use their branches to sell insurance Over 100 banks today sell their own insurance products in the United States Types of insurance products sold today:Life insurance policies Property/casualty insurance policies Life insurance underwriters and property/casualty insurance unde

28、rwriters manage their respective risks Sales of Insurance-Related Products(continued)There are mandatory public disclosures on the part of depository institutions selling insurance products that stipulate:1.An insurance product or annuity is not a deposit or other obligation of a depository institut

29、ion or its affiliate2.An insurance product or annuity sold by a depository institution in the United States is not insured by the FDIC,any other agency of the U.S.government,the depository institution itself,or its affiliates3.Insurance products or annuities may involve investment risk and possible

30、loss of value4.U.S.depository institutions cannot base granting loans on the customers purchase of an insurance product or annuity from a depository institution or any of its affiliates or on the customers agreement not to obtain an insurance product or annuity from an unaffiliated entity These disc

31、losures must be made both orally and in writing before completion of the sale of an insurance productThe Alleged Benefits of Financial-Services Diversification When two or more different industry types merge with each other,this strategic move is called convergence One possible benefit is the relati

32、vely low correlation that may exist between cash flows or revenues generated by the sale of traditional industry products versus the sale of nontraditional products But because streams of revenue from different product lines may move in different directions at different times,the overall impact of c

33、ombining these different industries and products under one roof may be to stabilize combined cash flows and profitability The risk of failure might also be reduced This potential consequence of the convergence of two or more financial-service industries is called the product-line diversification eff

34、ectThe Alleged Benefits of Financial-Services Diversification(continued)Example of what could happen to overall institutional risk by combining traditional and nontraditional financial services Suppose a banking company decides to add insurance services to its existing product menu It expects to ear

35、n a 12 percent average return from sales of its traditional banking products and a 20 percent return from selling or underwriting insurance services These two service lines are equally risky in the variance of their cash flows(with a standard deviation of about 5 percent each)The banking firm expect

36、s to receive 20 percent of its revenues from insurance sales and 80 percent from sales of traditional banking products The cash flows from the two sets of services are negatively correlated over time with a correlation coefficient of-0.50The Alleged Benefits of Financial-Services Diversification(con

37、tinued)What would happen to the banks overall return from sales of traditional and nontraditional products in this case?The Alleged Benefits of Financial-Services Diversification(continued)And what happens to the risk of return for this bank?The Alleged Benefits of Financial-Services Diversification

38、(continued)And what happens to the risk of return for this bank?Offering both traditional and nontraditional banking services lowers the banks standard deviation of its overall returnThe Alleged Benefits of Financial-Services Diversification(continued)Other potential benefits from offering multiple

39、services include economies of scale and economies of scopeEconomies of scope refer to a situation in which the joint costs of producing two or more services in one firm are less than the combined cost of producing each of these services through separate firmsFor example,if a single financial firm pr

40、oduces two services(S1 and S2),instead of producing only one service(S1),using the same resources,its cost of production(C)may be lower as followsAs a result,expanding the number of financial services offered may result in more intensive use of resources,reducing overall costs and widening a multise

41、rvice firms profit marginInformation Flows within the Financial Firm Financial firms have become more and more like pure information-gathering,information-processing,and information-dispersing businesses The Gramm-Leach-Bliley Act of 1999 allowed financial-service companies to share customer informa

42、tion among their affiliated firms and also with independently owned third parties provided customers did not expressly say“no”to(or“opt out”of)having their personal data distributed to others Protecting customer privacy became increasingly more importantEXHIBIT 141 Key Items That Must Be Included in

43、 a Financial Firms Privacy Policy and Be Sent to Its Customers at Least Once a YearQuick Quiz What services are provided by investment banks?Who are their principal clients?What advantages do commercial banks with investment banking affiliates appear to have over competitors that do not offer invest

44、ment banking services?Possible disadvantages?What are investment products?What advantages might they bring to an institution choosing to offer these services?How do trust services generate fee income and often deposits as well for banks and other financial institutions offering this service?What is convergence?Product-line diversification?Economies of scale and scope?Why might they be of considerable importance for banks and other financial-service firms?