商业银行管理Chap0课件14

1、Chapter FourteenInvestment Banking, Insurance, and Other Sources of Fee IncomeChapter FourteenInvestment BanKey TopicsThe Ongoing Search for Fee Income Investment Banking Services Mutual Funds and Other Investment Products Trust Services and Insurance Products Benefits of Product-Line Diversificatio

2、n Economies of Scope and Scale Information Flows and Customer PrivacyKey TopicsThe Ongoing Search fIntroductionFinancial institutions have faced a struggle recently to attract the funds they need in order to make loans and investments and boost their revenuesWhenever deposit growth slows, financial-

3、service managers frequently are forced to pursue new sources of funds and new ways to generate revenueImportant source of growth in future revenues fee incomeRevenues derived from charging customers for the particular services they useMonthly service charges on transaction accountsCommissions for pr

4、oviding insurance coverage for homes and businessesMembership 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 saleIntroductionFinancial institutIntroduction (continued)The drive among compet

5、ing financial firms to generate more fee income as an increasingly important revenue source comes from several sourcesA 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

6、same facilities and resources (economies of scope)An effort to offset higher production costs by asking customers to absorb a larger share of the cost of both old and new financial servicesA desire to reduce overall risk to the financial-service providers cash flow by finding new sources of revenue

7、not highly correlated with revenues from sales of traditional servicesA goal to promote cross-selling of traditional and new services in order to further enhance revenue and net incomeIntroduction (continued)The drSales of Investment Banking ServicesOne banking service that has been prominent, but v

8、olatile, is investment bankingMany leading U.S. banks recently either acquired or formed their own investment banking affiliates in order to serve corporations and governments around the worldFor example, JP Morgan Chases acquisition of Bear StearnsLeading investment banks in the world today:Citigro

9、upJP Morgan ChaseMorgan StanleyGoldman SachsCredit SuisseUBSNomura SecuritiesDeutsche BankRaymond JamesBanc of America SecuritiesSales of Investment Banking SeSales of Investment Banking Services (continued)Key Investment Banking ServicesTraditionally, the best-known and often the most profitable in

10、vestment banking service is security underwritingThe purchase for resale of new stocks, bonds, and other financial instruments in the money and capital markets on behalf of clients who need to raise new moneyOne of the most profitable underwriting services initial public offerings (IPOs)Leveraged bu

11、youts (LBOs)Involve the acquisition of a company, usually by a small group of investors, and typically are funded by large amounts of debtRecently, many investment banks jumped into the hedge fund businessSales of Investment Banking SeSales of Investment Banking Services (continued)Examples of clien

12、t 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 fund-raising task? Should our company enter new market areas at home or abroad? If so, how can we best accomplish thi

13、s 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 so, what is our company worth? And how do we find the right buyer?Sales of Investment Banking SeSales of Inv

14、estment 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 firmsResearch studies suggest that investment banking revenue and profitability are

15、 positively, but not highly, correlated with commercial banking revenues and profitabilityThere may be some significant product-line diversification effects It is not yet clear that the benefits alleged from this new service dimension have offset the costs and risks involvedSales of Investment Banki

16、ng SeSales 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 futureWhat mix of services should they be offering to achieve high and sustained profitability? A few commercial bankinvestment bank combi

17、nations have shown promise for the future, despite ongoing struggles to fend off losses following a huge mortgage market meltdown in 20072009Recently both investment banks and commercial banks have been under intense pressure to raise large amounts of new capitalMany observers anticipate more merger

18、sIt is not clear that future commercial bank-investment bank combinations will consistently turn out wellOne likely outcome is greater government regulationSales of Investment Banking SeSelling Investment Products to ConsumersIn recent years many of the largest business and household depositors have

19、 moved their funds out of deposits at banks and thrift institutions into investment productsStocks, bonds, mutual funds, annuities, and similar financial instrumentsMutual Fund Investment Products One of the most popular of the investment productsEach share in a mutual fund permits an investor to re

20、ceive a pro rata share of any dividends or other forms of income generated by a pool of stocks, bonds, or other securities the fund holdsIf 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 number o

21、f shares each investor holdsProprietary funds versus nonproprietary fundsSelling Investment Products toSelling Investment Products to Consumers (continued)Annuity Investment Products Annuities are a hedge against living too long and outlasting ones savingsFixed annuities promise a customer who contr

22、ibutes a lump sum of savings a fixed rate of return over the life of the annuity contractVariable 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 retu

23、rnRecently a new type of annuity contract has appeared, the equity-index annuityCombines the features of both fixed and variable annuitiesOne advantage for financial firms selling this service is that annuities often carry substantial annual feesOne significant disadvantage with annuities sold throu

24、gh depository institutions is they typically compete with selling depositsSelling Investment Products toSelling Investment Products to Consumers (continued)Several problems and risks are associated with sales of investment productsCurrent U.S. regulations require that customers must be told orally (

25、and sign a document indicating they were so informed) that investment products are:Not insured by the Federal Deposit Insurance Corporation (FDIC)Not a deposit or other obligation of a depository institution and not guaranteed by the offering institutionSubject to investment risks, including possibl

26、e loss of principalSelling Investment Products toTrust Services as a Source of Fee IncomeTrust services is the management of property owned by customers, such as securities, land, buildings, and other assetsAmong the oldest nondeposit services that banks and some of their closest competitors offer p

27、arts of the financial firmTrust departments often generate large deposits because they manage property for their customersDeposits placed in a bank by a trust department must be fully securedPopular kinds of trusts:Living trustsTestamentary trustsIrrevocable trustsCharitable trustsIndenture trustsEs

28、tablishment of fiduciary relationship is critical Trust Services as a Source of Sales of Insurance-Related Products Banks can use their branches to sell insuranceOver 100 banks today sell their own insurance products in the United StatesTypes of insurance products sold today:Life insurance policiesP

29、roperty/casualty insurance policiesLife insurance underwriters and property/casualty insurance underwriters manage their respective risks Sales of Insurance-Related ProSales of Insurance-Related Products (continued) There are mandatory public disclosures on the part of depository institutions sellin

30、g insurance products that stipulate:An insurance product or annuity is not a deposit or other obligation of a depository institution or its affiliateAn 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. governme

31、nt, the depository institution itself, or its affiliatesInsurance products or annuities may involve investment risk and possible loss of valueU.S. depository institutions cannot base granting loans on the customers purchase of an insurance product or annuity from a depository institution or any of i

32、ts affiliates or on the customers agreement not to obtain an insurance product or annuity from an unaffiliated entityThese disclosures must be made both orally and in writing before completion of the sale of an insurance productSales of Insurance-Related ProThe Alleged Benefits of Financial-Services

33、 DiversificationWhen two or more different industry types merge with each other, this strategic move is called convergenceOne possible benefit is the relatively low correlation that may exist between cash flows or revenues generated by the sale of traditional industry products versus the sale of non

34、traditional productsBut because streams of revenue from different product lines may move in different directions at different times, the overall impact of combining these different industries and products under one roof may be to stabilize combined cash flows and profitabilityThe risk of failure mig

35、ht also be reducedThis potential consequence of the convergence of two or more financial-service industries is called the product-line diversification effectThe Alleged Benefits of FinancThe Alleged Benefits of Financial-Services Diversification (continued)Example of what could happen to overall ins

36、titutional risk by combining traditional and nontraditional financial servicesSuppose a banking company decides to add insurance services to its existing product menuIt expects to earn a 12 percent average return from sales of its traditional banking products and a 20 percent return from selling or

37、underwriting insurance servicesThese 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 expects to receive 20 percent of its revenues from insurance sales and 80 percent from sales of traditional banking product

38、sThe cash flows from the two sets of services are negatively correlated over time with a correlation coefficient of -0.50The Alleged Benefits of FinancThe Alleged Benefits of Financial-Services Diversification (continued)What would happen to the banks overall return from sales of traditional and non

39、traditional products in this case? The Alleged Benefits of FinancThe Alleged Benefits of Financial-Services Diversification (continued)And what happens to the risk of return for this bank?The Alleged Benefits of FinancThe Alleged Benefits of Financial-Services Diversification (continued)And what hap

40、pens 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 FinancThe Alleged Benefits of Financial-Services Diversification (continued)Other potential benefits from offering m

41、ultiple 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 financia

42、l firm produces 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 multiservice firms profit marginThe Alleged Benefits of FinancInformation Flows withi