Dr. B. Rajesh Kumar is Professor of Finance at the Institute of Management Technology, Dubai International Academy City, UAE. He earned his PhD in Management from the Indian Institute of Technology, IIT Kharagpur. He has published over 40 empirical research papers in refereed international journals and is the author of six books. His co-authored research works have been cited in the popular financial press, such as The Financial Times, Money Week and The Economist.He has published three books with Elsevier/Academic Press including the recently published Strategic Financial Management Casebook that strategically uses integrative case studies-cases that do not emphasize specific subjects such as capital budgeting or value based management-to provide a framework for understanding strategic financial management. His earlier book, Strategies of Banks and Other Financial Institutions, presents a comprehensive portrait of financial institutions worldwide by balancing their theories of strategy and risk structure with detailed case studies. His book on Valuation Theories and Concepts, offer a broader more holistic perspective on valuation suited to companies and markets worldwide.
How and why do strategic perspectives of financial institutions differ by class and region? Strategies of Banks and Other Financial Institutions: Theories and Cases is an introduction to global financial institutions that presents both theoretical and actual aspects of markets and institutions. The book encompasses depository and non-depository Institutions; money markets, bond markets, and mortgage markets; stock markets, derivative markets, and foreign exchange markets; mutual funds, insurance, and pension funds; and private equity and hedge funds. It also addresses Islamic financing and consolidation in financial institutions and markets. Featuring up-to-date case studies in its second half, Strategies of Banks and Other Financial Institutions proposes a useful theoretical framework and strategic perspectives about risk, regulation, markets, and challenges driving the financial sectors. - Describes theories and practices that define classes of institutions and differentiate one financial institution from another- Presents short, focused treatments of risk and growth strategies by balancing theories and cases- Places Islamic banking and finance into a comprehensive, universal perspective
Front Cover 1
Strategies of Banks and Other Financial Institutions: Theories and Cases 4
Copyright 5
Contents 6
Preface 18
Strategies of Banks and Other Financial Institutions: Theories and Cases 18
Acknowledgments 20
Dedication 22
Part: A 24
Chapter 1: Strategies and Structures of Financial Institutions 26
1.1. Introduction 26
1.2. Banking Performance Trends 26
1.3. Strategic Trends 28
1.4. Reform Policy Trends 31
1.5. Technology Trends 31
1.5.1. The Growing Relevance of Digital Banking 31
1.5.2. Data Management at the Enterprise Level 33
1.5.3. Need for Scalable Architecture Framework for Digital Payments 34
1.5.4. Increasing Relevance of Virtual Currencies 34
1.6. Challenges of Global Financial Institutions 36
1.7. Changes in Control System 15 37
1.8. Banking Trends in Emerging Markets 37
1.9. The Financial Crisis of 2008 39
1.10. Impact of Financial Crisis on Banking System 41
1.11. Structures of Financial Institutions 43
1.11.1. Different Types of Financial Institutions 43
1.11.2. Banking Structures Based on Legal Frameworks 44
1.11.2.1. Bank holding companies and financial holding companies 44
1.11.2.2. C corporations and S corporations 45
1.11.3. Different Types of Banking Models 45
1.11.3.1. Narrow banks and universal banks 45
1.11.3.2. Retail banks 45
1.11.3.3. Private banks 46
1.11.3.4. Offshore banks 46
1.11.3.5. Investment banks 46
1.11.3.6. Islamic banks 46
1.11.4. Changing Financial Structures 46
1.12. Shadow Banking System 49
1.13. Consolidation in the Financial Services Industry 50
1.14. Importance of Corporate Governance in Financial Institutions 51
1.15. Summary 51
Questions for Discussion 52
References 52
Chapter 2: Regulatory Environment of Financial Institutions 54
2.1. Introduction 54
2.2. Universal Functions of Regulatory Agencies 55
2.3. History of Regulatory Reforms 55
2.3.1. Interest Rate Controls 55
2.3.2. Investment Restrictions on Financial Institutions 56
2.3.3. Line of Business Restrictions and Regulations on Ownership Linkages Among Financial Institutions 56
2.3.4. Restrictions on Entry of Foreign Financial Institutions 56
2.3.5. Controls on International Capital Movements and Foreign Exchange Transactions 56
2.4. Institutional Structures of Regulations 57
2.5. Drivers of Regulatory Reforms 57
2.6. Benefits of Regulatory Reform 57
2.7. Role of State in Regulatory System 59
2.8. Financial Crisis: Poor Governance of Financial Regulation 60
2.9. Initiatives for Stability of THE Financial System 61
2.10. Regulation of the Banking System 61
2.10.1. Instruments of Bank Regulation 62
2.10.1.1. Deposit insurance 62
2.10.1.2. Capital adequacy requirements 63
2.10.1.3. Glass-Steagall Act 63
2.11. Basel Reforms 63
2.11.1. Basel Committee on Banking Supervision 63
2.11.2. Committee on Global Financial System 64
2.11.3. Committee on Payment and Settlements Systems 65
2.11.4. Markets Committee 65
2.11.5. Central Bank Governance Forum 65
2.11.6. Irving Fisher Committee on Central Bank Statistics 65
2.11.7. Basel I Capital Accord 65
2.11.7.1. Tier 1 (core capital) 65
2.11.7.2. Tier 2 (supplementary capital) 65
2.11.8. Basel II Framework 66
2.11.8.1. Part 1—Scope of application 67
2.11.8.2. Part 2—First pillar: Minimum capital requirements 68
2.11.8.2.1. Constituents of capital 68
2.11.8.2.2. Capital requirements for credit risk 68
2.11.8.2.3. Operational risk 69
2.11.8.2.4. Market risk 69
2.11.8.2.5. Standardized approach 69
2.11.8.2.6. Internal models 70
2.11.8.3. Part 3—Second pillar: Supervisory review process 70
2.11.8.4. Part 4—Third pillar: Market disclosure 71
2.11.8.5. Basel II failure 72
2.11.9. Basel III Framework 73
2.11.9.1. Impact of Basel III implementation 76
2.11.9.2. Basel reforms: A critical analysis 76
2.12. Dodd-Frank Act 77
2.13. Systemically Important Financial Institutions 77
2.14. Financial Reforms in Europe 78
2.15. Regulation in Nonbanking Financial Sectors 78
2.15.1. Regulatory Measures for the Shadow Banking System 79
2.15.2. Regulations of Nonbanking Financial Institutions in the United States 79
2.15.3. Regulations of Nonbanking Financial Institutions in Europe 80
2.15.3.1. Regulations of money market funds 80
2.16. Regulations in Capital Market 80
2.16.1. Laws Governing the Securities Industry 81
2.16.1.1. Securities Act of 1933 81
2.16.1.2. Securities Exchange Act of 1934 81
2.16.1.3. Trust Indenture Act of 1939 81
2.16.1.4. Investment Act of 1940 81
2.16.1.5. Investment Advisers Act of 1940 81
2.16.1.6. Sarbanes-Oxley Act of 2002 81
2.16.1.7. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 81
2.16.1.8. Jumpstart Our Business Startups (JOBS) Act of 2012 81
2.17. Summary 82
Questions for Discussion 82
References 82
Chapter 3: Risks Inherent in Financial Institutions 84
3.1. Introduction 84
3.2. History of Risk Measurement 84
3.3. Services Provided by Financial Institutions 85
3.4. Major Steps in Risk Management of Financial Institutions 86
3.5. Generic Risks in Financial Institutions 86
3.6. Risk Mitigation Strategies 86
3.7. Risk Management Crisis: Lessons Learned 87
3.8. Risk Management in Banks 89
3.8.1. Risk Management Framework in Banks: Structure and System 90
3.8.1.1. Structure 90
3.8.2. Risk Management System 91
3.8.2.1. Stress testing 91
3.8.2.1.1. Stress-testing approaches 91
3.8.2.1.1.1. Scenario analysis. 91
3.8.2.1.1.2. Sensitivity analysis. 92
3.8.2.1.1.3. Enterprisewide stress testing 92
3.8.2.1.1.4. Reverse stress testing 92
3.8.2.2. Asset and liability management 92
3.8.2.2.1. Fund transfer pricing 93
3.8.3. Different Types of Risks in Banks 94
3.8.3.1. Credit risk 94
3.8.3.1.1. Counterparty risk 94
3.8.3.1.2. Management of credit risk 94
3.8.3.1.3. Estimating credit losses 95
3.8.3.1.4. Measures of estimating credit losses 95
3.8.3.1.5. Instruments for management of credit risk 96
3.8.3.1.5.1. Estimating expected loan losses 96
3.8.3.1.5.2. Multitiered credit approving systems 96
3.8.3.1.5.3. Prudential limits 96
3.8.3.1.5.4. Risk ratings 96
3.8.3.1.5.5. Risk pricing 96
3.8.3.1.5.6. Portfolio models 96
3.8.3.1.5.7. Loan review mechanism 97
3.8.3.1.6. Managing credit risk in off-balance sheet exposure 97
3.8.3.2. Interest rate risk 97
3.8.3.2.1. Forms of interest rate risk 98
3.8.3.2.1.1. Gap or mismatch risk 98
3.8.3.2.1.2. Basis risk 98
3.8.3.2.1.3. Embedded option risk 98
3.8.3.2.1.4. Yield curve risk 98
3.8.3.2.1.5. Price risk 98
3.8.3.2.1.6. Reinvestment risk 98
3.8.3.2.1.7. Net interest position risk 98
3.8.3.2.2. Measurement of interest rate risk 98
3.8.3.2.2.1. Maturity gap analysis 98
3.8.3.2.2.2. Limitations of gap analysis 99
3.8.3.2.2.3. Duration gap analysis 99
3.8.3.2.2.4. Simulation analysis 100
3.8.3.3. Market risk 100
3.8.3.3.1. Management of market risk 100
3.8.3.3.1.1. Value at risk models 100
3.8.3.4. Liquidity risk 102
3.8.3.4.1. Funding liquidity risk 103
3.8.3.4.2. Trading liquidity risk 103
3.8.3.4.3. Principles of liquidity management 103
3.8.3.4.4. Management of liquidity risk 103
3.8.3.4.5. Liquidity gap and liquidity management 104
3.8.3.4.6. Alternate scenarios 105
3.8.3.4.7. Challenges of liquidity management 106
3.8.3.5. Operational risk 106
3.8.3.5.1. Operational risk management 107
3.8.3.6. Other perspectives of risk 107
3.8.3.6.1. Residual risk 107
3.8.3.6.2. Dilution risk 107
3.8.3.6.3. Settlement risk 107
3.8.3.6.4. Compliance risk 107
3.8.3.6.5. Strategic risk 108
3.8.3.6.6. Reputational risk 108
3.8.3.6.7. Concentration risk 108
3.8.3.6.8. Country risk 108
3.8.3.6.9. Foreign exchange risk 108
3.8.3.6.10. Delivery risk 108
3.8.3.6.11. Price risk 108
3.9. Risks in Major Nonbanking Financial Institutions 112
3.9.1. Risks in Insurance 112
3.9.1.1. Underwriting and investment risk 112
3.9.1.2. Other risks in the insurance business 113
3.9.2. Risk in Pension Funds 113
3.9.2.1. Risk management of pension funds 114
3.9.3. Risk in Mutual Funds 114
3.10. Summary 114
Questions for Discussion 115
References 115
Chapter 4: Money Markets, Bond Markets, and Mortgage Markets 118
4.1. Introduction 118
4.2. Financial Market Instruments 119
4.2.1. Money Market Instruments 119
4.2.1.1. Types of money market instruments 120
4.2.1.1.1. Treasury bills 120
4.2.1.1.2. Federal agency notes 120
4.2.1.1.3. Tax-exempt state and municipal short-term notes 120
4.2.1.1.4. Certificates of deposit 120
4.2.1.1.5. Types of CDs 121
4.2.1.1.5.1. Traditional CD 121
4.2.1.1.5.2. Bump-up CD 121
4.2.1.1.5.3. Liquid CD 121
4.2.1.1.5.4. Zero coupon CD 121
4.2.1.1.5.5. Callable CD 121
4.2.1.1.5.6. Brokered CD 121
4.2.1.1.6. Commercial papers 121
4.2.1.1.7. Bankers' acceptances 122
4.2.1.1.8. Repurchase agreements 122
4.2.1.1.9. Types of repos 123
4.2.1.1.9.1. Hold in custody repo 123
4.2.1.1.9.2. Tri-party repo 123
4.2.1.1.9.3. Reverse repo 123
4.2.1.1.9.4. Other types of repos 123
4.2.1.1.10. Eurodollar deposits 123
4.2.1.1.11. Foreign exchange swaps 124
4.2.1.2. Participants in the money market 124
4.2.1.2.1. Governments 124
4.2.1.2.2. Commercial banks 124
4.2.1.2.3. Corporations 125
4.2.1.2.4. Government-sponsored enterprises 125
4.2.1.2.5. Money market mutual funds 125
4.2.1.2.6. Broker-dealers 125
4.2.2. Capital Market Instruments 125
4.2.2.1. Types of capital market instruments 126
4.2.2.1.1. Treasury notes 126
4.2.2.1.2. Treasury bonds 126
4.2.2.1.3. Treasury inflation-protected securities 126
4.2.2.1.4. Separate trading of registered interest and principal securities 126
4.2.2.1.5. Municipal bonds 127
4.2.2.1.6. Secured premium notes 127
4.2.2.1.7. Corporate bond market 127
4.2.2.1.8. Corporate bonds 127
4.2.2.1.9. Types of corporate bonds 127
4.2.2.1.9.1. Fixed-rate coupon bonds 128
4.2.2.1.9.2. Zero coupon bonds 128
4.2.2.1.9.3. Floating rate bonds 128
4.2.2.1.9.4. Variable and adjustable rate 128
4.2.2.1.9.5. Callable and putable bonds 128
4.2.2.1.9.6. Step-up and step-down corporate bonds 128
4.2.2.1.9.7. Convertible bonds 128
4.2.2.1.9.8. Pay in kind bonds 128
4.2.2.1.9.9. Floating-rate and increasing-rate notes 128
4.2.2.1.9.10. Extendable reset notes 128
4.2.2.1.9.11. Deferred-interest bonds 128
4.2.2.1.9.12. Multi-tranche bonds 128
4.2.2.1.9.13. Asset-backed securities and mortgage-backed securities 128
4.2.2.1.9.14. Junk bonds 129
4.2.2.1.10. Fundamentals of corporate bonds 129
4.2.2.1.11. Bond features 129
4.2.2.1.12. Bond ratings 130
4.2.2.1.13. Major corporate bond issues 131
4.2.2.2. Debt instruments in international financial markets 131
4.2.2.2.1. Syndicated euro credit loans 132
4.2.2.2.2. Euro commercial papers 132
4.2.2.2.3. Euro notes 132
4.2.2.2.4. Euro medium-term notes 132
4.2.2.2.5. Eurobonds 133
4.2.2.2.6. Types of Eurobonds 133
4.2.2.2.7. Special types of Eurobonds in financial markets 133
4.2.2.2.8. Floating rate notes 134
4.2.2.2.9. Types of FRNs 134
4.2.2.2.9.1. Perpetual FRNs 134
4.2.2.2.9.2. Fake perpetual FRNs 134
4.2.2.2.9.3. Variable rate notes 134
4.2.2.2.9.4. Reverse FRNs 134
4.2.2.2.9.5. Collared FRNs 134
4.2.2.2.9.6. Step-up recovery FRNs 134
4.2.2.2.9.7. Interest rate differential notes 135
4.2.2.2.9.8. Leveraged FRNs 135
4.2.2.2.9.9. Ratchet FRNs 135
4.2.2.2.9.10. Corridor floating rate notes 135
4.2.2.2.10. Foreign bonds 135
4.2.2.2.11. Global bonds 135
4.2.2.2.12. Sovereign bonds 135
4.2.2.3. Trends in global bond market 135
4.2.2.4. Bond market participants 136
4.2.2.5. Secondary bond markets 136
4.2.2.6. Bond investment strategies 137
4.2.2.7. Passive strategies 137
4.2.2.7.1. Buy and hold strategy 137
4.2.2.7.2. Laddered strategy 137
4.2.2.7.3. Barbell strategy 137
4.2.2.7.4. Indexing strategy 138
4.2.2.8. Active strategies 138
4.2.2.9. Match funding strategies 138
4.2.2.10. Contingent and structured strategies 138
4.2.2.11. Other specific strategies 138
4.2.2.11.1. Maximizing income 138
4.2.2.11.2. Rolling down yield curve 138
4.3. Mortgage Markets 139
4.3.1. Participants in the Mortgage Markets 140
4.3.2. Types of Mortgages 140
4.3.2.1. Fixed rate mortgages 140
4.3.2.2. Adjustable rate mortgages 140
4.3.2.3. Graduated payment mortgages 140
4.3.2.4. Automatic rate reduction mortgages 140
4.3.2.5. Growing equity mortgages 140
4.3.2.6. Second mortgages 141
4.3.2.7. Shared appreciation mortgages 141
4.3.2.8. Equity participation mortgages 141
4.3.2.9. Reverse annuity mortgages 141
4.3.2.10. Amortization and balloon payment mortgages 141
4.3.3. Mortgage-Backed Securities 141
4.3.3.1. Risks in mortgage investments and MBS 142
4.3.3.2. Types of MBS 143
4.3.3.2.1. Pass-through securities 143
4.3.3.2.2. Collateralized mortgage obligations 143
4.3.3.2.3. Asset-backed securities 143
4.3.3.2.4. Collateralized debt obligation 143
4.3.3.3. Subprime mortgage crisis 144
4.4. Summary 145
Questions for Discussion 146
References 146
Chapter 5: Stock Markets, Derivatives Markets, and Foreign Exchange Markets 148
5.1. Stock Markets and Instruments 148
5.1.1. Introduction 148
5.1.2. Stock Market Instruments and Characteristics 148
5.1.2.1. Common stock 148
5.1.2.2. Preferred stock 149
5.1.2.3. Primary stock market 149
5.1.2.3.1. IPO process 150
5.1.2.3.2. Shelf registration 150
5.1.2.3.3. Private placements 150
5.1.2.3.4. Green shoe option 150
5.1.2.3.5. Flipping shares 151
5.1.2.3.6. Underpricing of IPOs 151
5.1.2.4. Secondary stock markets 151
5.1.2.5. Stock market transactions and strategies 153
5.1.2.5.1. Market orders 153
5.1.2.5.2. Limit orders 153
5.1.2.5.3. Special orders 153
5.1.2.5.4. Margin transactions 153
5.1.2.5.5. Short selling 154
5.1.2.6. Facilitators in stock transactions 154
5.1.2.6.1. Floor broker 154
5.1.2.6.2. Market maker 154
5.1.2.6.3. Specialist 154
5.1.2.7. Innovations in trading systems 154
5.1.2.8. New trading systems 155
5.1.2.9. Regulation in the stock market 155
5.1.2.10. Participants in the stock market 156
5.1.2.11. Stock market indexes 156
5.1.2.11.1. Dow Jones Industrial Average 156
5.1.2.11.2. NYSE Composite Index 156
5.1.2.11.3. NASDAQ Composite Index 156
5.1.2.11.4. Standard & Poor’s 500
5.1.2.11.5. Nikkei 225 or Nikkei 157
5.1.2.11.6. Emerging markets 157
5.1.2.12. Investing in foreign stocks 157
5.1.2.12.1. Direct purchases 157
5.1.2.12.2. International mutual funds 157
5.1.2.12.3. International exchange-traded funds 157
5.1.2.12.4. American depository receipts 157
5.1.2.12.5. Global depository receipts 158
5.1.2.13. Common stock portfolio management strategies 158
5.1.2.14. Stock market trends 158
5.1.2.15. Bull and bear markets 159
5.1.2.16. Major stock exchanges in the world 159
5.1.2.16.1. New York Stock Exchange Euronext 159
5.1.2.16.2. National Association of Securities Dealers Automated Quotation System 160
5.1.2.16.3. London Stock Exchange 160
5.1.2.16.4. Tokyo Stock Exchange 161
5.2. Derivatives Market and Instruments 161
5.2.1. Introduction 161
5.2.2. Classification of Derivatives 161
5.2.3. Users of Derivatives 162
5.2.4. Volume of Bank Exposure in Derivatives Trading 162
5.2.5. Major Derivatives Exchanges 162
5.2.5.1. CME Group 162
5.2.5.2. Eurex Exchange 163
5.2.5.3. NYSE Euronext Liffe 164
5.2.6. Derivatives Instruments 164
5.2.6.1. Forward contracts 164
5.2.6.2. Futures contracts 164
5.2.6.2.1. Treasury bond futures 164
5.2.6.2.2. Stock index futures 164
5.2.6.2.3. Eurodollar futures 165
5.2.6.3. Options contracts 165
5.2.6.3.1. Equity options 165
5.2.6.3.2. Stock index and index ETF options 165
5.2.6.3.3. Currency options 165
5.2.6.3.4. Options on futures contracts 165
5.2.6.3.5. Swaptions 165
5.2.6.3.6. Futures options 165
5.2.6.3.7. Options on interest rate futures 166
5.2.6.4. Forward rate agreements 166
5.2.6.5. Swaps 166
5.2.6.5.1. Currency swaps 166
5.2.6.5.2. Amortizing swaps 166
5.2.6.5.3. Deferred swaps 166
5.2.6.5.4. Constant maturity swaps 166
5.2.6.5.5. Compounding swaps 166
5.2.6.5.6. Accrual swaps 167
5.2.6.5.7. Cross-currency interest rate swaps 167
5.2.6.5.8. Equity swaps 167
5.2.6.5.9. Commodity swaps 167
5.2.6.5.10. Interest rate swaps 167
5.2.6.5.11. LIBOR in arrears swaps 167
5.2.6.5.12. Accrual swaps 167
5.2.6.5.13. Cancelable swaps 167
5.2.6.6. Packages 167
5.2.6.6.1. Forward start options 167
5.2.6.6.2. Compound options 167
5.2.6.6.3. Barrier options 168
5.2.6.6.4. Binary options 168
5.2.6.6.5. Lookback options 168
5.2.6.6.6. Shout options 168
5.2.6.6.7. Asian options 168
5.2.6.7. Weather derivatives 168
5.2.6.8. Insurance derivatives 168
5.2.6.9. Commodity derivatives 168
5.2.6.10. Asset-backed securities in the securitization market 168
5.2.6.11. Credit derivatives 169
5.2.7. Derivatives Risks in Banks 170
5.2.8. Functions of Financial Institutions in Derivatives Markets 170
5.2.8.1. Role of financial institutions in forwards, futures, and options contracts 171
5.2.8.2. Role of financial institutions in swaps 171
5.2.8.3. Role of financial institutions in asset securitization 172
5.2.8.4. Role of banks in credit derivatives 172
5.2.8.4.1. Players in the derivatives market 172
5.2.8.4.2. Hedging with derivatives 173
5.3. Foreign Exchange Market and Instruments 173
5.3.1. International Monetary Systems 173
5.3.1.1. The era of bimetallism 173
5.3.1.2. Gold standard 173
5.3.1.3. Gold exchange standard 174
5.3.1.4. Flexible exchange rate regime 174
5.3.2. European Monetary System 175
5.3.3. Balance of Payment 175
5.3.4. Determinants of Exchange Rates 176
5.3.4.1. International parity relationships 176
5.3.4.1.1. Law of one price 176
5.3.4.1.2. Purchase power parity 176
5.3.4.1.3. Interest rate parity 176
5.3.4.1.4. Fisher effect 177
5.3.4.1.5. International Fisher effect 177
5.3.5. Foreign Exchange Market and Instruments 177
5.3.5.1. Exchange rate quotation 177
5.3.6. Types of Foreign Exchange Markets 178
5.3.6.1. Spot market 178
5.3.6.2. Currency forward market 178
5.3.6.3. Currency futures market 178
5.3.6.4. Currency swap market 179
5.3.6.5. Currency options market 179
5.3.7. Market Trends in Foreign Exchange Markets 179
5.3.8. Foreign Exchange Risk Management 180
5.3.9. Management of Transaction Exposure 181
5.3.9.1. Internal techniques 181
5.3.9.1.1. Hedging through invoice currency 181
5.3.9.1.2. Leading and lagging 182
5.3.9.1.3. Matching 182
5.3.9.2. External techniques 182
5.3.9.2.1. Forward contracts 182
5.3.9.2.2. Futures contracts 182
5.3.9.2.3. Money market hedges 182
5.3.9.2.4. Options 182
5.3.9.2.5. Bilateral and Multilateral Netting 183
5.3.10. Management of Operating Exposure 183
5.3.10.1. Marketing strategies 183
5.3.10.2. Production strategies 183
5.3.10.3. Financial strategies 183
5.3.11. Management of Translation Exposure 183
5.3.11.1. Measures of translation exposure 183
5.3.12. Market Participants in the Foreign Exchange Market 184
5.4. Summary 185
Questions for Discussion 186
References 187
Chapter 6: Strategies of Depository Institutions 188
6.1. Commercial Banks and Thrift Institutions 188
6.1.1. Introduction: Commercial Banks 188
6.1.1.1. Global commercial banking trends 189
6.1.1.2. Challenges in the commercial banking industry 191
6.1.1.3. Functions of commercial banks 192
6.1.1.3.1. Accept deposits 192
6.1.1.3.1.1. Significance of deposits 193
6.1.1.3.1.2. Nature of deposits 193
6.1.1.3.2. Provide loans 193
6.1.1.3.2.1. Secured loans 194
6.1.1.3.2.2. Unsecured loans 194
6.1.1.3.2.3. Mortgage loans 194
6.1.1.3.2.4. Business lending 194
6.1.1.3.3. Overdraft services 194
6.1.1.3.4. Discounting of bills of exchange 195
6.1.1.3.5. Fund investment 195
6.1.1.3.6. Buy/hold securities 195
6.1.1.3.7. Agency functions 195
6.1.1.3.8. Miscellaneous functions 195
6.1.1.4. Sources of funds for commercial banks 195
6.1.1.5. Uses of funds by banks 196
6.1.1.5.1. Business loans 196
6.1.1.5.2. Loan syndication 196
6.1.1.5.3. Consumer loans 197
6.1.1.5.4. Investment in government securities and bonds 197
6.1.1.5.5. Other uses of funds 197
6.1.1.6. Commercial bank statistics 197
6.1.1.7. Off-balance sheet activities 197
6.1.1.8. Types of commercial banking customers 198
6.1.1.9. Special characteristics of commercial banks 199
6.1.1.10. Components of income statements 199
6.1.1.10.1. Interest income 199
6.1.1.10.2. Interest expense 199
6.1.1.10.3. Net interest income 199
6.1.1.10.4. Noninterest income 200
6.1.1.10.5. Provision for loan losses 200
6.1.1.10.6. Net income 200
6.1.1.11. Framework for bank performance evaluation 200
6.1.1.12. Analysis of bank performance 201
6.1.1.12.1. Profitability measures 201
6.1.1.12.1.1. Return on equity 201
6.1.1.12.1.2. Return on assets 201
6.1.1.12.1.3. Equity multiplier 201
6.1.1.12.1.4. Profit margin 201
6.1.1.12.1.5. Asset utilization 201
6.1.1.12.2. Other profitability ratios 201
6.1.1.12.2.1. Net interest margin 201
6.1.1.12.2.2. Spread 201
6.1.1.12.2.3. Efficiency ratio 202
6.1.1.12.2.4. Overhead efficiency ratio 202
6.1.1.12.2.5. Risk adjusted return on capital 202
6.1.1.12.2.6. Expense ratios 202
6.1.1.12.2.7. Productivity ratios 202
6.1.1.12.2.8. Leverage ratios 202
6.1.1.12.3. CAMEL rating system 202
6.1.1.12.3.1. Capital adequacy 203
6.1.1.12.3.2. Asset quality 203
6.1.1.12.3.3. Management quality 204
6.1.1.12.3.4. Earning ability 204
6.1.1.12.3.5. Liquidity 205
6.1.1.12.3.6. Sensitivity to market risk 205
6.1.1.13. Key banking rates/ratios 205
6.1.1.13.1. Bank rate 205
6.1.1.13.2. Repo rate 205
6.1.1.13.3. Reverse repo rate 205
6.1.1.13.4. Cash reserve ratio 205
6.1.1.13.5. Statutory liquidity ratio 206
6.1.1.13.6. Credit to deposit ratio 206
6.1.1.13.7. Nonperforming assets to loans (advances) 206
6.1.1.13.8. Provision coverage ratio 206
6.1.1.13.9. Rate paid on funds 206
6.1.1.13.10. Gross yield on earning assets 206
6.1.1.14. Credit appraisal at commercial banks 206
6.1.2. Thrift Institutions 207
6.1.2.1. New regulations for thrift institutions 208
6.1.2.1.1. Qualified thrift lender test 208
6.1.2.2. Types of thrift institutions 209
6.1.2.2.1. Mutual savings banks 209
6.1.2.2.2. Savings and loan associations 209
6.1.2.2.3. Credit unions 209
6.1.2.3. Risk management in thrift institutions 211
6.1.2.4. Participation of savings institutions in financial markets 212
6.2. Summary 212
Questions for Discussion 213
References 213
Chapter 7: Investment Banks and Finance Companies 214
7.1. Introduction to Investment Banking 214
7.1.1. Functions of Investment Banking 214
7.1.1.1. Raising funds 215
7.1.1.2. Asset management 215
7.1.1.3. Mergers and acquisitions advisory services 216
7.1.1.4. Facilitation of arbitrage 216
7.1.1.5. Brokerage services 216
7.1.1.6. Market making 216
7.1.2. Structure of Investment Banks 216
7.1.3. Activities of Investment Banking 217
7.1.3.1. Securities underwriting 217
7.1.3.2. Equity underwriting 218
7.1.3.3. Methods of IPO pricing 218
7.1.3.4. Stabilization activities 219
7.1.3.5. Compensation for underwriting 219
7.1.3.6. Debt instruments underwriting 220
7.1.3.6.1. Process of competitive sales 220
7.1.3.6.2. Process of negotiated sales 220
7.1.3.6.3. Private placements 221
7.1.4. Investment Bank Participation in Financial Markets 221
7.1.5. Regulation of Securities Industry 221
7.1.6. Risk in Investment Banking 222
7.1.7. Challenges for Investment Banks 222
7.1.8. Global Investment Banking Statistics 223
7.1.8.1. Emerging markets 224
7.1.9. Role of Investment Banks in the Global Economic Crisis 224
7.2. Finance Companies 225
7.2.1. Types of Finance Companies 225
7.2.1.1. Consumer finance companies 225
7.2.1.2. Commercial finance companies 225
7.2.1.3. Sales finance companies 226
7.2.1.4. Captive finance companies 226
7.2.2. Assets and Liabilities of Finance Companies 226
7.2.3. Risk of Finance Companies 226
7.3. Summary 227
Questions for Discussion 228
References 228
Chapter 8: Mutual Funds, Insurance, and Pension Funds 230
8.1. Mutual Funds 230
8.1.1. Introduction 230
8.1.2. Organization of Mutual Funds 230
8.1.3. Stakeholders of Mutual Funds 230
8.1.3.1. Shareholders 230
8.1.3.2. Board of directors 230
8.1.3.3. Sponsors 231
8.1.3.4. Advisers 231
8.1.3.5. Administrators 231
8.1.3.6. Underwriters 231
8.1.3.7. Transfer agents 231
8.1.4. Key Features of Mutual Funds 232
8.1.5. Classification of Mutual Funds 232
8.1.5.1. Open-ended funds 232
8.1.5.2. Closed-end funds 232
8.1.5.3. Unit investment trusts 233
8.1.6. Sources of Revenue for Investors in a Mutual Fund 233
8.1.7. Mutual Fund Expenses and Load Fees 233
8.1.8. Regulation of Mutual funds 234
8.1.9. Categories of Mutual Funds 235
8.1.9.1. Stock funds 235
8.1.9.2. Bond funds 235
8.1.9.3. Money market funds 235
8.1.9.4. Hybrid funds 236
8.1.9.5. Active/index funds 236
8.1.10. Other Types of Funds 236
8.1.10.1. Exchange-traded funds 236
8.1.10.2. Venture capital funds 237
8.1.10.3. Private equity funds 238
8.1.10.4. Hedge funds 238
8.1.10.5. Real estate investment trusts 239
8.1.11. Mutual Fund Industry Trends 239
8.1.12. Challenges Faced by the Mutual Fund Industry 241
8.1.13. Participation of Mutual Funds in Financial Markets 241
8.2. Insurance 242
8.2.1. Introduction 242
8.2.2. Major Types of Insurance 243
8.2.2.1. Life insurance 243
8.2.2.1.1. Term life insurance 243
8.2.2.1.2. Permanent life insurance 244
8.2.2.1.3. Group life insurance 244
8.2.2.1.4. Credit life insurance 244
8.2.2.1.5. Other life insurance products 245
8.2.2.1.5.1. Annuity 245
8.2.2.1.5.2. Pension plans 245
8.2.2.2. Property and casualty insurance 245
8.2.2.2.1. Major products of PC insurance 245
8.2.2.3. Other classifications 246
8.2.2.3.1. Health insurance 246
8.2.2.3.2. Business insurance 246
8.2.2.3.3. Bond insurance 247
8.2.2.3.4. Mortgage insurance 247
8.2.3. Underwriting Cycle 247
8.2.4. Insurance Pricing 247
8.2.5. Distribution Channels 248
8.2.6. Regulation 248
8.2.7. Risk Management in Insurance 249
8.2.7.1. Types of risk 249
8.2.7.1.1. Underwriting risk 249
8.2.7.1.2. Catastrophe risk 249
8.2.7.1.3. Longevity and mortality risk 249
8.2.7.1.4. Market risk 249
8.2.7.1.5. Downgrade risk 250
8.2.7.1.6. Regulatory risk 250
8.2.7.2. Risk measurement in insurance 250
8.2.7.3. Risk mitigation strategies in insurance 251
8.2.7.3.1. Internal measures 251
8.2.7.3.2. Reinsurance 251
8.2.7.3.3. Financial market instruments 251
8.2.7.3.4. Letters of credit 251
8.2.7.3.5. Increased capital and contingent capital 251
8.2.7.4. Sources and uses of funds by insurance companies 251
8.2.7.5. Valuation of insurance companies 252
8.2.7.5.1. Underwriting leverage 253
8.2.7.5.2. Investment yield 253
8.2.7.5.3. Investment return 253
8.2.7.5.4. Growth 253
8.2.7.5.5. Risk ratios 253
8.2.7.6. Participation of life insurance companies in financial markets 253
8.2.7.7. Global insurance market trends 253
8.3. Pension Funds 256
8.3.1. Introduction 256
8.3.2. Types of Pension Plans 256
8.3.2.1. Public pension and private pension plans 256
8.3.2.2. Occupational and personal pension plans 256
8.3.2.3. Defined contribution and defined benefit occupational plans 256
8.3.2.4. Protected and unprotected pension plans 257
8.3.2.5. Funded pension plans versus unfunded pension plans 257
8.3.2.6. Pension funds versus pension contracts 257
8.3.3. Pension Fund Classification 257
8.3.4. Types of Private Pension Funds 258
8.3.5. Key Features of Pension Funds 258
8.3.6. Challenges Faced by the Global Pension Fund Industry 258
8.3.7. Risk in Pension Funds 259
8.3.8. Governance Structure of Pension Funds 260
8.3.9. Participation of Pension Funds in Financial Markets 260
8.3.10. Regulation of Pension Funds 260
8.3.11. Global Pension Fund Trends 261
8.4. Summary 263
Questions for Discussion 264
References 264
Chapter 9: Private Equity and Hedge Funds 266
9.1. Private Equity 266
9.1.1. Introduction 266
9.1.2. Strategies of Private Equity Firms 267
9.1.3. Organization Structure of Private Equity Funds 267
9.1.3.1. Exit strategy 268
9.1.4. Types of Private Equity Funds 268
9.1.4.1. Leveraged buyout funds 269
9.1.4.2. Venture capital funds 269
9.1.4.3. Growth equity funds 269
9.1.4.4. Special situation funds 269
9.1.5. Determinants of Private Equity 269
9.1.6. Private Equity Market Trends 269
9.1.7. Regulation 270
9.1.8. Challenges 270
9.2. Hedge Funds 271
9.2.1. Introduction 271
9.2.2. Market Trends 271
9.2.3. Structure of Hedge Funds 272
9.2.4. Difference between Mutual Funds and Hedge Funds 273
9.2.5. Regulation 273
9.2.6. Hedge Fund Strategies 273
9.2.6.1. Equity long strategy 274
9.2.6.2. Fixed income strategy 274
9.2.6.3. Convertible arbitrage strategy 274
9.2.6.4. Fund of funds strategy 275
9.2.6.5. Investments in distressed securities 275
9.2.6.6. Global macro strategy 275
9.2.6.7. Merger arbitrage strategy 275
9.2.6.8. Relative value arbitrage 275
9.2.6.9. Managed futures strategy 276
9.2.7. Challenges 276
9.3. Summary 276
Questions for Discussion 277
References 277
Chapter 10: Islamic Influence 278
10.1. Introduction 278
10.2. Features of Islamic Finance 278
10.3. Relevance of Islamic Finance in the Global Economy 279
10.4. Challenges 279
10.5. Regulation 279
10.6. Financing Methods in Islamic Finance 280
10.6.1. Fixed Claim Instruments 280
10.6.1.1. Murabaha (cost plus financing) 280
10.6.1.2. Ijara 280
10.6.1.2.1. Operating lease ( operating ijara) 280
10.6.1.2.2. Ijara wa iqtina ( lease and ownership) 280
10.6.1.2.3. Ijara mawsoofa bil thimma ( forward lease) 281
10.6.1.3. Mukarada 281
10.6.1.4. Salam (forward contract) 281
10.6.1.5. Istisna 281
10.6.1.6. Sukuk 281
10.6.1.6.1. Differentiating sukuk from conventional bonds 281
10.6.1.6.2. Islamic financing through sukuk 282
10.6.1.6.3. Sukuk market 282
10.6.2. Equity-like Instruments 283
10.6.2.1. Mudarabah (profit sharing) 283
10.6.2.2. Musharakah (joint venture) 283
10.6.2.2.1. Comparison of mudarabah and musharakah 284
10.6.3. Investment Funds 284
10.7. Models Used in Islamic Banks 284
10.8. Risk in Islamic 284
10.8.1. Different Types of Risk in Islamic Finance 284
10.8.1.1. Credit risk 284
10.8.1.2. Benchmark risk 285
10.8.1.3. Liquidity risk 285
10.8.1.4. Operational risk 285
10.8.1.5. Legal risk 285
10.8.1.6. Fiduciary risk 285
10.8.1.7. Counterparty risk 285
10.8.2. Risk Management in Islamic Financial Institutions 286
10.9. Takaful 286
10.9.1. Working of General Takaful 286
10.9.2. Difference between Conventional Insurance and Takaful 286
10.9.3. Models of Takaful 287
10.9.3.1. Al mudharabah model 287
10.9.3.2. Al wakala model 287
10.9.4. Other Models 287
10.9.4.1. Cooperative insurance (ta’awuni model) 287
10.9.4.2. Nonprofit model 288
10.10. Summary 288
Questions for Discussion 288
References 288
Chapter 11: Consolidations in Financial Institutions and Markets 290
11.1. Introduction 290
11.2. Megamergers and Acquisitions in the Banking and Other Finance Sectors 291
11.3. Consolidation in the Insurance Sector 293
11.4. Stock Market Mergers 294
11.5. Summary 295
Questions for Discussion 295
References 295
Part: B 296
Cases on Universal Banking 298
1.1. Bank of America 298
1.1.1. Major Divisions 298
1.1.2. Assets and Liabilities of Bank of America 300
1.1.3. Strategy of Bank of America 300
1.1.3.1. Focus on small, medium, and large companies 301
1.1.4. Corporate Social Responsibility Activities 302
1.1.5. Growth through Mergers and Acquisitions 302
1.1.6. Risk Management at Bank of America 303
References 305
1.2. JPMorgan Chase and Company 307
1.2.1. Business Divisions 307
1.2.1.1. Consumer and Community Banking 307
1.2.1.2. Corporate and Investment Banking 308
1.2.1.3. Commercial Banking 309
1.2.1.4. Asset Management 309
1.2.2. Corporate Social Responsibility Activities 309
1.2.3. Capital Strategy 310
1.2.4. Acquisitions by JPMorgan Chase Bank 310
1.2.4.1. JPMorgan and Chase Manhattan merger 311
1.2.4.2. Merger of Bank One with JPMorgan Chase 311
1.2.5. Risk Management at JPMorgan Chase 311
References 313
1.3. Citigroup 314
1.3.1. Major Achievements and Milestones 314
1.3.2. Structure of Citigroup 315
1.3.2.1. Global Consumer Banking 315
1.3.2.1.1. Retail banking 315
1.3.2.1.2. Credit cards 316
1.3.2.1.3. Citi Retail Services 316
1.3.2.1.4. Citi Commercial Bank 316
1.3.2.1.5. CitiMortgage 316
1.3.2.2. Citi’s Institutional Clients Group 316
1.3.2.2.1. Corporate and investment banking 316
1.3.2.2.2. Citi Markets 317
1.3.2.2.3. Citi Private Bank 317
1.3.2.2.4. Citi Transaction Services 317
1.3.2.3. Citi Holdings 318
1.3.3. Assets and Liabilities of Citigroup 318
1.3.4. Strategy 318
1.3.4.1. Mergers and acquisitions by Citicorp 319
1.3.5. Corporate Social Responsibility Activities 320
1.3.6. Risk Management 320
References 323
1.4. Barclays 323
1.4.1. Business Structure 324
1.4.1.1. Retail Business and Banking 324
1.4.1.2. Barclaycards 324
1.4.1.3. Investment Banking 324
1.4.1.4. Universal Banking 325
1.4.1.5. Wealth and Investment Management 325
1.4.2. Strategy 325
1.4.3. Corporate Social Responsibility Activities 326
1.4.4. Risk Management at Barclays 326
References 328
1.5. BNP Paribas 329
1.5.1. Core Business Divisions 329
1.5.1.1. Retail Banking 329
1.5.1.1.1. Domestic markets 329
1.5.1.1.2. BNP Paribas Personal Finance 330
1.5.1.1.3. International Retail Banking 330
1.5.1.2. Investment Solutions 330
1.5.1.3. Corporate and Investment Banking 331
1.5.2. Corporate Social Responsibility Activities 331
1.5.3. Strategy 332
1.5.4. Risk Management at BNP Paribas 332
References 333
1.6. Crédit Agricole Group 334
1.6.1. Structure of Crédit Agricole Group 335
1.6.1.1. Business lines of Crédit Agricole S.A. 335
1.6.1.1.1. Retail banking 335
1.6.1.1.1.1. French Retail Banking: Regional Banks 335
1.6.1.1.1.2. French Retail Banking: LCL 335
1.6.1.1.1.3. International Retail Banking 336
1.6.1.1.2. Specialized business lines 336
1.6.1.1.2.1. Crédit Agricole Consumer Finance 336
1.6.1.1.2.2. Crédit Agricole Leasing and Factoring 336
1.6.1.1.3. Savings management 336
1.6.1.1.3.1. Asset Management, Securities and Investor Services 336
1.6.1.1.3.2. Private Banking 337
1.6.1.1.4. Corporate and investment banking 337
1.6.1.1.4.1. Subsidiaries of Crédit Agricole 337
1.6.2. Corporate Social Responsibility Activities 338
1.6.3. Strategy 338
1.6.4. Risk Management at Crédit Agricole 339
1.6.4.1. Credit risk 339
1.6.4.2. Market risk 339
References 340
1.7. HSBC 341
1.7.1. Business Divisions of HSBC 342
1.7.1.1. Commercial Banking 342
1.7.1.2. Global Banking and Markets 342
1.7.1.3. Private Bank 344
1.7.1.4. Retail Banking and Wealth Management 345
1.7.2. Strategy 345
1.7.3. Risk Management at HSBC 346
References 347
1.8. Industrial and Commercial Bank of China 348
1.8.1. Business Segments 348
1.8.1.1. Personal Banking 348
1.8.1.2. Corporate Banking 349
1.8.1.3. E-banking 350
1.8.1.4. International Banking 351
1.8.2. Strategy 351
1.8.3. Corporate Social Responsibility Activities 351
1.8.4. Risk Management 352
1.8.5. Capital Management 353
References 353
1.9. Deutsche Bank 354
1.9.1. Business Divisions 354
1.9.1.1. Corporate Banking and Securities 354
1.9.1.2. Global Transaction Banking 355
1.9.1.3. Asset and Wealth Management 355
1.9.1.4. Private and Business Clients 356
1.9.1.5. Non-Core Operations Unit 356
1.9.2. Strategy 356
1.9.3. Corporate Social Responsibility Activities 357
1.9.4. Risk Management at Deutsche Bank 358
References 359
Cases on Mortgage Institutions and Credit Unions 360
2.1. Mortgage Institutions 360
2.1.1. Fannie Mae 360
2.1.1.1. Mortgage securitization 360
2.1.1.2. Business segments 361
2.1.1.2.1. Rent services 362
2.1.1.2.2. Buy services 362
2.1.1.2.3. Refinance services 362
2.1.1.2.4. Modify services 363
2.1.1.2.5. Avoid foreclosure services 363
2.1.1.3. Strategy 363
2.1.1.4. Risk management 364
References 365
2.1.2. Freddie Mac 366
2.1.2.1. Business divisions 366
2.1.2.1.1. Single-Family Credit Guarantee 366
2.1.2.1.2. Multifamily business 367
2.1.2.1.3. Investments 367
2.1.2.2. Strategy 367
2.1.2.3. Risk management 367
References 369
2.1.3. Ginnie Mae 370
2.1.3.1. Major programs of Ginnie Mae 370
2.1.3.2. Products 371
2.1.3.3. Risk management 371
References 372
2.2. Thrift Institutions—Credit Unions 372
2.2.1. Navy Federal Credit Union 372
2.2.1.1. Products and services 372
2.2.1.1.1. Loans 372
2.2.1.1.2. Checking and savings services 373
2.2.1.1.3. Credit cards 373
2.2.1.1.4. Online and mobile banking 373
2.2.1.1.5. Business services 373
2.2.1.1.6. Investment and insurance 373
References 374
2.2.2. State Employees’ Credit Union 374
2.2.2.1. Products and services 374
2.2.2.1.1. Loans 374
2.2.2.1.2. Mortgages 375
2.2.2.1.3. Cards and accounts 375
2.2.2.1.4. Estates, insurance, investments, and trusts 375
2.2.2.1.5. Services 376
References 376
2.2.3. Pentagon Federal Credit Union 376
2.2.3.1. Products and services 376
2.2.3.1.1. Credit cards 376
2.2.3.1.2. Loans 376
2.2.3.1.3. Checking and savings accounts 377
2.2.3.1.4. Mortgages 377
References 377
Cases on Investment Banks 378
3.1. Investment Banks 378
3.1.1. Credit Suisse 378
3.1.2. Business Divisions 378
3.1.2.1. Private Banking and Wealth Management 378
3.1.2.2. Investment Banking 379
3.1.3. Products and Services 379
3.1.3.1. Investment banking products and services 379
3.1.3.2. Global securities 379
3.1.4. Strategy 380
3.1.4.1. Liquidity and funding strategy 382
3.1.4.2. Capital management strategy 382
3.1.5. Risk Management 382
3.1.6. Corporate Social Responsibility Activities 384
References 385
3.2. Goldman Sachs Group 385
3.2.1. Major Divisions 385
3.2.1.1. Investment banking 386
3.2.1.1.1. Investment Banking division 386
3.2.1.1.2. Financing Group 387
3.2.1.1.3. Industrial sectors 388
3.2.1.2. Institutional Client Services 388
3.2.1.2.1. Securities Sales and Trading 388
3.2.1.2.2. Prime Brokerage Group 389
3.2.1.2.3. Securities Clearing Services 389
3.2.1.2.4. Securities products and business groups 389
3.2.1.3. Investing and lending 390
3.2.1.4. Investment management 390
3.2.1.5. Research 391
3.2.2. Strategy 391
3.2.3. Corporate Social Responsibility Activities 392
3.2.4. Funding Sources 392
3.2.5. Capital Management 392
3.2.6. Risk Management 392
References 395
3.3. Morgan Stanley 395
3.3.1. Business Segments 395
3.3.1.1. Institutional Securities 396
3.3.1.1.1. Investment banking and corporate lending activities 397
3.3.1.1.2. Sales and trading activities 397
3.3.1.2. Global Wealth Management Group 398
3.3.1.3. Asset Management 398
3.3.2. Strategy 399
3.3.3. Funding Management 399
3.3.4. Capital Management 399
3.3.5. Risk Management 399
3.3.6. Corporate Social Responsibility Activities 401
References 402
3.4. UBS Group 402
3.4.1. Business Divisions 403
3.4.1.1. Wealth Management division 403
3.4.1.2. Wealth Management Americas 404
3.4.1.3. Investment Banking division 404
3.4.1.4. Global Asset Management 405
3.4.1.5. Retail and Corporate division 406
3.4.1.6. Corporate Center 406
3.4.2. Strategy of UBS Group 406
3.4.3. Risk Management 407
3.4.4. Corporate Social Responsibility Activities 408
References 409
Cases on Investment Management Companies 410
4.1. Introduction 410
4.2. The Vanguard Group 410
4.2.1. Different Classes of Mutual Funds 411
4.2.1.1. Money market mutual funds 411
4.2.1.2. All in one funds 411
4.2.1.3. Bond market mutual funds 412
4.2.1.4. Stock funds 412
4.2.1.5. Balanced funds 412
4.2.1.6. International funds 413
4.2.1.7. Index and active funds 413
4.2.1.8. Exchange-traded funds 413
4.3. American Funds 414
4.3.1. Different Funds 414
4.4. Fidelity Funds 415
4.4.1. Businesses 415
4.4.1.1. Asset management 415
4.4.1.2. Personal investing 415
4.4.1.2.1. ETFs 415
4.4.1.2.2. Fidelity trade equity index and ETF options 416
4.4.1.2.3. Retirement investments 416
4.4.1.3. Institutional services 417
4.4.2. Investment Products 418
4.4.2.1. Mutual funds 418
4.4.2.2. Types of mutual funds 418
4.4.2.2.1. Stock mutual funds 419
4.4.2.2.2. Index funds 419
4.4.2.2.3. Asset allocation funds 419
4.4.2.2.4. Fixed-income funds 420
4.4.3. Fidelity Advisory Funds 420
4.5. T. Rowe Price 425
4.5.1. Business Activities 425
4.5.1.1. Mutual funds 425
4.5.1.2. Notable funds 426
4.5.1.3. Retirement investment products 426
4.5.1.4. Planning and research 427
4.6. PIMCO 428
4.6.1. Investment Strategies 428
4.6.1.1. Short duration 428
4.6.1.2. Fixed income 428
4.6.1.3. Equity 429
4.6.1.4. Real estate 429
4.6.1.5. Currency 429
4.6.1.6. Alternatives 429
4.6.1.7. Asset allocation 430
4.6.2. Mutual Funds 430
4.6.3. Featured Funds 430
4.6.4. Exchange-Traded Funds 431
4.6.5. Managed Accounts 433
4.6.5.1. Core products 433
4.6.5.2. Municipal products 433
4.7. Franklin Templeton 433
4.7.1. Types of Investment Management and Related Services 434
4.7.1.1. Investment management services 434
4.7.1.2. Sales and distribution 435
4.7.1.3. Shareholder and transfer agency services 435
4.7.1.4. High-net-worth investment management services 435
4.7.1.5. Institutional investment management 435
4.7.1.6. Trust and custody services 436
4.7.1.7. Management of alternate investment products 436
4.7.1.8. Private banking 436
4.7.2. Investment Products 436
4.7.3. Types of Risk 437
4.8. BlackRock 438
4.8.1. Strategy 438
4.8.1.1. Investment strategies 438
4.8.1.2. Alpha strategies 438
4.8.1.3. Beta strategies 439
4.8.1.4. Multi-asset strategies 439
4.8.1.5. Alternate strategies 439
4.8.2. Products and Services 440
4.8.2.1. Asset management for individuals 440
4.8.2.2. Asset management for institutions 440
4.8.2.3. Global Retail 440
4.8.2.4. BlackRock Solutions 440
References 441
Cases on Insurance Companies 444
5.1. Trends in THE Insurance Industry 444
5.1.1. Specific Risk in Insurance 445
5.2. Japan Post Insurance CO. 445
5.3. Berkshire Hathaway 447
5.3.1. Insurance 447
5.3.2. Government Employees Insurance Company 447
5.3.2.1. Products offered by GEICO 448
5.3.2.1.1. Auto insurance 448
5.3.2.1.2. Motorcycle insurance 448
5.3.2.1.3. Umbrella insurance 448
5.3.2.1.4. Homeowner’s insurance 448
5.3.2.1.5. Other insurance 448
5.3.3. General Reinsurance Corporation 449
5.3.3.1. Reinsurance solutions 449
5.3.3.1.1. Life/health solutions 449
5.3.3.1.2. Property/casualty insurance 450
5.3.4. BHRG and BHPG 451
5.4. AXA S.A. 452
5.4.1. Regulatory Requirements 453
5.4.2. Divisions 453
5.4.2.1. L& S segment
5.4.2.2. P& C insurance
5.4.2.3. International insurance segment 454
5.4.2.4. Asset management 455
5.4.2.5. Banking segments 455
5.4.3. Risk Management 455
5.5. ALLIANZ 458
5.5.1. Products and Solutions 459
5.5.1.1. Private insurance 459
5.5.1.2. Business insurance 459
5.5.1.3. Asset management 460
5.5.1.4. Global division lines 460
5.5.1.5. Global assistance and services 461
5.5.2. Risk Management 461
5.5.3. Corporate Social Responsibility Activities 461
5.6. Generali Group 462
5.6.1. Strategy for Growth 463
5.6.2. Products and Services 465
5.6.2.1. Major groups 465
5.7. Nippon Life Insurance 465
5.7.1. Business Structure 466
5.7.1.1. Insurance and related business 466
5.7.1.2. Asset management 466
5.7.1.3. General affairs and related operations 466
5.7.2. Products and Services 466
5.7.2.1. Major strategic investments 467
5.8. Munich Reinsurance 467
5.8.1. Business Divisions 468
5.8.1.1. Reinsurance 468
5.8.1.1.1. Nonlife reinsurance 468
5.8.1.1.2. Life reinsurance 469
5.8.1.1.3. Health reinsurance 469
5.8.1.1.4. Risk solutions 469
5.8.1.1.5. Claims 469
5.8.1.2. Primary insurance 469
5.8.1.3. Munich Re Health 470
5.8.1.4. Asset management 470
5.8.2. Strategy 470
5.8.3. Risk Management 471
5.9. American International Group 473
5.9.1. AIG Property Casualty 474
5.9.1.1. Commercial products 474
5.9.1.2. Consumer products 474
5.9.2. AIG Life and Retirement 474
5.9.2.1. Life insurance products 475
5.9.2.2. Retirement Services 475
5.9.2.3. Distribution network 476
5.9.3. Other Operations 476
5.9.4. Strategy 476
5.9.5. Risk Management 477
5.9.6. Corporate Social Responsibility Activities 478
5.10. MeTLife 479
5.10.1. Strategy 480
5.11. China Life Insurance Group 481
5.12. AIA Group 482
5.13. ING 482
5.14. Zurich Insurance Group 483
References 484
Cases on Pension Funds 486
6.1. Pension Fund Trends 486
6.2. Sovereign Pension Funds 486
6.2.1. Government Pension Investment Fund Japan 486
6.2.2. Government Pension Fund Norway 487
6.2.3. ABP Netherlands 487
6.2.3.1. Products 488
6.2.3.1.1. ABP Flexible Early Retirement Pension 488
6.2.3.1.2. ABP Retirement Pension 488
6.2.3.1.3. ABP Multi-Option Pension 488
6.2.3.1.4. ABP Incapacity Pension 488
6.2.3.1.5. ABP Surviving Dependents Pension 488
6.2.4. National Pension Service OF Korea 489
6.2.5. Central Provident Fund Singapore 490
6.2.5.1. Operations 491
6.2.5.1.1. Retirement schemes 491
6.2.5.1.2. Health care 491
6.2.5.1.3. Homeownership 491
6.2.5.1.4. Workfare 492
6.2.6. Canada Pension Plan 493
6.2.7. Employees Provident Fund Malaysia 493
6.2.8. National Social Security Fund China 494
6.2.9. Federal Retirement Thrift US 494
6.2.10. California Public Employees Retirement System 496
6.2.10.1. Programs and services 497
6.2.10.2. Investments 497
6.3. Corporate Pension Funds 499
6.3.1. General Motors Pension Plan 499
6.3.2. IBM Pension 500
6.3.3. Boeing Company EmployEEment Retirement Plan 501
6.3.4. AT& T Pension Plans
6.3.5. BT Pension Scheme 503
6.3.6. General Electric Pension Plans 504
References 505
Cases on Private Equity Firms 508
7.1. Kohlberg Kravis Roberts 508
7.1.1. Business Review 508
7.1.1.1. Private markets 508
7.1.1.2. Public markets 509
7.1.1.3. Capital markets and principal activities 510
7.1.2. Client and Partner Group 510
7.1.2.1. Partners 510
7.1.2.2. KKR mutual funds 510
7.1.3. Strategy 510
7.1.4. Risk in Business 511
7.2. Blackstone Group 512
7.2.1. Businesses of Blackstone 512
7.2.1.1. Asset management 512
7.2.1.1.1. Private equity 512
7.2.1.1.2. Real estate 513
7.2.1.1.3. Hedge fund solutions 513
7.2.1.1.4. Credit solutions 514
7.2.1.1.5. Tactical Opportunities 514
7.2.1.1.6. Strategic Partners 514
7.2.1.2. Financial advisory services 514
7.2.1.2.1. Blackstone Advisory Partners 514
7.2.1.2.2. Restructuring and Reorganization 515
7.2.1.2.3. Park Hill Group 515
7.3. Bain Capital 516
7.3.1. Bain Capital Private Equity 517
7.3.2. Brookside Capital 518
7.3.3. Sankaty Advisors 518
7.3.4. Bain Capital Ventures 518
7.3.5. Absolute Return Capital 518
7.4. Carlyle Group 519
7.4.1. Business Segments 519
7.4.1.1. Corporate Private Equity 519
7.4.1.2. Real estate 519
7.4.1.3. Global Market Strategies 520
7.4.1.4. Global Solutions segment 520
7.5. TPG Capital 521
7.5.1. Investment Platforms 521
References 522
Cases on Hedge Funds 524
8.1. Bridgewater Associates 524
8.2. Adage Capital Management 524
8.3. York Capital Management 524
8.4. Graham Capital Management 525
8.5. Pershing Square Capital Management 525
8.6. Man Group 525
8.7. Brevan Howard Asset Management 526
8.8. Och-Ziff Capital Management Group 526
References 526
Cases on Islamic Banks 528
9.1. Saudi Al Rajhi Bank 528
9.2. Kuwait Finance House 530
9.2.1. Risk Management 531
9.3. Dubai Islamic Bank 532
9.3.1. Risk Management 533
9.4. Abu Dhabi Islamic Bank 534
9.5. Al Baraka Islamic Bank 536
9.6. Qatar Islamic Bank 537
References 538
Cases on Sovereign Wealth Funds 540
10.1. Sovereign Wealth Funds 540
10.1.1. Government Pension Fund Global — Norway 540
10.1.2. SAMA Foreign Holdings — Saudi Arabia 541
10.1.3. Abu Dhabi Investment Authority — United Arab Emirates 541
10.1.4. China Investment Corporation — China 542
10.1.5. State Administration of Foreign Exchange — Hong Kong 542
10.1.6. Kuwait Investment Authority — Kuwait 543
10.1.7. Hong Kong Monetary Authority — Hong Kong 543
10.1.8. GIC Private Limited — Singapore 543
10.1.9. Temasek Holdings — Singapore 544
10.1.10. Qatar Investment Authority — Qatar 545
References 545
Index 546
Strategies and Structures of Financial Institutions
Abstract
A financial sector comprises a set of institutions, instruments, and markets established in the context of a legal and regulatory framework. Financial institutions face challenges for gaining competitive advantage in the context of rapid changes in technological, economic, social, demographic, and regulatory environments. The deep transformation the financial sector is witnessing can be attributed to a number of factors such as technology innovation, deregulation, worldwide consolidation and restructuring, deregulation, and changing demographic profiles. Information technology is the primary force that keeps the financial industry dynamic. The post-economic crisis witnessed a series of policy reforms initiated by regulatory authorities. The global technology trends in the financial industry indicate the relevance of next-generation remote banking solutions, business intelligence, and analytics in transaction monitoring. Financial institutions face much complexity in the types of risks they have to manage. The trends indicate the growing significance of the emerging Asia market, consisting of China, India, and ASEAN countries for growth opportunities in the financial services industry.
Keywords
Financial institutions
Strategic trends
Technology trends
Reform policy trends
Universal banking
Digital banking
Mobile banking
Remote deposit capture
Consolidation
Emerging markets
Corporate governance
Shadow banking
1.1 Introduction
Financial institutions basically serve as financial intermediaries between primary saving and borrowing sectors. In the current environment it has become critical for financial institutions to evolve strategies for competitiveness in the context of rapid changes within technological, economic, social, demographic, and regulatory environments. The financial sector encompasses a set of institutions, instruments, and markets as well as the legal and regulatory framework. Globalization, regulatory compliance, risk management, technological innovation, and demographics are the major transformative issues that will determine the growth of the global financial sector. Consolidation and cross-border mergers and acquisitions (M&A) in the context of easing cross-border investment regulations are also visible trends observed in the global financial sector. Technology has transformed products offered by financial institutions into commodities. Technology has transformed the internal operating environment as well as the external market environment. Information technology (IT) is the primary force that keeps the financial industry dynamic.
The biggest banking markets by assets are the United States, the United Kingdom, Japan, China, and France. Of these countries, the United States has the largest number of banking institutions in the world. In 2011, there were 6291 commercial banking institutions with 83,209 branches in the United States. In the 1990s, the number of US banking institutions was approximately 12,000. In 2011, the number of savings institutions was 1067.1
US, German, and Japanese banks are dominant both in terms of assets and number of institutions. There are 20 US banks, 16 German banks, and 11 Japanese banks among the top 100 banks.2
1.2 Banking Performance Trends
A McKinsey Global Institute report indicates that during the next 10 years, the growth rate of the global banking industry will exceed that of the gross domestic product (GDP). Experts estimate that the banking industry is likely to more than double its revenues and profits over this period. The shadow banking system around the world had grown to a $67 trillion market by 2011, according to the Financial Stability Board (FSB) Monitoring Report of 2012.
According to the FSB report, the global banks sector is forecast to have a value of $136,946.8 billion by 2015, which represents an increase of approximately 34% from 2010. Bank credit is the largest segment of global banking, accounting for 59.7% of the total sector value. Europe accounts for 53% of the global banks’ sector value. In 2010, the global banks industry group had total assets of $101,880.2 billion, representing a compounded annual growth rate (CAGR) of 7.6% during the period 2006-2010.
The United States accounts for 11.5% of the global banks sector value. By 2015, the US banks sector is forecasted to have a value of $15.617 billion dollars.3 The Asia Pacific bank sector is forecasted to have a value of $40,669 billion. Currently, China accounts for 47.9% of the Asia Pacific bank sector value,4 and Japan accounts for a further 31.3% of the Asia Pacific sector. In the year 2011, the biggest banks in terms of market capitalization were the Industrial and Commercial Bank of China, China Construction Bank Corporation, HSBC Holdings, and JPMorgan.
The industry growth rate of assets of the top 1000 banks was 2.7% in the post-crisis period of 2008-2010, as compared to the double-digit growth witnessed by the sector during the period 2006-2007.5 At the same time, the capital adequacy ratio of the banks registered a growth rate of 3.8% during the period 2007-2010. In the period between 2007 and 2008, the profit before tax of the top 1000 global banks declined by $667 billion.6
The highest growth was registered by Latin American banks whose assets grew at a CAGR of 28.1% during 2007-2010. During the same period, the assets of the banking sectors in Asia Pacific and North America grew at rates of 16.3% and 6.9%, respectively, while the assets of European banks declined at a rate of 3.3%.7
In the post-crisis period, the cost-to-income ratio showed impressive improvement in North America, Europe, and Latin America. This improvement was primarily because of the reduction of operational costs owing to the adoption of the Basel recommendations.
According to a McKinsey Quarterly report in 2011, “The state of global banking—in search of a sustainable model,” despite a strong global profit performance in 2010 and the first half of 2011, the return on equity (ROE) of banks in Europe and the United States has still not recovered, particularly in the context of gaps that arise from the new regulatory requirements. The global banking revenues reached a record $3.8 trillion in 2010 compared to $3.5 trillion in 2009. Global banking profits after tax grew to $712 billion in 2010, up from $400 billion in 2009. But 90% of the profit increase was attributable to a decline in provisions for loan losses. In 2010, US and European banking industries had an ROE of just 7% and 7.9%, respectively. Bank revenues in such developing countries as India, Brazil, and China grew by approximately 19.8%, 17.6%, and 13.7%, respectively, during 2010.8 In spite of the economic crisis of 2008, total banking assets are predicted to reach an estimated $163,058 billion in 2017 with a CAGR of 8% over the next five years.9 Table 1.1 highlights the global banking performance trends in terms of profits. Table 1.2 shows the financial position of the global banking industry in terms of loans and deposits, total assets and liabilities during the period 2009-2011.
Table 1.1
Global Banking After-Tax Profits (Billions of US Dollars)
| Year | Profits |
| 2000 | 366 |
| 2005 | 681 |
| 2006 | 802 |
| 2007 | 952 |
| 2008 | 852 |
| 2009 | 549 |
| 2010 | 730 |
Source: McKinsey Global Banking Pools.
The estimated profits realized by banks and nonbanking financial institutions from the provision of banking services to clients. Nonclient driven banking activities such as asset liability management, market making, proprietary trading (the latter two with the exception of Asia Pacific) and banks’ nonbanking activities are excluded.
Table 1.2
Global Banking Amounts Outstanding (Billions of US Dollars)
| Total assets | 33,841.4 | 33,989.1 | 35,878.1 |
| Loans and deposits | 21,664.1 | 22,083.7 | 23,303.2 |
| Total liabilities | 32,338.9 | 32,801.6 | 34,878.7 |
Source: BIS Quarterly Review, March 2012.
1.3 Strategic Trends
The gap for bank revenue growth is expected to widen between growing markets in emerging markets and saturated developed markets. Banks from the emerging markets will become the growth drivers of the global banking industry. Geographically the regions of biggest potential are China, India, Brazil, and Russia. The most populous nation in the world, China has one of the largest savings rates at 40% of the GDP. Financial institutions have spent billions to acquire stakes in Chinese banks. Chinese markets are characterized by a large savings rate and a dearth of health care and pension funds.
With the imposition of more stringent capital adequacy and risk management standards, banks face strains on their traditional business models and operating margins. The financial crisis highlighted the differences that exist between the...
| Erscheint lt. Verlag | 16.7.2014 |
|---|---|
| Sprache | englisch |
| Themenwelt | Recht / Steuern ► Wirtschaftsrecht |
| Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung | |
| Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Bankbetriebslehre | |
| Wirtschaft ► Betriebswirtschaft / Management ► Unternehmensführung / Management | |
| ISBN-10 | 0-12-417167-2 / 0124171672 |
| ISBN-13 | 978-0-12-417167-1 / 9780124171671 |
| Haben Sie eine Frage zum Produkt? |
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