Banking Chapter 4 - Establishing Financial Institutions

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Questions and Answers

What is the main reason financial-service facilities are established?

To expand market share

To increase revenue

To reduce costs

For the convenience of customers (correct)

What has caused customers' views about convenience to change rapidly?

Economic downturn

Changes in government regulations

Environmental concerns

Advancements in technology (correct)

What is one way financial firms can respond to customers' changing demands?

Merging with other firms

Laying off employees

Chartering new financial institutions (correct)

Raising interest rates

What is being discussed in Chapter Four of this book?

Establishing New Banks, Branches, ATMs, Telephone Services, and Websites Signup and view all the answers

What is a limited-service facility?

A facility that offers a limited range of services Signup and view all the answers

Why have financial-service providers traditionally emphasized location?

Because it is convenient for customers Signup and view all the answers

What is the main reason for the recent increase in branchless banking?

Due to the high cost of chartering new financial firms and setting up full-service branch offices Signup and view all the answers

What is one of the services provided through branchless banking?

Telephone banking Signup and view all the answers

What is the cost of installing an ATM, according to the given data?

$30,000 Signup and view all the answers

How much does a bank estimate it will save for each check that is not written due to the use of an ATM?

$1.00 Signup and view all the answers

What is the life expectancy of an ATM, according to the given data?

10 years Signup and view all the answers

What is the cost of capital to finance the ATM's purchase?

14% Signup and view all the answers

What do regulators usually ask about the proposed service area of a new bank?

The population growth and demographics of the area Signup and view all the answers

Why do government chartering agencies believe financial-service providers need special scrutiny?

Because they hold the public's savings and are at the heart of the payments process Signup and view all the answers

What do organizers need to disclose about stock ownership?

The total value of stock held by organizers, directors, and officers Signup and view all the answers

What experience is regulators looking for in the organizers, management, and board of directors?

Experience in the financial industry Signup and view all the answers

Who can issue a charter of incorporation to start a new U.S. bank?

Both the banking commissions in each of the 50 states and the Office of the Comptroller of the Currency (OCC) Signup and view all the answers

What is required to demonstrate the need for a new (de novo) bank in a particular location?

The public's need must be demonstrated Signup and view all the answers

What financial projections do organizers need to provide?

Deposits, loans, and net income for the first few years Signup and view all the answers

Why do organizers often seek a federal bank charter?

Because it conveys added prestige in the minds of customers Signup and view all the answers

What external factor should organizers consider when seeking a new charter?

The level of economic activity Signup and view all the answers

What internal factor should organizers consider when seeking a new charter?

The qualifications of the organizers Signup and view all the answers

What is one reason why chartering too many financial firms might lead to financial struggles?

They have the ability to create money through granting credit Signup and view all the answers

What do founder stockholders need to supply in order to start a new financial firm?

Enough start-up capital to cover several years Signup and view all the answers

What is an important consideration when deciding to seek a new charter?

The need for a new financial firm Signup and view all the answers

Why is a federal bank charter considered more prestigious?

Because it conveys added prestige in the minds of customers Signup and view all the answers

What is a key aspect of a new bank's financial plan?

The projected deposit and loan growth Signup and view all the answers

What is the main reason for government regulation of financial-service providers?

To ensure special scrutiny Signup and view all the answers

What is a major advantage of internet banking?

Allowing customers to verify and manage their accounts in real time Signup and view all the answers

Why do experts believe the total number of financial-service outlets may not decline significantly?

Despite continually advancing technology Signup and view all the answers

What is a potential benefit of 'digital cash'?

Enabling customers to act as their own financial-service branches Signup and view all the answers

How are financial-service providers likely to evaluate their branch offices?

In terms of profits and costs per square foot Signup and view all the answers

What is a growing trend in financial service delivery?

Outsourcing of financial service delivery Signup and view all the answers

What feature of internet banking allows customers to view and print images of cleared checks?

View and print images of cleared checks Signup and view all the answers

What is a benefit of telephone banking?

Putting customers in touch with financial-service providers Signup and view all the answers

What can customers do through internet banking?

Submit an application for loans and credit cards online Signup and view all the answers

Study Notes

Establishing New Financial-Service Institutions

Financial-service facilities are established today for the convenience of customers, which is rapidly changing due to technology.
Financial firms have several options to respond to customers' changing demands: • Chartering new (de novo) financial institutions • Establishing new full-service branch offices • Setting up limited-service facilities

Chartering a New (De Novo) Financial-Service Institution

No one can start a financial firm without the express approval of federal or state authorities.
The public's need for a new bank in a particular location must be demonstrated.
Founder stockholders must supply enough start-up capital to cover several years and show that the proposed new institution will achieve adequate levels of profitability.
Government chartering agencies believe financial-service providers need special scrutiny because: • They hold the public's savings • They are at the heart of the payments process to support trade and commerce • They have the ability to create money (through granting credit), which suggests that chartering too many might lead to financial struggles

The Bank Chartering Process in the United States

Only the banking commissions in each of the 50 states and the Office of the Comptroller of the Currency (OCC) can issue a charter of incorporation to start a new U.S. bank.
Federal standards for receiving a bank charter are more rigorous than the rules of state banking commissions.
Organizers often seek a federal bank charter for the added prestige it conveys in the minds of customers, especially large depositors.
The choice between pursuing a federal or a state charter usually comes down to weighing the benefits and costs of each for the particular bank and its location(s).

Questions Regulators Usually Ask the Organizers of a New (De Novo) Bank

What is happening to population growth, incomes, types of occupations represented, educational levels, and the age distribution of residents in the proposed service area?
Who is to own any stock issued? What amount of stock will be held by the organizers, directors, and officers?
How experienced are the organizers, management, and board of directors of the new institution?
What are the organizers' projections for deposits, loans, revenues, operating expenses, and net income for the first few years?

Factors Weighing on the Decision to Seek a New Charter

External factors: • The level and growth of economic activity • The need for a new financial firm • The strength and character of competition in supplying financial services
Internal factors: • Qualifications and contacts of the organizers • Management quality • Pledging of capital to cover the cost of filing a charter application and getting under way

Establishing and Monitoring Automated Limited-Service Facilities (“Branchless Banking”)

There has been a recent spike in branchless banking due to the high cost of chartering new financial firms and setting up full-service branch offices.
Examples of automated limited-service facilities include: • Point-of-sale (POS) terminals • Automated teller machines (ATMs) • Telephone banking • Internet-supplied services
The decision to install a new ATM involves considering its cost, life expectancy, and the number of cash transactions it will handle per year.

Banking in Homes, Offices, Stores, and on the Street

Telephone banking and call centers remain a popular channel for customers to interact with financial-service providers.
Internet banking features include: • Verifying account balances in real-time • Moving funds instantly between accounts • Confirming deposits and transactions • Viewing and printing images of checks • Submitting loan and credit card applications • Conducting online bill paying

Financial-Service Facilities of the Future

Despite advancing technology, the total number of financial-service outlets may not decline significantly for a time.
The use of "digital cash" will permit customers to be their own financial-service branches for certain transactions.
Service providers will evaluate the success of their branch offices and limited-service facilities in terms of profits and costs per square foot.
Outsourcing of financial service delivery is likely to grow.

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Description

This quiz covers key topics in banking including chartering new financial institutions, performance of new banks, establishing full-service branches, limited-service facilities, ATMs, and telephone centers.