Principles of Banking. Eleventh Edition

Transcription

1 Principles of Banking Eleventh Edition

2 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations The American Bankers Association is committed to providing innovative, high-quality products and services that are responsive to its members critical needs. To comment about this product, or to learn more about the American Bankers Association and the many products and services it offers, please call BANKERS or visit us at our Web site: This textbook has been approved by the American Bankers Association for use in courses for which ABA certificates or diplomas (formerly American Institute of Banking (AIB) certificates or diplomas) are granted by the American Bankers Association Eleventh Edition All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without prior written permission from the American Bankers Association. Printed in the United States of America Catalog Number: ISBN: X

3 Contents EXHIBIT LIST PREFACE ACKNOWLEDGMENTS XIII XV XXI CHAPTER 1 BANKS AS SERVICE PROVIDERS LEARNING OBJECTIVES 1 INTRODUCTION 2 BANK EMPLOYEES 2 Bank Employee Careers 3 Bank Employee Training 3 BANKS AND THEIR CUSTOMERS 3 Basic Product Users 4 High-End Savers 5 Investors 5 Borrowers 5 Businesses 5 BANKS AND THE COMMUNITY 5 Community Development 5 Community Support 6 BANK COMPETITORS 6 Credit Unions 6 Savings Institutions 6 Brokerage Firms 6 Finance Companies 7 Insurance Companies 7 Mutual Funds 7 Money Market Funds 7 Mortgage Companies 7 Money Service Businesses 7 BANK REGULATORS 7 Federal Reserve System (Fed) 8 Office of the Comptroller of the Currency (OCC) 8 Federal Deposit Insurance Corporation (FDIC) 8 Consumer Financial Protection Bureau (CFPB) 8 State Banking Departments 9 Bank Regulations 9 American Bankers Association Principles of Banking iii

4 DEVELOPING THE PUBLIC TRUST: A BRIEF HISTORY OF BANKS AND THE U.S. ECONOMY 10 The Early Banking System 10 Central Banking 10 Dual Banking System 11 The Federal Reserve System 12 The Great Depression 12 Social Change and Consumer Protection 13 Leveling the Playing Field 16 New Opportunities 17 New Responsibilities 17 The Financial Crisis and the Great Recession 18 THE FUTURE OF BANKING 20 Regulatory Evolution 20 Financial Services Expansion 20 Continued Competition 21 Technological Advances 21 Smaller, More Innovative Branches 21 Online and Social Media Marketing 21 SUMMARY 21 SELF-CHECK AND REVIEW 22 CHAPTER 2 BANKS AS BUSINESSES LEARNING OBJECTIVES 25 INTRODUCTION 26 BANKS AS FINANCIAL INTERMEDIARIES 26 The Fed s Management of Bank Loans and Deposits 26 THE BANK AS A BUSINESS ORGANIZATION 28 Bank and Financial Holding Companies 31 Bank Structural Change 31 BANK ASSETS AND LIABILITIES 33 Statement of Condition 33 Managing Assets and Liabilities 35 BANK INCOME AND EXPENSES 37 Profit and Loss Statement 37 Loans Versus Investments 37 Loan Income 39 Investment Income 41 Fee Income 42 EVALUATING BANK PERFORMANCE 43 Financial Information Users 44 Performance Measures 45 iv Contents American Bankers Association

5 Budgeting and Planning 46 SUMMARY 48 SELF-CHECK AND REVIEW 50 CHAPTER 3 DEPOSIT ACCOUNTS LEARNING OBJECTIVES 51 INTRODUCTION 52 THE DEPOSIT FUNCTION 52 Money Supply 53 Safety 54 Customer Convenience 54 DEPOSIT ACCOUNT PRODUCTS 55 Types of Deposit Accounts 55 Common Deposit Account Products 56 DEPOSIT-RELATED SERVICES 59 Options for Depositing Funds 59 Types of Deposited Items 60 Accessing Funds and Account Information 61 OWNERSHIP OF DEPOSIT ACCOUNTS 62 Consumer Account Ownership 62 Business Account Ownership 64 OPENING A DEPOSIT ACCOUNT 66 Establishing Identity 66 Evaluating Capacity and Authority 67 BANK DEPOSITS REGULATION 67 Electronic Fund Transfers 68 Expedited Funds Availability 68 Truth in Savings 69 Reserve Requirements 70 FDIC Insurance Protection 70 SUMMARY 71 SELF-CHECK AND REVIEW 73 CHAPTER 4 PAYMENTS: CASH AND CHECKS LEARNING OBJECTIVES 75 INTRODUCTION 76 CASH AS A PAYMENT SYSTEM 76 United States Legal Tender 76 Damaged Coin and Currency 77 CHECKS AS A PAYMENT SYSTEM 78 Uniform Commercial Code 78 Elements of Negotiable Instruments 78 American Bankers Association Principles of Banking v

6 Other Types of Checks 80 ELECTRONIC CHECK PROCESSING 81 THE CHECK PAYMENT PROCESS 84 The Drawer 84 The Payee 85 The Drawee 86 CHECK FRAUD 90 Check Counterfeiting and Alteration 91 Closed Account Fraud 91 Check Kiting 91 Bank Efforts to Combat Check Fraud 91 LAWS AND REGULATIONS 92 Collection of Checks and Funds Transfers 92 Expedited Funds Availability Act 92 SUMMARY 93 SELF-CHECK AND REVIEW 94 CHAPTER 5 ELECTRONIC BANKING LEARNING OBJECTIVES 95 INTRODUCTION 96 THE DEVELOPMENT OF ELECTRONIC BANKING 96 The Roots of Electronic Banking 96 Trends in Electronic Banking 97 PROCESSING ELECTRONIC TRANSACTIONS 99 EFT and ACH 99 Fedwire, CHIPS, and SWIFT 100 Other Federal Reserve Services 102 ELECTRONIC BANKING AND CONSUMERS 103 Bank Websites 104 Internet Banking Services 104 Card Access to Funds 106 ELECTRONIC BANKING AND BUSINESSES 109 Electronic Bill Presentment and Payment (EBPP) 109 Imaging and Remote Deposit Capture 109 LAWS AND REGULATIONS 110 Electronic Fund Transfers 111 Funds Availability 111 Check Collection and Funds Transfers 111 Check Conversion 112 Electronic Signatures 112 SUMMARY 112 SELF-CHECK AND REVIEW 114 vi Contents American Bankers Association

7 CHAPTER 6 LENDING LEARNING OBJECTIVES 115 INTRODUCTION 116 THE LENDING FUNCTION 116 Sources of Credit 116 Banks as Lenders 117 LOAN CATEGORIES 117 Consumer Loans 118 Real Estate Loans 119 Business Loans 121 Government as Borrower and Loan Supporter 124 THE LENDING PROCESS 125 The Application and Interview 125 The Investigation 127 Loan Documentation 128 Loan Decision 130 Loan Administration 130 Loan Review and Asset Recovery 131 LOAN POLICY 131 LAWS AND REGULATIONS 132 Dodd-Frank and Consumer Lending 133 Equal Credit Opportunity Act 134 Truth in Lending Act 134 Credit CARD Act 135 Community Reinvestment Act 135 Loans to Bank Insiders 136 Home Mortgage Disclosure Act 136 Real Estate Settlement Procedures Act 136 Fair Credit Reporting Act 137 Flood Disaster Protection Act 137 Bank Lending Limits 137 SUMMARY 137 SELF-CHECK AND REVIEW 139 CHAPTER 7 PERSONAL FINANCIAL PLANNING LEARNING OBJECTIVES 141 INTRODUCTION 142 FINANCIAL HEALTH EQUALS PERSONAL WEALTH 142 Banks and Financial Planning 144 Financial Planning Goals 144 Time Value of Money 144 Risk Management Considerations 144 American Bankers Association Principles of Banking vii

8 The Role of the Financial Planner 145 Ethical Standards 146 Minimizing Tax Liability 146 FINANCIAL PLANNING PROCESS 146 Customer Life Stages 147 Financial Planning Goals 148 Financial Products 148 Net Worth Statement 149 Cash Flow Strategy 151 INSURANCE PROTECTION 152 Life Insurance 152 Health, Disability, and Long-term Care Insurance 153 Property, Title, and Vehicle Insurance 154 Liability Insurance 154 INVESTMENT SERVICES 154 Investment Strategies 155 Portfolio Management 157 RETIREMENT PLANNING 157 Social Security and Pensions 158 Individual Retirement Accounts 160 Estate Planning 161 TRUST SERVICES 162 Estate Settlement 163 Trust Administration 164 Guardianships 165 Personal Agency Services 165 LAWS AND REGULATIONS 165 Retail Sales of Nondeposit Investment Products 166 Consumer Protection in Sales of Insurance 166 Uniform Trust Laws 166 SUMMARY 167 SELF-CHECK AND REVIEW 169 CHAPTER 8 BUSINESS AND INTERNATIONAL BANKING SERVICES LEARNING OBJECTIVES 171 INTRODUCTION 172 BUSINESS BANKING SERVICES 172 Cash Management 172 Insurance 176 Capital Markets 177 BUSINESS TRUST SERVICES 178 Corporate Agency Services 179 viii Contents American Bankers Association

9 Employee Benefit Services 180 INTERNATIONAL BANKING 184 International Banking Structures 184 International Payments 185 Foreign Exchange Services 186 LAWS AND REGULATIONS 187 Fiduciary Activities of National Banks, Regulation Gramm-Leach-Bliley Act 187 Uniform Commercial Code Article Federal Reserve Regulation K (International Operations of U.S. Banking Organizations) 189 SUMMARY 189 SELF-CHECK AND REVIEW 190 CHAPTER 9 BUILDING RELATIONSHIPS: MARKETING, SALES, AND CUSTOMER SERVICE LEARNING OBJECTIVES 193 INTRODUCTION 194 MARKETING AND SELLING TODAY 194 Marketing and Sales 194 Customer Service 195 Marketing, the Internet, and Electronic Devices 196 THE MARKET-DRIVEN STRATEGY 196 Total Company Effort 196 Customer Satisfaction 197 Profitability 197 Social Responsibility 198 MEETING CUSTOMER EXPECTATIONS 199 Responsive Service and Problem Resolution 199 Competent Staff 200 Customer Perspective 200 Courteous Treatment 200 Reliable Service 201 Appropriate Products and Services 201 Professional Appearance 201 Access to Funds and Staff 202 Financial Privacy 202 CROSS-SELLING AND REFERRALS 202 THE PURCHASING PROCESS 204 Needs Identification 204 Prepurchase Searching 205 Purchase Decision 206 American Bankers Association Principles of Banking ix

10 Postpurchase Assessment 206 PRODUCT DEVELOPMENT 206 LAWS AND REGULATIONS 209 FDIC Insurance Notification 209 Unfair, Deceptive, or Abusive Acts or Practices 209 Do Not Call, Do Not Fax 211 Prescreening 212 E-Commerce and Social Media Guidance 212 CAN-SPAM Act 213 SUMMARY 214 SELF-CHECK AND REVIEW 215 CHAPTER 10 SAFEGUARDING CUSTOMERS AND THE BANK LEARNING OBJECTIVES 217 INTRODUCTION 218 PROTECTING CUSTOMER INFORMATION 218 Data Security 219 CUSTOMER IDENTIFICATION 219 Account Identification Requirements 220 Account Access Identification Methods 220 Identity Theft 222 FRAUD SCHEMES 223 Bank Card Fraud 224 Telephone Fraud 224 Advance Fee Fraud 225 Letter of Credit Fraud 225 Prime Bank Note Fraud 225 Cashier s Check Scams 226 Phishing 226 Pharming 227 Text Message Fraud 227 Elder Financial Abuse 227 SAFEGUARDING BANK ASSETS 228 Corporate Governance and Ethical Behavior 228 Employee Hiring and Vendor Management 230 Crimes Against Banks 231 SAFEGUARDING THE ECONOMY AND THE NATION 237 Emergency Preparedness 237 Terrorism 238 Money Laundering 240 Security Breaches 240 x Contents American Bankers Association

11 LAWS AND REGULATIONS 240 Privacy of Consumer Financial Information 240 Interagency Guidelines on Information Security 241 Interagency Guidance on Internet Authentication 241 Protecting Children Online 241 Right to Financial Privacy 242 State Requirements Protecting Social Security Numbers 242 Red Flag Rules 242 Bank Security Systems 242 Bank Secrecy Act 243 USA PATRIOT Act 243 SUMMARY 243 SELF-CHECK AND REVIEW 245 ANSWERS TO SELF-CHECK AND REVIEW Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter GLOSSARY 267 INDEX 281 American Bankers Association Principles of Banking xi