OTHER FEE INCOMES

Investment Banking, Trust,

and Insurance Services

(Adapted from Chapter 14 – Rose)

McGraw-Hill/Irwin 14-1
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Key Terms
• Fee Income: Thu nhập từ phí (ngoài lãi)
• Investment Banking Affiliate: Công ty thành viên/Bộ
phận ngân hàng đầu tư
• Mutual Fund: Quỹ tương hỗ
• Hedge Fund: Quỹ đầu tư mạo hiểm (rủi ro cao)
• Fiduciary/Trust Services: Dịch vụ ủy thác
• Securitization: Chứng khoán hóa (sales of loans)
• Non/Proprietary Funds: Quỹ ko/có quyền sở hưu
• Exchange Traded Fund – Quỹ đầu tư chỉ số (ETFs)
• Annuities: Đầu tư tài sản trả lãi hàng năm
McGraw-Hill/Irwin 14-2
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Objectives

• Traditional Versus Newer Sources of Fee

Incomes
• Investment Banking Services
• Trust Services
• Insurance Related Services

McGraw-Hill/Irwin 14-3
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Traditional Sources of Fee
Income
• Service Charges on Deposit Accounts
• Credit Card Service Fees
• Commitment Fees for Making Credit
Available
• Fees for Use of Safe Deposit Boxes
• Rental of Bank Property to Individuals
and Businesses
McGraw-Hill/Irwin 14-4
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Newer Sources of Fee Income
• Commissions and Fees From Investment
Banking Services
• Brokerage Commissions for Aiding in the
Purchase of Securities
• Fiduciary Income – Trust Services
• Commissions for the Sake of Insurance
• Servicing Fees from Securitization and
Sales of Loans
McGraw-Hill/Irwin 14-5
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Reasons for the Drive for More
Service Fees
• A Desire to Supplement Traditional
Sources of Funds
• An Effort to Offset Higher Production
Costs
• A desire to Reduce Overall Risk
• A goal to Promote Cross-Selling of
Traditional and New Services

McGraw-Hill/Irwin 14-6
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Investment Banking Services
• Under The Authority Of The Gramm-
Leach-Bliley-Act Many Banking Firms
Have Either Acquired Or Formed Their
Own Investment Banking Affiliates.
• The Primary Role Of Investment Bankers
Is to Serve As Financial Advisers To
Corporations, Governments, And Other
Large Institutions.

McGraw-Hill/Irwin 14-7
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Principal Types of Securities
Underwritten by Investment
Bankers
• Government and • Common and
Federal Agency Preferred Stock
Securities • Corporate Junk Bonds
• Investment Grade • Asset Backed
Corporate Bonds Securities
• Convertible
Corporate Bonds and
Stock
McGraw-Hill/Irwin 14-8
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Additional Sources of Revenue
for Investment Bankers
• Advising Clients • Stock and Bond
Regarding Trading
Acquisitions and • Currency and
Mergers Commodity Trading
• Creating and Trading • Issuing Credit and
Derivatives Liquidity
• Brokering Loan Sales Enhancements
• Setting Up Special • Developing Business
Purpose Entities Plans

McGraw-Hill/Irwin 14-9
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Mutual Funds

Companies that Offer Shares in a Pool

of Securities and Flow Through Any
Earnings Generated to Shareholding
Customers

McGraw-Hill/Irwin 14-10
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Two Popular Mutual Funds

• Exchange Traded Funds (ETFs) – Behave

Like Index-Tracking Mutual Funds but
Trade All Day on Stock Exchanges
• Hedge Funds – Private Partnerships
Whose Shares are Offered Primarily to
Wealthy Clients that Often Make High-
Stakes Bets on the Direction of the Market

McGraw-Hill/Irwin 14-11
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Two Different Ways of Being
Involved with Mutual Funds
• Proprietary Funds Offered Through One
of Their Affiliated Companies
– Offer Investment Advice
– Serve as Transfer Agents
– Execute the Transactions of the Fund
• Nonproprietary Funds – The Offering
Institution Acts as a Broker for an
Unaffiliated Mutual Fund
McGraw-Hill/Irwin 14-12
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Annuities

A Savings Instrument in Which the

Customer Makes Cash Payments to
an Investment Manager Who Places
Them Into Earning Assets and Where
Later the Purchaser Receives a Stream
of Income From Those Assets

McGraw-Hill/Irwin 14-13
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Types of Annuities
• Fixed Annuities – Promise a Customer Who
Contributes a Lump Sum a Fixed Rate of Return
Over the Life of the Contract
• Variable Rate Annuities – A Lump Sum of
Money is Invested Into a Basket of Stocks,
Mutual Funds or Other Investments Return for
a Customer But is Not Promised a Fixed
• Equity-Index Annuity – Combines Features of
Both Fixed and Variable Annuities

McGraw-Hill/Irwin 14-14
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Regulations Regarding
Investment Products

• Customers Must be Informed that

Investment Products are:
– Not Insured by the FDIC
– Not a Deposit or Other Obligation of a
Depository Institution
– Subject to Investment Risks

McGraw-Hill/Irwin 14-15
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Trust Services

These Services are Centered on the

Management of Property Owned By a
Bank’s Customers, Such as Securities,
Land, Buildings and Other
Investments

McGraw-Hill/Irwin 14-16
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Types of Trusts
• Living Trusts – Allows Trust Officers to Act on Behalf
of a Living Customer without a Court Order
• Testamentary Trusts – Arise Under a Probated Will
and Used to Save on Estate Taxes - Di chúc
• Irrevocable Trusts – Allows Wealth to be Passed Free
of Gift and Estate Taxes
• Charitable Trusts – Used to Support Worthwhile
Causes
• Indenture Trusts – Used Collect, Hold and Manage
Assets to Back an Issue of Securities by a Corporation
• Dynasty Trusts – Set Up to Avoid Paying Federal
Estate Taxes and Generation-Skipping Taxes – Thế hệ

McGraw-Hill/Irwin 14-17
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Offerings of Insurance Related
Products

• Life Insurance Policies

• Life Insurance Underwriters
• Property-Casualty Insurance Policies
• Property-Casualty Insurance
Underwriting

McGraw-Hill/Irwin 14-18
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Insurance Products Disclosure
Rules
• An Insurance Product is not a Deposit or Other
Obligation of a Depository Institution
• An Insurance Product is not Insured by the
FDIC
• Insurance Products May Involve Investment
Risk and Possible Loss of Value
• Depository Institutions Cannot Base Granting
Loans Based on the Purchase of Insurance

McGraw-Hill/Irwin 14-19
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Product-Line Diversification
Effect

Offering More Than One Product or

Service Through the Same Company
in Order to Reduce the Overall Risk
of the Revenues Flows Through the
Individual Firm

McGraw-Hill/Irwin 14-20
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Risk and Return With Traditional
and Nontraditional Services

E(R) w NT R NT w T R T
1
2 2 2 2
w NT NT w T T 2w NT w T rNT *T NT T
2

Where: NT is Nontraditional Services and

T is Traditional Services and
r is the Correlation Between Them
McGraw-Hill/Irwin 14-21
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Customer Privacy

Protecting the Personal Information

That Customers Supply to Their
Financial-Service Providers So That
Customers are Not Damaged By the
Release of Their Private Data to
Outside Parties

McGraw-Hill/Irwin 14-22
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Lesson Wrap-up
• Traditional Versus Newer Sources of Fee
Incomes
• Investment Banking Services
• Trust Services
• Insurance Related Services

McGraw-Hill/Irwin 14-23
Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.