New services in banking

Banks perform the widest range of functions (see Fig. 1) in the economy and consequently any modern full-service banking institu­tion should provide the widest variety of services.

Fig.1.

Banks may be defined as firms producing and selling financial services. Their success or failure hinges on their ability to identify the financial services the public demands, produce those services efficient­ly, and sell them at a competitive price. The service menu of banks does not remain unchanged as new services are constantly being introduced and developed by commercial banks. Many of them offer a combination of wholesale and retail banking. The former provides large scale services to the corporate sector. The latter mainly provides smaller scale services to the general public.

The 1980s ushered in an explosion of new service options. Many of the new services have simply been variations of traditional deposit and loan product. Other innovative services, however, have broken new ground and exposed bankers to all the uncertainty and risk associated with new product development.

Trust services are one of the most important and rapidly growing bank service areas today. Bank trust operations encompass the man­agement of property and other assets owned by a bank customer and the administration of a customer's security holdings and borrowings. In offering trust services the bank places itself as authorized agent between the marketplace and the customer, making investment and management decisions on the customer's behalf and dispensing funds when needed to cover the customer's obligations. A bank's trust operations are usually divided into three broad areas: (1) personal trust services, (2) business trust services, and (3) trust services for charities and nonprofit organizations. Each involves a fiduciary rela­tionship between bank and customer — that is, a trust department acts to benefit its customers within those areas defined by contract (the trust agreement) between the bank (trustee) and the customer (trustor) covering a specified period of time.

Banks provide a wide range of trust services for individuals and families in the form of estate settlement, trust administration and agency services. Bank trust divisions act as agents for corporations and other businesses in a host of different ways. This may involve issuing securities on the business customer's behalf, paying dividends or interest owed on any securities issued, reinvesting the dividends for securities holders who request that service, and retiring the securities at maturity."⁴¹ Under the terms of the Federal Trust Indenture Act of 1939, any foreign or domestic corporation that issues securities to the general public in the United States must designate a trustee for that security issue to act as a fiduciary, representing the investors purchas­ing those securities. Trust departments also handle transfers of owner­ship of corporate stock, stock splits, and conversions of stock into debt, and they issue proxies and count votes in connection with annual stockholder meetings.

Today, banks frequently serve as trustees under indenture, holding legal title to property securing a bond issue, with the power to foreclose on and liquidate that property if the issuer defaults. The bank as trustee must make sure all bond covenants agreed to by the issuing corporation are adhered to and that all required liens against the company's property are duly filed and recorded. The trust depart­ment will set up and manage a sinking fund, investing all monies that the bond issuer contributes to that fund periodically with the intent of eventually redeeming the bond issue.

The fiduciary activities of banks make a critical contribution to the functioning of the commercial paper market, where the unse­cured, short-term notes of large corporations (both foreign and domestic) are traded. Bank trust departments keep records on which investors purchase commercial paper, see that any notes purchased are actually delivered to the investors involved, and pay off the holders of those notes on the maturity date. Even more important, banks issue letters of credit backstopping issuers of commercial paper in order to reassure investors that the bank will pay off a note issue if the borrowing corporation cannot do so. A bank's trust department will receive and hold any credit letters issued by other lending institutions and check to see that all the terms of those credit letters are being adhered to by borrowing companies. If necessary, the trust department will file for payment under the terms of a credit letter and dispense the collected funds to note holders.

1. What is the bank? What factors determine the success of its operation?

2. What makes the 1980s a turning point in banking?

3. What do bank trust operations encompass?

4. What groups do the bank trust operations fall into?

5. What does the Federal Indenture Act of 1939 envisage?

6. What are the obligations of a bank acting as trustee under indenture?

7. What are letters of credit aimed at when they are issued by banks acting as fiduciaries to benefit their corporate customers?

Text 2

Read the text. Point out the key sentence of each paragraph. Be ready to answer the questions given below.