Banking and Finance Career Field Structure
Banks and Savings Institutions
Banks and savings institutions in the United States are financial businesses, chartered and supervised by either state or federal government agencies to provide financial services for the public. Banks collectively administer hundreds of billions in resources and millions of dollars more in trust funds and other accounts.
Basically, individual banks act as intermediaries for the movement of money, credit, and capital to wherever they are needed within the economy. It is estimated that 90 percent of all payments in the United States are made by bank checks. There are billions of checks written in the United States each year, and the number is increasing steadily. In addition to checks, most banks today offer debit cards. Debit cards look like credit cards but draw from the user’s checking account.
Today, most automobiles, home appliances, and houses are bought through bank consumer loans. Inventories, equipment, and machinery for business and industry are financed by term loans made through bank commercial departments.
There are thousands of commercial banks, which are sometimes described as financial department stores because they offer all kinds of financial services, such as checking and savings accounts, loans, and trust services for the administration of estates, endowments, and pension funds. There also are several hundred savings and loan institutions in various states that specialize in savings and time accounts and the making of mortgage loans.
In addition to large banks and savings and loan institutions, there are scores of private and specialized banks, such as investment banks and land banks. Under federal law, banks cannot underwrite stock or bond issues. They cannot engage in underwriting or investment banking. But they can take and fill orders, and in 1982 the government began approving requests from banks and bank holding companies to acquire or establish brokerages. These limited service firms either perform their own market operations or contract with carrying firms to handle stock and bond trades, registration and billing, and dividends and margin accounts.
Credit unions and other institutions not legally defined as banks offer some comparable services, such as savings accounts and consumer loans. In the aggregate, banks operate thousands of offices located in practically every neighborhood and community in the country. Many of the larger banks maintain offices in principal foreign cities of the world. The banks are organized so that through correspondent relationships they perform services for other banks or for individual customers both in this country and abroad.
The major service areas of banking are commercial banking, including corporate lending; consumer, or retail, banking; and trust administration and estate planning. Business banking is the major service function of the industry. Business bankers are involved in making loans to businesses and corporations. This includes providing credit assistance for such things as accounts receivable financing, leasing, energy financing, and equipment financing. Bank loans to commerce and industry total hundreds of billions of dollars.
Corporate services also include foreign currency exchange and other trade-related requirements for companies that export their products. Such companies use special financing techniques, such as cross-currency loans and commercial letters of credit. International banking is one of the newer and interesting specialties within the industry.
Retail banking offers consumers not only lending services, but also savings, investment, and payment services. Mortgage loans are made for the purchase of homes, and smaller amounts are lent for appliances, cars, vacations, and the like through traditional installment loans or even a line of credit activated by a checking account or other means.
Bank cards represent the fastest growing type of consumer credit in America. Commercial credit cards, as well as individual bank cards, offer customers flexibility in money management and convenient credit availability.
Payment services for bank customers range from regular checking accounts to electronic bill-paying services, 24-hour-a-day automated teller machines, and direct deposit of Social Security checks and other checks. Most banks now offer debit cards. While they appear as credit cards and often are affiliated with a major credit card company, the debit cards draw from the user’s checking account. The major advantage to debit cards over checks is the ease of use (not having to show further identification). Savings services include statement and passbook accounts, as well as a variety of long-term deposits offering higher rates of interest.
Bank trust services, which were originally for the administration and conservation of large estates, are now growing to include pension and retirement funds and a wide variety of smaller funds to meet the needs of people of moderate means. Through trust departments, customers may arrange for professional administration of their assets, estate planning, and a variety of personal financial services.
The Securities Industry
The New York Stock Exchange, the American Stock Exchange, and the regional exchanges (for example, the Midwest Stock Exchange in Chicago and the Pacific Stock Exchange in San Francisco) provide central meeting places and supervised auction markets where member brokers buy and sell securities for their clients. The exchanges as such do not buy or sell securities nor do they set prices. Instead, they provide the facilities for trading and enforce a variety of rules and regulations designed to maintain fair and orderly markets. The exchanges require the listed companies to meet certain specified standards of size and earnings and to publicize important basic financial information regularly. Shares in companies that offer stocks are traded, along with other types of securities, every business day around the world.
The over-the-counter (OTC) market is, after the New York Stock Exchange, the second largest U.S. market for stocks. It is served by a network of brokers; they are not in one specific place, as are exchange members. The electronic NASDAQ (National Association of Security Dealers Automatic Quote System) offers shares of new or smaller companies traded on the OTC.
The business practices of the member brokers are governed by rules requiring certain amounts of financial backing and strict standards of business conduct in their dealings with clients and with each other. Most exchanges are limited-membership associations, and admission is by election. Rules are established by a constitution and bylaws and are enforced by an elected governing board with the aid of officers and committees. At the New York and the American exchanges, the supervisory work is carried out by a paid professional staff.
Specialists are those member brokers who deal only with other brokers and act for those brokers who cannot remain at a post on the exchange floor until prices specified by their customers’ buy and sell orders are reached. Part of the regular brokerage commission is paid to them when they act as a broker’s broker. The specialists also act as dealers, buying and selling shares for their own accounts. It is their job to sell stock when nobody wants to sell and to buy when there are no buyers. In this way they maintain a market and try to restrain wide fluctuations in price.
The American Stock Exchange (AMEX) trades in the shares of smaller, growing companies. Formerly known as the Curb Exchange because trading used to be done out-of-doors on the street, AMEX served as the proving ground for trading in the shares of such companies as DuPont, General Motors, and RCA, all of which subsequently transferred to the New York Stock Exchange. The regional stock exchanges trade many of the same stocks that are listed on the two major exchanges. The regional exchanges also trade the shares of many smaller local companies.
The American Stock Exchange is also a membership organization. The New York and American Stock Exchanges operate in a similar fashion. The president, selected by the board of governors, is charged with administrative responsibility, and under the president’s direction, a staff of several hundred people implement policy. The Surveillance Department follows the action of market prices and studies financial news, investment advisory service reports, and brokerage recommendations, watching for any signs of unusual activity.
Self-regulation has characterized the securities markets in this country since their inception. The exchanges have always, in varying degrees, imposed upon their members certain rules of conduct. These self-governing activities were officially endorsed and strengthened by the first federal Securities Acts of 1933 and 1934, which set the current pattern of self-regulation supervised by the government.
Before the passage of the legislation that created the Securities and Exchange Commission in 1934, the individual states had enacted a number of contradictory laws purporting to regulate the sale of securities. These varied greatly and only a few provided for effective enforcement. Today, however, each state has some legislation governing issuance and sale of securities. Some have created smaller and somewhat similar versions of the Securities and Exchange Commission. They all require securities and brokers to be registered, and some have established qualification standards for salespeople. Certain selling practices are prohibited in some states, and the public sale of securities that do not meet strict standards can be prohibited by several state administrators.
It is the federal agency, the Securities and Exchange Commission (SEC), however, that bears the main burden of overseeing the operations of the securities industry. The SEC, an independent governmental organization located in Washington, DC, enforces the laws passed by Congress in the interest of protecting the investing public. It is composed of five commissioners, appointed by the president, with no more than three commissioners belonging to one political party. Its staff is responsible for registering, supervising, and investigating the operations of the securities industry.
At the SEC headquarters, the Division of Corporation Finance examines the many detailed financial statements that must be submitted by companies that sell their stock to the public. If any statement seems misleading, inaccurate, or incomplete, the company is so informed and given an opportunity to file corrections or clarifications before the securities can be sold. The commission can prohibit the sale of securities if all the facts are not presented or if they appear misleading.
The SEC, however, has no power to pass on the merits of a security. It cannot pass judgment on value or price. A company that might want to dig for green cheese on the moon could be permitted to sell its stock by the SEC, as long as all the facts about this venture were truthfully and completely stated. Congress left to individual investors the responsibility for appraising the actual value of particular securities offered for sale.
Two out of three SEC employees are located in Washington while the others work in the regional and branch offices. College training is a virtual necessity, and the more important jobs require more specialized training. The SEC has been a noted training ground for many young lawyers who have subsequently gone into private practice.
While the individual exchanges supervise the trading on the floor and many of the activities of their members, the main responsibility for self-regulation of the over-the-counter markets rests with the National Association of Securities Dealers. This self-policing organization is a private, nonprofit organization headquartered in Washington, DC, with 14 district offices. It enforces the rules of fair practice that govern the professional conduct of its member firms, and a uniform practice code that deals with technical methods for executing transactions and conducting a securities business. The bulk of its work is done by committees composed of brokers who serve without pay, acting on the principle that ethical standards can best be adopted and enforced by self-governing bodies of individuals rather than by direct government controls and regulations.
Surprise examinations are made of all member offices at least once every three years. All salespeople’s’ backgrounds are reviewed, and they must take special examinations in addition to those required by the major stock exchanges. Underwriting practices are watched, and excessive price changes are reported and analyzed. Disciplinary actions, such as fines, suspensions, and expulsion from the association, are taken against those who violate any rules.
The Commodity Futures Industry
Commodity exchanges in various parts of the country provide facilities and equipment for commodity futures trading. Formed as membership organizations like the major stock exchanges, they fall under the regulatory authority of the federal Commodity Futures Trading Commission. They have trading floors with trading pits, or rings, where futures contracts are bought or sold. There are 11 domestic exchanges, with the major ones located in Chicago, New York, Minneapolis, and Kansas City, Missouri.
Organized in 1848, the Chicago Board of Trade (CBOT) is the nation’s oldest and largest commodity futures exchange. It accounts for about half of all the futures trading volume in the United States. It provides facilities for trading in futures contracts (agreements to buy or sell commodities such as agricultural products, silver, gold, plywood, and energy sources) for its more than 3,600 members.
The CBOT and another Chicago exchange, the Chicago Mercantile Exchange, account for most of all U.S. futures trading. Indirectly the two account for thousands of jobs in support and ancillary positions, from telecommunications specialists to brokerage house personnel.
Other American futures exchanges include the Commodity Exchange of New York, the Kansas City Board of Trade, the MidAmerica Commodity Exchange of Chicago, the Minneapolis Grain Exchange, and the New York Cotton Exchange. Some exchanges specialize. For example, the New York Cotton Exchange focuses on cotton contracts, while the Minneapolis Grain Exchange specializes in wheat. Other exchanges may offer facilities for futures trading in live and feeder cattle, coffee, copper, and other commodities.
Futures trading is a means of providing protection against changeable prices in the cash markets. Users of the futures market (buyers of grain, for example, or the farmers who grow grain) minimize the risk of adverse price changes by hedging, or buying or selling futures contracts at prices immediately available.