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Unit 9: Commercial Banking Services

aware of policies which would address asset liability management goals and risk limits and by Notes
information that relates directly to its asset liability position.

9.9 Risk Management Systems

Measurement, control and monitoring of risk will help banks to attain the objective. Techniques
such as gap, duration and value at risk are suggested to analyse risk. Strengthening of information
technology in commercial banks is a prerequisite to implement effectively A.I.M system. The
role of a broad-based ALCO in advising boards of banks is of significance.

9.9.1 Financial Services

Commercial banks provide securities related services. Commercial banks in Indian have set up
subsidiaries to provide capital market related services, advice on portfolio management or
investment counseling. In US, the Glass-Stegall Act of 1933 restricts the nature of services provided
by commercial banks. In US, they may offer discount brokerage services but not general purpose
brokerage services. US banks facilitate mergers and acquisitions and in trading in currencies
and US Government securities.
The Glass-Stegall Banking Act prohibits commercial banks from owning a firm dealing in
securities. The Act has been challenged by banks offering money market mutual funds and other
investment services. US Federal Reserve Board in January, 1997 issued a proposal that would
allow bank holding companies and their securities industry affiliates to offer one stop shopping
for their customers. Commercial banks in US in 1990s have become very active in the
management and distribution of mutual funds, managing more than 10 per cent of the assets of
all mutual funds. In India, several commercial banks such as Bank of India, Canara Bank, Indian
Bank and State Bank of India have set up subsidiaries under the guidelines issued by the Reserve
bank in 1987, followed by guidelines laid down by the Ministry of Finance in 1991.

9.9.2 Fiduciary Services

In US, banks manage employee pension and profit-sharing programs that do not show up on
banks balance sheet. In US, banks operate separate trust departments which manage the funds of
others for a fee under the guidance of a trust agreement. The assets held in trust do not show up
on banks balance sheet because they do not own the assets held in trust.

9.10 Functions of Bank Capital

Bank capital is the link between financial markets and bank's profitability. By relating bank's
operations to financial markets, it indicates how well banks are performing. A capital shortage
of a bank indicates that it should change, among others, its operating policies.
Bank capital is a source of funds. It helps meet start-up costs of investment in land, plant and
equipment. Established banks also require capital to finance growth.
Return on bank capital indicates how well a bank's programmes can be sustained and the capital
sum serves as a cushion against temporary losses and as a protection to uninsured depositors
and other holders of liabilities in the event of liquidation. Financial markets continuously
evaluate the relationship between earnings, assets and capital. The return on assets is measured
by the return on capital divided by leverage. Profitability is the cornerstone of the capital policy
of banks. Banks with low profitability are regarded as inefficient and may find it difficult to
raise capital.

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