Fig. 1. Banks may be defined as firms producing and selling financial ser-

Banks may be defined as firms producing and selling financial ser-

vices. Their success or failure hinges on their ability to identify the fi-

nancial 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 manage-

ment of property and other assets owned by a bank customer and the

administration of a customer’s security holdings and borrowings. In of-

fering 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 di-

vided 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

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is, a trust department acts to benefit its customers within those areas de-

fined 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 fam-

ilies 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. Under the

terms of the Federal Trust Indenture Act of 1939, any foreign or domes-

tic 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 ma-

turity date. Even more important, banks issue letters of credit backstop-

ping 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 let-

ter and dispense the collected funds to note holders.

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

ration?

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.