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Insurance | Credit Cards | Banking | Credit | Loans | Debt | Invest Money
Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss.
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium.
An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount, called the
premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and
controlling risk, has evolved as a discrete field of study and practice. Primary forms
include - Health, Disability, Casualty, Life insurance, Property, Liability,
Credit and Auto.
Credit Cards
Credit card debt has soared, particularly among young people. Since the late 1990s, lawmakers, consumer advocacy groups,
college officials and other higher education affiliates have become increasingly concerned about the rising use of credit
cards among college students. The major credit card companies have been accused of targeting a younger audience, in
particular college students, many of whom are already in debt with college tuition fees and college loans and who
typically are less experienced at managing their own finances.
A 2006 documentary film titled Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders deals with this
subject in detail. The nonprofit group Americans for Fairness in Lending works with Maxed Out to educate
Americans about credit card abuse.
Another controversial area is the universal default feature of many North American credit card contracts. When a
cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably.
Universal default allows creditors to periodically check cardholders' credit portfolios to view trade, thus allowing
the institution to decrease the credit limit or increase rates on cardholders who may be late with another credit
card issuer. Being late on one credit card will potentially affect all the cardholder's credit cards. Citibank
voluntarily stopped this practice in March 2007 and Chase stopped the practice in November 2007.
Another controversial area is the trailing interest issue. Trailing interest is the practice of charging interest on the
entire bill no matter what percentage of it is paid. U.S Senator Carl Levin raised the issue at a U.S Senate Hearing of
millions of Americans whom he said are slaves to hidden fees, compounding interest and cryptic terms. Their woes were
heard in a Senate Permanent Subcommittee on Investigations hearing which was chaired by Senator Levin who said that he
intends to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry.
In the United States, some have called for Congress to enact additional regulations on the industry; to expand the
disclosure box clearly disclosing rate hikes, use plain language, incorporate balance payoff disclosures, and also
to outlaw universal default. At a congress hearing around March 1, 2007 Citibank announced it would no longer practice
this, effective immediately. Opponents of such regulation argue that customers must become more proactive and
self-responsible in evaluating and negotiating terms with credit offerers. Some of the nation's influential top
credit card issuers, who are among the top fifty corporate contributors to political campaigns, successfully opposed it.
Banking
The banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured
deposits have the FDIC as a regulator; however, for examinations, the Federal Reserve is the primary federal regulator
for Fed-member state banks; the Office of the Comptroller of the Currency (“OCC”) is the primary federal regulator
for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts.
State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator—the OCC.
Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.
The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency
body empowered to prescribe uniform principles, standards, and report forms for the federal examination of
financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between
the agencies, the rules and regulations are constantly changing.
In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve,
FDIC, OTS and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced
and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks
per regulator.
While banks struggle to keep up with the changes in the regulatory environment, regulators struggle
to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving
less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems
slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States.
The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively
manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general
market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their
growth strategies with the recent economic market.
A rising interest rate environment may seem to help financial
institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains
for banks to grow and effectively manage the spread to generate a return to their shareholders.
The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. Loans are a
bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core.
While always an issue for banks, declining asset quality has become a big problem for financial institutions.
There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years
of “good times.”
The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in
some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the
bank when they are recognized. In addition, banks, like any business, struggle to cut costs and have consequently
eliminated certain expenses, such as adequate employee training programs.
Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks’ management
teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private,
to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories
of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become
tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc.
Investing
In finance, investment= cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets
or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for
assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies).
These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value
giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not
considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related
to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies,
collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally
makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where
there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally
on a regular basis.
This distinction is important, as investment risk can cause a capital loss when an investment is realized,
unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many
deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an
investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.
