Asset-Liability and Liquidity Management

CHAPTER 1Interest Rate

Finance charges, fees, and principal gains are the most common earnings channels in the finance industry. The most traditional revenue source for banks and many non-bank financial institutions is the finance charges associated with lending activities. Commercial and personal loans, student loans, lines of credit, mortgages, and many other financial instruments create revenue for the entities that underwrite and sell these products. Many banks provide fee-based services to their customers as well and charge them accordingly. Various checking, savings, retirement, and investment accounts offered by financial institutions include monthly fees that may vary by account activities and outstanding balances. Investment banks often offer a range of fee-based advisory services, including equity and debt issuances, mergers and acquisitions, and restructuring. Trading, clearing, and bookkeeping services offered by brokerage houses are also fee-based. Financial institutions with trading desks have significant, although volatile, revenue through gains on principal of traded securities. Financial institutions always attempt to diversify their earnings and utilize more than one of these channels. For example, broker-dealer firms rely on fee-based earnings for services offered through their brokerage divisions, as well as principal gain revenues from their trading activities on their own security inventory.

Finance charge as one of the main sources of revenue in finance ...