US Bank of Washington; Commercial Banks in US

Management of Commercial BanksU.S BANK OF WASHINGTON

HBR Case Study

GROUP 1.Ghanshyam Gupta 109

Balagopal Padmakumar 301Harbir Singh Banga 302

Rishi Bajaj 402Anirwan Bhattacharya 503

Commercial Banks and their roleRishi Bajaj 402

COMMERCIAL BANK

• A financial institution that provides banking and financial services to Commercial institues, organizations, bodies, companies and entities.

• The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs.

CURRENT PLAYERS

• The term ‘Commercial Bank’ used for a normal bank to distinguish it from an investment bank.

• After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities.

• Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

U.S COMMERCIAL BANKS

• The largest commercial banks – Bank of America Corp, – JP Morgan Chase & Co, – HSBC Bank, – Citigroup, and – Goldman Sachs Group (96 percent of all exposures and had the largest share of derivative exposures of the commercial banking sector)

• Some commercial banks, also have investment banking divisions, while others, such as Ally, operate strictly on the commercial side of the business.

ROLE – ENGAGE IN ACTIVITIES

• Processing of payments by way of telegraphic transfer, internet banking, or other means

• Issuing bank drafts and bank cheques• Accepting money on term deposit• Lending money by overdraft, installment loan, or

other means• Providing documentary and standby LC,

Guarantees, Performance Bonds, Security underwriting and other forms of off balance sheet exposure

ROLE (CONT.)

• Safekeeping of documents and other items in safe deposit boxes

• Sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a “financial supermarket”

• Cash management and treasury• Merchant Banking & PE Financing • Traditionally, large commercial banks also underwrite

bonds, make markets in currency, interest rates and credit related securities (usually handled by IB now)

• Broader role towards economy, government.

Primary Function

Accepting Deposits

Making Advances

Credit creation

Secondary Function

Agency Functions

General Utility Functions

AGENCY FUNCTIONS

• To collect and clear cheque, dividends and interest warrant.

• To make payment of rent, insurance premium, etc.

• To deal in foreign exchange transactions.• To purchase and sell securities.• To act as trusty, attorney, correspondent and

executor.• To accept tax proceeds and tax returns.

GENERAL UTILITY FUNCTIONS

• To provide safety locker facility to customers.• To provide money transfer facility.• To issue traveller's cheque.• To accept various bills for payment e.g phone

bills, gas bills, water bills, etc.• To provide merchant banking facility.• To provide various cards such as credit cards,

debit cards, Smart cards, etc.

Changes in the sectorGhanshyam Gupta 109

Traditional & Modern Role of US Banks

The two main roles played by banks in US are

• Operate payment system of credit cards, checks etc

• Channelizing credit to business and households, investing money into the economy

• Traditionally, banks funded their loan portfolios by issuance of deposit/insurance & pension liabilities to the investors.

Credit Market in 1950• Primary Asset Held: U.S. Treasury Securities, C&I loans, Business

& Home mortgages, Consumer Credit• Sources of Funding: Zero interest bearing checking accounts,

saving accounts

• There has been a shift in how banks lend: from short term lending of funds unsecured by real estate to collateralized loans.

• Asset securitization of home mortgages as well as consumer credit have resulted in an reduction in the extent to which commercial banks fund these loans directly to the client.

• There has been a change in the composition of bank loan portfolio as well as the bank customers.

• Small time deposits have been increasing as a percentage of total assets. Demand deposits continued to fall.

• There has been a change in the maturity structure of bank’s assets, average maturity of banks loans and earning assets has risen since 1988.

• Providing several services through separate business units e.g. US Bancorp

• The Gramm-Leach-Bliley Act, allows banks again to merge with investment and insurance houses.

• Banks have expanded the use of risk-based pricing from business

lending to consumer lending

• Third, banks have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards.

Traditional profit makingAnirwan Bhattacharya 503

Traditional Profit Making

• Held loans and securities as assets, which in turn were

primarily funded by issuance of deposit liabilities

• By 1989, loans accounted for over 61% of total assets held by

US commercial banks

• Strong growth in real estate loans, steady growth in consumer

loans

• Due to high perceived risk in commercial sector, banks’ real

estate portfolio has seen a shift from commercial to

residential mortgages

• $11 billion consumer receivables mostly credit card debt and

automobile loans were securitized in 1989

• Securitization helped banks to remove underlying loans from

bank’s balance sheet thus lowering the regulatory capital

required to support actual level of bank’s lending activity

• It also enabled banks to earn free income from originating

and servicing the loans

• Non-interest income has seen an increase

• In 1989, Net income for banking industry was down due to

provisions for losses on non-performing loans

• Interest cost of deposits and purchased funds increased

resulting lower net interest margin

• Small banks continued to book relatively high profits, larger

banks, particularly the money center institutions, reported

weak earnings.

• This was due to losses for commercial real estate and

domestic business loans

Strategies for future

Harbir Singh Banga 302Balagopal Padmakumar 301

THANK YOU!