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Depository Depository InstitutionsInstitutions
Chapter 2
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.McGraw-Hill/Irwin
2-2
Products of U.S. FIs
Comparing the products of FIs in 1950, to products of FIs in 2007: Much greater distinction between types of FIs in
terms of products in 1950 than in 2007 Blurring of product lines and services over time Wider array of services offered by all FI types (Refer to Tables 2-1A and 2-1B in the text)
2-3
Changes in Services
2-4
Other outputs of depository FIs
Other products and services 1950: Payment services, Savings products, Fiduciary
services By 2007, products and services further
expanded to include: Underwriting of debt and equity, Insurance and
risk management products
2-5
Size of Depository FIs
Consolidation has created some very large FIs
Combined effects of disintermediation, global competition, regulatory changes, technological developments, competition across different types of FIs
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Largest US Depository Institutions
Citigroup $1,746.2 (3)Bank of America 1,451.6 (2)J.P.Morgan Chase 1,338.0 (1)Wachovia 559.9 (4)Wells Fargo 483.4 (5)HSBC North America 473.7 (7)Taurus 430.4 ?Washington Mutual 348.9 RIPU.S. Bancorp 216.9 (6)Countrywide Financial 193.2 RIP
Total Assets ($Billions)
2-7
Depository Institutions
Commercial Banks Largest depository institutions are commercial banks. Differences in operating characteristics and
profitability across size classes.• Notable differences in ROE and ROA as well as the spread
Thrifts S&Ls Savings Banks Credit Unions
Mix of very large banks with very small banks
2-8
Functions & Structural Differences
Functions of depository institutions Regulatory sources of differences across types
of depository institutions. Structural changes generally resulted from
changes in regulatory policy. Example: changes permitting interstate
branching Reigle-Neal Act
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Commercial Banks, December 2006
Primary assets: Real Estate Loans: $3,207.1 billion C&I loans: $1,117.2 billion Loans to individuals: $846.9 billion Investment security portfolio: $1,632.9 billion
Of which, Treasury securities: $1,070.6 billion
Inference: Importance of Credit Risk
2-10
Commercial Banks
Primary liabilities: Deposits: $6,426.5 billion Borrowings: $2,020.7 billion Other liabilities: $306.2 billion
Inference: Highly leveraged
2-11
Small Banks, Nation
Credit Card1%
Consumer6%
Other5%
Real Estate73%
C&I15%
2-12
Large Banks, Nation
Credit Card7%
Consumer9%
Other11%
Real Estate53%
C&I20%
2-13
Structure and Composition
Shrinking number of banks: 14,416 commercial banks in 1985 12,744 in 1989 7,450 in 2007
Mostly the result of Mergers and Acquisitions M&A prevented prior to 1980s, 1990s Consolidation has reduced asset share of small
banks
2-14
Commercial Banking Structural Changes
2-15
Commercial Banking Structural Changes
2-16
2-17Structure & Composition of Commercial Banks
Financial Services Modernization Act 1999 Allowed full authority to enter investment
banking (and insurance) Limited powers to underwrite corporate
securities have existed only since 1987
2-18Composition of Commercial Banking Sector
Community banks Regional and Super-regional
Access to federal funds market to finance their lending and investment activities
Money Center banks Bank of New York, Deutsche Bank (Bankers
Trust), Citigroup, J.P. Morgan Chase, HSBC Bank USA
declining in number
2-19
Balance Sheet and Trends
Business loans have declined in importance Offsetting increase in securities and
mortgages Increased importance of funding via
commercial paper market Securitization of mortgage loans Temporary effects: credit crunch during
recessions of 1989-92 and 2001-02
2-20
Some Terminology
Transaction accounts Negotiable Order of Withdrawal (NOW)
accounts Money Market Mutual Fund Negotiable CDs: Fixed-maturity interest
bearing deposits with face values over $100,000 that can be resold in the secondary market.
2-21
Off-balance Sheet Activities
Heightened importance of off-balance sheet items
OBS assets OBS liabilities
Large increase in derivatives positions is a major issue
Standby letters of credit Loan commitments When-issued securities
2-22
2-23
2-24
Other Fee-generating Activities
Trust services Correspondent banking
Check clearing Foreign exchange trading Hedging Participation in large loan and security
issuances Payment usually in terms of noninterest bearing
deposits
2-25
Key Regulatory Agencies
FDIC DIF Role in preventing contagious runs or panics
OCC: Primary function is to charter national banks. FRS: monetary policy, lender of last resort.
National banks are automatically members of the FRS. State-chartered banks can elect to become members.
State bank regulators Dual Banking System: Coexistence of nationally and state-
chartered banks.
2-26
Bank Regulators
2-27
Web Resources
For more detailed information on the regulators, visit:
http://www.fdic.gov
http://www.occ.treas.gov
http://federalreserve.gov
2-28
Other Regulatory Issues
Importance of Bank Holding Companies is increasing.
BHCs regulated by FRS.
2-29
Key Regulatory Legislation
1927 McFadden Act: Controls branching of national banks.
1933 Glass-Steagall: separates securities and banking activities, established FDIC, prohibited interest on demand deposits.
1956 Bank Holding Company Act and subsequent amendments specifies permissible activities and regulation by FRS of BHCs.
2-30
Legislation (continued)...
1970 Amendments to the Bank Holding Company Act: Extension to one-bank holding companies
1978 International Banking Act: Regulated foreign bank branches and agencies in USA
2-31
Legislation (continued)
1980 DIDMCA and 1982 DIA (Garn-St. Germain Depository Institutions Act) Mainly deregulation acts. Phased out Regulation Q. Authorized NOW accounts nationwide Increased deposit insurance from $40,000 to
$100,000 Reaffirmed limitations on bank powers to
underwrite and distribute insurance products.
2-32
Legislation (continued)
1987 Competitive Equality in Banking Act (CEBA) Redefined bank to limit growth of nonbank
banks. 1989 FIRREA
Imposed restrictions on investment activities Replaced FSLIC with FDIC-SAIF Replaced FHLB with Office of Thrift
Supervision Created Resolution Trust Corporation
2-33
Legislation (continued)
1991 FDIC Improvement Act Introduced Prompt Corrective Action Risk-based deposit insurance premiums Limited “too big to fail” Extended federal regulation over foreign bank
branches and agencies
2-34
Legislation (continued)
1994 Riegle-Neal Interstate Banking and Branching Efficiency Act Permits BHCs to acquire banks in other states. Invalidates some restrictive state laws. Permits BHCs to convert out-of-state subsidiary
banks to branches of single interstate bank. Newly chartered branches permitted interstate if
allowed by state law.
2-35
1999 Financial Services Modernization Act
Financial Services Modernization Act Allowed banks, insurance companies, and
securities firms to enter each others’ business areas
Provided for state regulation of insurance Streamlined regulation of BHCs Prohibited FDIC assistance to affiliates and
subsidiaries of banks and savings institutions Provided for national treatment of foreign banks
2-36
Recent Legislative Changes
USA Patriot Act of 2001 Sarbanes-Oxley Act of 2002
2-37
Industry Performance
Economic expansion and falling interest rates through 1990s
Brief downturn in early 2000 followed by strong performance improvements Record earnings $106.3 billion 2003
Only 2 failures in 2006 versus 206 in 1989 Performance remained strong through mid
2000s as interest rates rose
2-38
Savings Institutions
Comprised of: Savings and Loans Associations Savings Banks
Effects of changes in Federal Reserve’s policy of interest rate targeting combined with Regulation Q and disintermediation.
Effects of moral hazard and regulator forbearance. Qualified Thrift Lender (QTL) test. Industry is smaller, overall Intense competition form other FIs
Mortgages
2-39
Primary Regulators
Office of Thrift Supervision (OTS). Charters and examines all federal S&Ls.
FDIC-DIF Fund. FDIC Oversaw and managed Savings
Association Insurance Fund (SAIF). SAIF and BIF merged in January 2007 to form
DIF Same regulatory structure applied to
commercial banks
2-40
Web Resources
For more information on the regulation of savings institutions, visit:
Treasury www.ots.treas.gov
FDIC www.fdic.gov
American Bankers Assoc. aba.com
2-41
Savings Banks
Mutual organizations Primarily East Coast Not exposed to the oil-based shocks of 1980s Real estate price exposure Demutualization
May be regulated at both state and federal level
2-42
Credit Unions
Nonprofit depository institutions owned by member-depositors with a common bond.
Exempt from taxes and Community Reinvestment Act (CRA).
Expansion of services offered in order to compete with other FIs.
Claim of unfair advantage of CUs over small commercial banks
2006: 66.4 percent of CUs federally chartered and regulated by NCUA
2-43
Global Issues
Narrowing margins Mortgages dominating retail growth Personal bankruptcies rising Near crisis in Japanese Banking China
Deterioration in early 2000s, NPLs at 50% levels
Opening to foreign banks (WTO entry) slow
2-44
Pertinent Websites
American Bankers Association www.aba.com Federal Reserve www.federalreserve.gov
Credit Union National Association www.cuna.org
FDIC www.fdic.gov
National Credit Union Administration www.ncua.gov
Office of Comptroller of the Currency www.occ.treas.gov
Office of Thrift Supervision www.ots.treas.gov
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