Post on 21-Jan-2016
Banking Banking in the U. in the U.
S.S.
ECO 473Dr. D. Foster
Institutions . . .Institutions . . .
• Commercial Banks “Money Center” banks
Regional (& Super-) banks
Community Banks
• Savings Institutions Lost 50% of deposits 1989 - 2001
1980s - Congress relaxes lending rules
• Credit Unions 1934-strict member rules; relaxed since.
no fed’l tax - deposit rates & loan rates
Commercial Bank Commercial Bank Assets Assets
($ Billions), June 2008 ($ Billions), June 2008Commercial & industrial loans 1,507 13.5%Consumer loans 831 7.5%Real estate loans 3,645 32.7%Interbank loans 454 4.1%Other loans (net) 918 8.2%Total loans 7,355 66.1%
U.S. government securities 1,113 10.0%Other securities 1,358 12.2%Total securities 2,471 22.2%
Cash assets 300 2.7%
Other assets 1,004 9.0%Total assets 11,130 100.0%
Dec.Dec.20142014
1,784 11.9%1,198 8.0%3,629 24.2%
86 0.6%1,195 8.0%7,892 52.6%
2,045 13.6%884 5.9%
2,929* 19.5%
2,821 18.8%
1,363 9.1%15,005 100.0%
* $1,393 bill. is in * $1,393 bill. is in mortgaged-backed mortgaged-backed
securities (MBS)securities (MBS)
Commercial Bank LiabilitiesCommercial Bank Liabilitiesand Equity Capital and Equity Capital
($ Billions), June 2008($ Billions), June 2008
Transactions deposits 603 Small time and savings deposits 4,180 Large time deposits 2,126 Total deposits 6,909
Borrowings from banks 480Other borrowings 1,829 Total borrowings 2,309
Trading liabilities --- Other liabilities 674
Net due to foreign offices -18
Equity capital 1,155 Total liabilities & equity 11,029
5.5%37.9%19.3%62.6%
4.4%16.6%20.9%
--- 6.1%
-0.2%
10.5%100.0%
Dec.Dec.20142014
--- ---8,736 58.2%
1,700 11.3%10,436 69.5%
118 0.8%1,663 11.1%
1,781 11.9%
226 1.5%423 2.8%
505 3.4%
1,642 10.9%15,013 100.0%
Commercial Bank Asset AllocationsCommercial Bank Asset Allocations Dec. Dec. 20142014
6060%%
2020%%2020%%
Commercial Bank LiabilitiesCommercial Bank Liabilitiesand Equity Capitaland Equity Capital Dec. Dec.
20142014
7070%%
1919%%
1111%%
Misc. Data on Banks & Savings Institutions Misc. Data on Banks & Savings Institutions (FDIC)(FDIC)
Misc. Data on Credit Unions (FDIC)Misc. Data on Credit Unions (FDIC)
The Top Fifteen Banks* [based on The Top Fifteen Banks* [based on assets] in the United States (FRS)assets] in the United States (FRS)
*Bank Holding CompaniesAs of September 30, 2014
Assets in thousands of dollars.
Sources of Commercial Bank RevenuesSources of Commercial Bank Revenues
Commercial Bank Expenses
Equity as a Percentage of Bank Equity as a Percentage of Bank Assets in the United States, Assets in the United States,
1840–Present1840–Present
Evolution of theories of bank Evolution of theories of bank management & risk.management & risk.
• Real bills doctrineReal bills doctrine
• Shiftability theoryShiftability theory
• Anticipated incomeAnticipated income
• Conversion of fundsConversion of funds
• Gap managementGap management
• Duration gap managementDuration gap management
• Real bills doctrine – Real bills doctrine – managing liquidity riskmanaging liquidity risk
• Shiftability theory
• Anticipated income
• Conversion of funds
• Gap management
• Duration gap management
Make low-risk loans with high liquidity…Make low-risk loans with high liquidity… Lend to finance shipment of goods:Lend to finance shipment of goods:
-- paid off quickly to known buyer.-- earns low return.
Lend for production…Lend for production…-- “self-liquidating” loans; repaid as sold.-- relatively low risk.
• Real bills doctrine
• Shiftability theoryShiftability theory – – managing credit riskmanaging credit risk
• Anticipated income
• Conversion of funds
• Gap management
• Duration gap management
Return with longer-term loans…Return with longer-term loans…-- adds to the default risk.-- offset with purchases of gov’t. securities.
- “Secondary reserves” add liquidity.
Popular until the Crash of 1929:Popular until the Crash of 1929:-- falling prices means converting to cash involves a capital loss.-- exacerbated circumstances, as loans were going into default as well.
• Real bills doctrine
• Shiftability theory
• Anticipated income -Anticipated income - managing interest rate riskmanaging interest rate risk
• Conversion of funds
• Gap management
• Duration gap management
Initiation of the “installment loan”…Initiation of the “installment loan”…-- mitigates default risk through ongoing payments.-- gives the bank a highly predictable stream of income.-- has features that make it a “super-liquidating” loan.
• Real bills doctrine
• Shiftability theory
• Anticipated income
• Conversion of fundsConversion of funds - - managing interest rate managing interest rate riskrisk
• Gap management
• Duration gap management
Match asset & liability maturities…Match asset & liability maturities…-- long-term loans with CDs.-- short-term loans with deposits.
Events that change interest rates will Events that change interest rates will be neutralized.be neutralized.
• Real bills doctrine
• Shiftability theory
• Anticipated income
• Conversion of funds
• Gap Management – Gap Management – managing profitmanaging profit
Duration gap managementDuration gap management
Relate assets & liabilities by interest…Relate assets & liabilities by interest…-- manage the “gap” to bank’s advantage.-- if re is rising, then make gap positive.-- if re is falling, then make gap negative.
Measure ave. time for payments (in or out)…Measure ave. time for payments (in or out)…-- if positive and interest rates fall, bank profits rise.-- if negative and interest rates rise, profits rise.
Does Bank Size Matter?Does Bank Size Matter?
Economies of scale-- Efficient structure theory.-- Cost savings seem minor; mgt. savings.
Concentration will . . .
-- raise costs?
-- lower costs?
Consolidation stats (1990 vs. 2007): Community bank % of all banks: 92%92% Community bank % of total bank assets: 14%14%
Universal BankingUniversal Banking
• Banks own firms-- Better informed about financial condition.-- Conflict of interest?
• Firms own banks-- Does the FED regulate the firm as well?
• Banks do . . . Whatever (economies of scope):-- Insurance.-- Real estate.-- Stock brokers.
Banking Banking in the U. in the U.
S.S.
ECO 473Dr. D. Foster