Banking in the U. S. ECO 473 Dr. D. Foster. Institutions... Commercial Banks “Money Center”...
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Transcript of Banking in the U. S. ECO 473 Dr. D. Foster. Institutions... Commercial Banks “Money Center”...
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