Chapter 16commercial banking industry:structure and competition

Chapter 17Thrifts: savings and loans and credit unions

Chapter 18Banking Regulation

Chapter 16commercial banking industry:structure and competition

路洋谊

commercial banking industry

historical development

structure of the U.S.’s

Bankconsolidation

andnationwide

banking

Separationof the

bankingand

securitiesindustries

FinancialInnovation

and thedecline oftraditionalbanking

Outline☞

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Historical development of the banking system

♬ major controversy involving the industry in its early years was whether the federal government or the states should charter banks.

♬ multiple regulatory agencies

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Structure of the U.S. commercial banking industry

More competitive?

♬ Size distribution and shares of ten largest U.S. banks

♬ Number of commercial banks :compare with other industries

Is commercial banking more competitive than other industries?

Restrictions and Response:

Branches: additional offices for the conduct of banking operations

Restrictions on Branching

Response to Branching Restrictions

Three kinds of financial innovations

Bank HoldingCompanies

NonbankBank

Automated Teller

Machines

Restrictions on Branching

♫ Banking holding company : A corporation that owns several different companies.

♫ Nonbank banks: the bank holding company act of 1956 defined a bank as a financial institution that accepts deposits and makes loans.

a nonbank bank is a limited-service banks that either took deposits but did not make commercial loans or did not take deposits but made commercial loans.

Automated teller machine (ATM): the bank did not own or rent the ATM but instead let it be owned by someone else and paid for each transaction with a fee, the ATM would probably not be considered a branch of the bank and thus would not be subject to branching regulations.

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Bank consolidation and nationwide banking

Superregional banks: bank holding companies that have begun to rival the money center banks in size but whose headquarters are not based in one of the money center cities.

Riegle-Neal interstate banking and branching efficiency act of 1994

What will the structure of the U.S. banking industry look like in the future?

Are bank consolidation and nationwide banking good things?

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Separation of the banking and securities industries

The case for

allowing banks

to enter the

securities

business

The case against

allowing banks to enter the securities business

Repeal of the Glass-Steagall Act

Future Prospects

The case for allowing banks to enter the securities business

♫ It is unfair: Brokerage firms have been able to pursue traditional banking activities with the development of money market mutual funds and cash management accounts.

♫ increased competition lower price

The case against allowing banks to enter the securities businessOpponents:♫ banks have an unfair advantage in

competing against brokerage firms.♫ commercial banks face a potential

conflict of interest if they engage in underwriting of securities.

Proponents:♫ regulatory authorities’ greater power♫ erection of “fire walls” can separate various bank

operation and help prevent conflicts of interest. ☞

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Financial innovation and the decline of traditional banking

Money MarketMutual Funds

Junk bonds

Commercialpaper market Securitization

The decline of traditionalbanking

Reasons Responses

Reasons:

♫ decline in cost advantages in acquiring funds (liabilities)

♫ decline in income advantages on uses of funds (assets)

Responses:

♫ attempt to maintain their traditional lending activity by expanding into new and riskier areas of lending.

♫ pursue new off-balance-sheet that are more profitable.

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Chapter 17Thrifts: savings and loans and credit unions

路洋谊

Thrifts: savings and loans and credit unions

Mutual saving banks Savings and loan associations Credit unions

mortgage loansOther types

of loans

not Only to members

The northeastern all

Insure deposits with the state or FDIC

not

Less concentrated in mortgages and

have more flexibility in their investing

practices

Thrift crisis

Economicforces

Politicalforces

History andorganization

Sources of funds

Uses of funds

Advantage anddisadvantages

Future of credit unions

not

Today and the future

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mutual savings banks:

♫ mutual savings banks: first established by philanthropists in Scotland and England to encourage saving by the poor.

♫ Advantage: (1)great safer; (2)Managers are more risk-averse

than in the corporate form.♫ Disadvantage: (1)the mutual form of

ownership accentuates the principal-agent problem that exists in corporations. ☜

savings and loan associations:

♫ savings and loan associations: to accomplish the part of the American dream of home ownership.

to aggregate depositor’s funds and use the money to make long-term mortgage loans.

♫ Character: (1)the single largest provider of mortgage loans in the country;

(2)regulations differed from state to state; then in 1934 get support from congress;

(3) successful and low-risk businesses;

Mutualownership

Commonbond

membership

Nonprofit,Tax-exempt

status

RegulationAnd

insurance

CentralCreditunions

CreditUnionsize

Tradeassociations

organization

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Chapter 18Banking Regulation

路洋谊

Outline

♫ asymmetric information and bank regulation

♫ the 1980s U.S. banking crisis

♫ federal deposit insurance corporation improvement act of 1991

Asymmetric information and bank regulation

Seven types

Government safety net

Restrictions on bank asset

holdings and capital

requirements

Bank supervision

Disclosure requirements

Consumer protection

Restrictions on

competition

Separation of the banking

and securities industries

Federal deposit insurance corporation improvement act of 1991

The 1980s U.S. banking crisis

Limits on the scope of deposit

insurance Prompt corrective action

Risk-based insurance premiums

Other FDICIA

provisions

The burst of financial

innovation

Highly leveraged transaction loans

Existence of deposit

insurance

New financial instruments

Brokered deposits

The effect of DID and MCA

of 1980

Other proposed changes in banking regulations

Regulatory consolidation

Market-value accounting for capital

requirements