BUS FINANCE 826

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BUS FINANCE 826
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Overview of Depository Institutions

• In this segment, we explore the depository FIs
• Size, structure and composition
• Balance sheets and recent trends
• Regulation of depository institutions
• Depository institutions performance

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Products of U.S. FIs

• Comparing the products of FIs in 1950, to
  products of FIs in 2000
• Much greater distinction between types of FIs in
  terms of products in 1950 than in 2000
• 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

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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 Depository Institutions, 2000 by total
assets (billions)

• Citigroup 804.3
• J.P. Morgan Chase 707.5
• BankAmerica 671.7
• Banc One 283.4
• First Union 246.6
• Wells Fargo 241.1
• Washington Mutual 190.8
• Fleet Boston 179.1
• SunTrust Banks 100.6
• HSBC 87.1

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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
• SLs
• Savings Banks
• Credit Unions

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Functions and 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

• Primary assets
• Real Estate Loans 1,670.3 billion
• CI loans 1,048.2 billion
• Loans to individuals 609.7 billion
• Other loans 367.5 billion
• Investment security portfolio 1,662.0 billion
• Of which, Treasury bonds 710.0 billion
• Inference Importance of Credit Risk

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Commercial Banks

• Primary liabilities
• Deposits 4,176.6 billion
• Borrowings 1,532.5 billion
• Other liabilities 401.0 billion
• Inference
• Highly leveraged

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Small Banks, Nation
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Large Banks, Nation
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Structure and Composition

• Shrinking number of banks
• 14,416 commercial banks in 1985
• 12,744 in 1989
• 8,315 in 2000
• Mostly the result of Mergers and Acquisitions
• MA prevented prior to 1980s, 1990s
• Consolidation has reduced asset share of small
  banks

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Structure and 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

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Composition of Commercial Banking Sector

• Community banks
• Regional and Super-regional
• Access to federal funds market to finance their
  lending activities
• Money Center banks
• Bank of New York, Bank One, Bankers Trust,
  Citigroup, J.P. Morgan/Chase, HSBC Bank USA
• declining in number

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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

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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.

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Off-balance sheet activities

• Heightened importance of off-balance sheet items
• Large increase in derivatives positions is a
  major issue
• Standby letters of credit
• Loan commitments
• When-issued securities
• Loans sold

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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

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Key Regulatory Agencies

• FDIC (BIF and SAIF)
• 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.

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Web Resources

• For more detailed information on the regulators,
  visit
• http//www.fdic.gov
• http//www.occ.treas.gov
• http//federalreserve.gov

Web Surf
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Other Regulatory Issues

• Importance of Bank Holding Companies is
  increasing.
• BHCs regulated by FRS.

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Key Regulatory Legislation

• 1927 McFadden Act Controls branching of national
  banks.
• 1933 Glass-Steagall separates securities and
  banking activities.
• 1956 Bank Holding Company Act and subsequent
  amendments specifies permissible activities and
  regulation by FRS of BHCs.

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Legislation (continued)...

• 1970 Amendments to the Bank Holding Company Act
  Extension to one-bank holding companies
• 1970 International Banking Act Regulated foreign
  bank branches and agencies in USA

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Legislation (continued)

• 1980 DIDMCA and 1982 DIA (Garn-St. Germain
  Depository Institutions Act)
• Mainly deregulation acts.
• Phased out Regulation Q.
• 1987 Competitive Equality in Banking Act (CEBA)
• Redefined bank to limit growth of nonbank banks.

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Legislation (continued)

• 1989 FIRREA
• Imposed restrictions on investment activities
• Replaced FSLIC with FDIC-SAIF
• Replaced FHLB with Office of Thrift Supervision
• Created Resolution Trust Corporation

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Legislation (continued)

• 1991 FDIC Improvement Act
• Introduced Prompt Corrective Action
• Risk-based deposit insurance premiums
• Limited too big to fail

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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.

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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

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Industry Performance

• Economic expansion and falling interest rates
  through 1990s
• Commercial banks record earnings of 71.6
  billion
• Downturn in early 2000s
• Reduction in performance
• Increased provision for loan losses
• Only 6 failures in 2000 versus 206 in 1989
• Technology risks remain

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Savings Institutions

• Comprised of
• Savings and Loans Associations
• Savings Banks
• Effects of changes in Federal Reserves policy of
  interest rate targeting combined with Regulation
  Q and disintermediation.
• Effects of moral hazard and regulator
  forbearance.
• Qualified Thrift Lender (QTL) test.

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Savings Institutions Recent Trends

• Industry is smaller overall
• Intense competition from other FIs
• mortgages for example
• Concern for future viability

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Primary Regulators

• Office of Thrift Supervision (OTS).
• Charters and examines all federal SLs.
• FDIC-SAIF Fund.
• Oversees and manages Savings Association
  Insurance Fund (SAIF).

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Web Resources

• For more information on the regulation of savings
  institutions, visit
• Treasury www.ots.treas.gov
• FDIC www.fdic.gov

Web Surf
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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

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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.
• Approximately 2/3 federally chartered and subject
  to NCUA regulation.

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Web Resources

• For information on credit unions visit
• American Bankers Association www.aba.com

Web Surf
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Global Issues

• Near crisis in Japanese Banking
• 19 of the biggest Japanese banks on credit watch
  list
• European banks continued to perform well
• Implications for future competitiveness

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Other Trends

• Number of banks continues to decline.
• Increase in off-balance-sheet activities.
• Increase in income derived from fees-for-service
  rather than spread income.
• Increased competition between banks and across
  financial services sectors.
• Increased competition from foreign FIs.

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Pertinent Websites

• www.federalreserve.gov
• www.cuna.org
• www.fdic.gov
• www.occ.treas.gov
• www.ots.treas.gov
• www.us-banker.com

Web Surf
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Financial Statement Analysis

• Time series analysis of key ratios
• ROE framework
• ROE ROA EM
• ROA PM AU