Commercial Banking

1
Commercial Banking

• Nate Bard

2
More than Lending and Saving

• Retail Banking
• Advisory Services
• Deposit Accounts
• Credit Services
• Corporate Banking
• Big
• Advanced services

3
Restrictions from the Start

• State Chartered Banks
• Branching limited
• McFadden Act of 1927
• Allows federal branching
• Loophole for holding companies
• Douglas Amendment of 1956
• Glass-Steagall Act of 1933
• Commercial investment banking separate

4
Branching Expands

• Maine leads charge
• 1975 starts
• 1995 all states allow interstate branching
• 1994 Riegle-Neal Efficiency Act
• Removes many of the restrictions
• Allows mergers and purchases by holding
  companies
  
• 1999 Repeal of Glass-Stegall
• Brokers making loans (syndications)
• Banks underwriting

5
Government Holds Back Efficiency

• Economies of scale
• Technology
• Employee specialization
• Advertising
• Cut back-office costs
• Diversification
• Decreases risk
• No big bankruptcies during economic downturn

6
Consolidation Higher Prices?

• Market power concerns
• No alternatives
• Pricing flexibility
• Brand ID
• Barriers to Entry
• Legal
• Lack of knowledge
• Switching costs

7
Concentration at the Top

• 12,300 in 1980 - 6,900 in 98 - 7,887 in 02
• Local concentration unchanged
• Number of large banks increase

8
Urban vs. Rural
9
Nonbanks Enter

• Savings and Loans, Savings Banks
• Accept deposits, invest in loans
• Little presence in commercial loans
• Thrifts are counted in concentrations
• Credit Unions
• Deposits and loans from members
• Must have common bond

10
Competition

• Price, but no price
• Difficult to calculate
• Multi-product schedules
• Service, location
• Product Variety
• Expanding, cross-selling
• Brand Image

11
Role of Large Banks

• Economies of scale
• Put small banks out
• Raise prices
• Threat of retaliation
• Limit exploitation of competitive advantages
• However, may lower prices

12
Profits, a Double Take

• Low profits in highly concentrated areas
• Greater net interest margin
• Lower efficiency
• Larger Smaller
• Diseconomies of scale
• Higher fees, but lower prices
• SmallerLarger
• Customer service

13
Large Bank Effects

• Anticompetitive Impact
• Small banks with large earn higher profits
• Merger Concerns
• Anti-Trust concerned with concentration at local
  levels
  
• Internet possibly expands market
• ATM fees, charges

14
Diseconomies at Some Point
15
Current Trends

• Computers now second biggest expense behind
  staffing
  
• More big mergers
• 2003 Bank of American and FleetBoston
• 2004 JP Morgan and Bank One
• Looking for growth
• Credibility
• Reputational Riskon loans

16
Bye Bye Checks

• Debit Cards
• More purchases are made with them than credit
  cards
  
• Surpass cash in 2005
• Merchants pay higher fees
• Court case

17
In-home Branch

• 25 million homes use computers for online
  banking
  
• Sold forever
• Late fees eliminated
• Huge security costs