Chapter 16 commercial banking industry: structure and competition

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• Chapter 16commercial banking industrystructure
  and competition
• Chapter 17Thrifts savings and loans and credit
  unions
• Chapter 18Banking Regulation

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Chapter 16commercial banking industrystructure
and competition

• ???

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Outline
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historical development
structure of the U.S.s
commercial banking industry
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Financial Innovation and the decline
of traditional banking
Bank consolidation and nationwide banking
Separation of the banking and securities industrie
s
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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?
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Restrictions and Response

• Branches additional offices for the conduct
  of banking operations

Response to Branching Restrictions
Restrictions on Branching
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Three kinds of financial innovations
Bank Holding Companies
Nonbank Bank
Automated Teller Machines
Restrictions on Branching
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? 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.
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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
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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
Repeal of the Glass-Steagall Act
The case for allowing banks to enter the
securities business
The case against allowing banks to enter the
securities business
Future Prospects
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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

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The case against allowing banks to enter the
securities business

• Opponents
• ? 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
Junk bonds
Commercial paper market
Securitization
Money Market Mutual Funds
The decline of traditional banking
Reasons
Responses
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Reasons

• ? decline in cost advantages in acquiring funds
  (liabilities)
• ? decline in income advantages on uses of funds
  (assets)

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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

• ???

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Thrifts savings and loans and credit unions
Mutual saving banks
Savings and loan associations
Credit unions
mortgage loans
Other types of loans
The northeastern
all
Insure deposits with the state or FDIC
not
not
Only to members
not
Less concentrated in mortgages and have more
flexibility in their investing practices
History and organization
Thrift crisis
?
Sources of funds
Economic forces
Political forces
Uses of funds
Today and the future
Advantage and disadvantages
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Future of credit unions
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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.
  ?

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savings and loan associations

• ? savings and loan associations to accomplish
  the part of the American dream of home ownership.
• to aggregate depositors 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

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Central Credit unions
Credit Union size
Trade associations
organization
Mutual ownership
Regulation And insurance
Common bond membership
Nonprofit, Tax-exempt status
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Chapter 18Banking Regulation

• ???

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Outline

• ? asymmetric information and bank regulation
• ? the 1980s U.S. banking crisis
• ? federal deposit insurance corporation
  improvement act of 1991

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Asymmetric information and bank regulation
Separation of the banking and securities
industries
Government safety net
Restrictions on competition
Seven types
Restrictions on bank asset holdings and capital
requirements
Consumer protection
Disclosure requirements
Bank supervision
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Existence of deposit insurance
New financial instruments
The effect of DID and MCA of 1980
Highly leveraged transaction loans
The 1980s U.S. banking crisis
The burst of financial innovation
Brokered deposits
Federal deposit insurance corporation
improvement act of 1991
Other FDICIA provisions
Limits on the scope of deposit insurance
Risk-based insurance premiums
Prompt corrective action
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Other proposed changes in banking regulations
Regulatory consolidation
Market-value accounting for capital
requirements
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