commercial banking structure, regulation and performance chapter 15 © 2003 south-western/thomson...
TRANSCRIPT
Commercial Banking Structure, Regulation
and Performance
Commercial Banking Structure, Regulation
and Performance
Chapter 15
© 2003 South-Western/Thomson Learning
Slide 2
Learning ObjectivesLearning Objectives Who regulates whom in banking system and
why
What a bank holding company is and why
virtually all large banks are now organized as
holding companies
What is a financial holding company
Nature of and reasons for the recent wave of
bank mergers
Profitability of the banking system in recent
years
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Banking Regulatory StructureBanking Regulatory Structure
Glass-Steagall Act of 1933 Banking legislation Enacted in response to Great Depression Established Regulation Q interest rate ceilings Separated commercial and investment banking Created the FDIC
Regulation Q Interest rate ceilings on deposits at
commercial banks Established during the Great Depression Phased out after 1980
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Banking Regulatory StructureBanking Regulatory Structure
Federal Deposit Insurance Corporation (FDIC) Federal agency Insures the deposits of banks and
savings associations Comptroller of Currency
Federal agency Charters national banks
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Banking Regulatory StructureBanking Regulatory Structure Chartered
Given permission to engage in business of commercial banking
Banks must obtain charter before opening Commercial banks in U.S. are chartered
National Bank Bank that has received charter from
Comptroller of Currency (federal government) Dual Banking System
System whereby a bank may have either a national or state charter
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Regulatory ResponsibilitiesRegulatory Responsibilities
FDIC regulates: State-chartered, insured non-Fed
members Insured branches of foreign banks
Comptroller of Currency regulates: National banks that are not bank
holding companies Federally chartered branches of foreign
banks
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Regulatory ResponsibilitiesRegulatory Responsibilities
Fed regulates: State-chartered, insured members of the
Fed All bank holding companies All financial holding companies Branches of foreign banking
organizations operating in U.S. and their parent bank
States regulate: State-chartered, non-FDIC-insured
banks that are not Fed members
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Structure of Commercial Banking SystemStructure of Commercial Banking System Regulators
Interested in monitoring, influencing, controlling structure of market for banking services
Control entry into market Control mergers among existing firms Control branching in effort to maintain
many small firms
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Structure of Commercial Banking SystemStructure of Commercial Banking System McFadden Act - 1927
Outlawed interstate branching Made national banks conform to the intrastate
branching laws of states in which they were located
Interstate Banking and Branching Efficiency Act (IBBEA) Signed into law in September 1994 by
Congress Allows unimpeded, nationwide branching
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Bank Holding CompaniesBank Holding Companies
Bank Holding Company Corporation that owns several firms - at least
one is a bank Owns one - one-bank holding company Owns more than one – multi-bank holding company
Many banks organize into holding companies to: Circumvent restrictions on branching, thus seek out
sources and uses of funds in other geographical markets
Diversify into other product areas, thus providing public with a wider array of financial services, while reducing risk associated with limiting operations to traditional banking services
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Exhibit 15–5Allowable Activities for Bank Holding Companies (Federal Reserve Regulation Y, Revised January 1, 2001)
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Bank Holding CompaniesBank Holding Companies Organizing into holding company allows
banks to: Circumvent prohibitions on intrastate and
interstate branching (which now have been virtually eliminated)
Participate in activities that otherwise would be barred such as:
Data processing Leasing Investment counseling Servicing out-of-state loans
Almost all large banks are owned by holding companies
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Financial Holding CompaniesFinancial Holding Companies Financial Holding Companies
Engage in broader array of financial-related activities than bank holding companies Securities underwriting & dealing Insurance agency and underwriting activities Merchant banking activities Other activities that Fed determines to be
financial or incidental to financial activities Any non-financial activity that Fed determines
is complementary to financial activity and doesn’t pose a substantial risk
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Bank Holding Companies and Financial Holding CompaniesBank Holding Companies and Financial Holding Companies
Merchant Banking Direct equity investment (purchasing of
stock) by a bank in a start-up or growing company
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Ongoing Changes in Structure of Banking IndustryOngoing Changes in Structure of Banking Industry
Increased competition in financial services industry
Considerable erosion in domain and effectiveness of many long-standing financial regulations
Significant increase in share of total bank assets controlled by largest banks
Pace and dollar volume of mergers increased significantly
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Evolution of International BankingEvolution of International Banking Increase in international borrowing and
lending by domestic banks Many foreign banks made significant
inroads into U.S. markets by the 1980s. Agency of a Foreign Bank
U.S. Banking office of foreign bank Can borrow funds only in wholesale and
money markets Not allowed to accept retail deposits
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Bank Management: Managing Risk and ProfitsBank Management: Managing Risk and Profits
Primary function of a bank loan officer is to evaluate or assess the default risk associated with lending to particular borrowers firms individuals domestic and foreign governments
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Managing Risk and ProfitsManaging Risk and Profits
Asymmetric Information Potential borrower knows more about
the risks and returns of an investment project than bank loan officer
Adverse Selection Problem When least desirable borrowers pursue
a loan most diligently
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Managing Risk and ProfitsManaging Risk and Profits
Moral Hazard Problem When borrower has incentive to use
proceeds of loan for more risky venture after loan is funded
Bank manager must manage interest rate risk
Adjustable-(Variable-) Rate Loan When interest rate on loan is adjusted up
or down as cost of funds rises or falls Banks can use financial futures, options
and swaps to manage interest rate risk
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Bank PerformanceBank Performance
Nonbanks Other intermediaries and nonfinancial
companies that have taken increasing share of intermediation
Banks are facing increasing competition from other FIs and nonfinancial
corporations in a global environment.