Chapter 4. Depository Institutions Banks Asset/Liability problem Commercial Banks Savings and Loans...
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Transcript of Chapter 4. Depository Institutions Banks Asset/Liability problem Commercial Banks Savings and Loans...
Chapter 4. Depository InstitutionsChapter 4. Depository Institutions“Banks”“Banks”
Chapter 4. Depository InstitutionsChapter 4. Depository Institutions“Banks”“Banks”
• Asset/Liability problem
• Commercial Banks
• Savings and Loans
• Credit Unions
• Asset/Liability problem
• Commercial Banks
• Savings and Loans
• Credit Unions
I. Asset/Liability Problem I. Asset/Liability Problem I. Asset/Liability Problem I. Asset/Liability Problem
• Assets how banks USE their funds loans, cash reserves, securities
• Liabilities how banks GET their funds deposits, borrowing, commercial
paper
• Assets how banks USE their funds loans, cash reserves, securities
• Liabilities how banks GET their funds deposits, borrowing, commercial
paper
Interest Rate RiskInterest Rate RiskInterest Rate RiskInterest Rate Risk
• banks tend to borrow short and lend long maturity intermediation
• banks depend on spread income interest received on assets minus
interest paid on deposits
• banks tend to borrow short and lend long maturity intermediation
• banks depend on spread income interest received on assets minus
interest paid on deposits
• changes in interest rates will change profits rising short-term rates reduce the
spread income
example:
1970 30 yr. loan 9.1%, 6 mo. CD 8%
1981 6 mo. CD 18.27%
• derivatives help banks manage this risk
• changes in interest rates will change profits rising short-term rates reduce the
spread income
example:
1970 30 yr. loan 9.1%, 6 mo. CD 8%
1981 6 mo. CD 18.27%
• derivatives help banks manage this risk
LiquidityLiquidityLiquidityLiquidity
• banks must hold some cash, near cash
• if fall short, must pay to borrow funds or sell assets
• tradeoffs between liquidity and interest rate earned
• banks must hold some cash, near cash
• if fall short, must pay to borrow funds or sell assets
• tradeoffs between liquidity and interest rate earned
II. Commercial BanksII. Commercial BanksII. Commercial BanksII. Commercial Banks
• state or federal charter dual banking system 75% state chartered
• consolidation 1988: 13,137, 2000: 8,375
• all insured by FDIC
• state or federal charter dual banking system 75% state chartered
• consolidation 1988: 13,137, 2000: 8,375
• all insured by FDIC
RegulatorsRegulatorsRegulatorsRegulators
• Federal Reserve System member banks
-- all federal & some state banks
• Comptroller of the Currency federal banks
• FDIC nonmember state banks
• state agencies
• Federal Reserve System member banks
-- all federal & some state banks
• Comptroller of the Currency federal banks
• FDIC nonmember state banks
• state agencies
Bank servicesBank servicesBank servicesBank services
• individual consumer loans, mortgages, credit
cards, student loans, accounts
• institutions commercial lending/leasing pension, cash management
• individual consumer loans, mortgages, credit
cards, student loans, accounts
• institutions commercial lending/leasing pension, cash management
• global corporate financing currency exchange bank acceptances
• interest and fee income banks increasingly rely on fee
income
• global corporate financing currency exchange bank acceptances
• interest and fee income banks increasingly rely on fee
income
Balance Sheet (2003)Balance Sheet (2003)Balance Sheet (2003)Balance Sheet (2003)
• Assets loans (64%) securities (25%) cash (5%) other (6%)
• Assets loans (64%) securities (25%) cash (5%) other (6%)
• Liabilities deposits (65%) other borrowing (28%)
-- the Federal Reserve
(discount loans)
-- other banks (federal funds)
-- financial markets (commercial paper) Equity capital (7%)
• Liabilities deposits (65%) other borrowing (28%)
-- the Federal Reserve
(discount loans)
-- other banks (federal funds)
-- financial markets (commercial paper) Equity capital (7%)
• money center banks rely on money market to raise
funds
• regional banks rely on deposits to raise funds
• money center banks rely on money market to raise
funds
• regional banks rely on deposits to raise funds
RegulationRegulationRegulationRegulation
• much of it due to Great Depression
& resulting bank failures some of this has been repealed,
but still affects banks today
• much of it due to Great Depression
& resulting bank failures some of this has been repealed,
but still affects banks today
Repealed regulationsRepealed regulationsRepealed regulationsRepealed regulations
• Regulation Q (1933) interest rate ceilings on bank
deposits problems in 1970s as market
interest rates rose above ceilings phased out in 1980
• Regulation Q (1933) interest rate ceilings on bank
deposits problems in 1970s as market
interest rates rose above ceilings phased out in 1980
• McFadden Act (1927) restricted interstate bank branching designed to protect small banks
-- U.S. has many smaller banks inefficient
-- no economies of scale repealed 1994
-- a lot of merger activity since
• McFadden Act (1927) restricted interstate bank branching designed to protect small banks
-- U.S. has many smaller banks inefficient
-- no economies of scale repealed 1994
-- a lot of merger activity since
• Glass-Steagall Act (1933) separation of commercial banking,
securities firms, & insurance
-- belief that abuses led to 1929 market crash
weakened in 1980s, 1990s repealed 1999
-- advantages for global banking,
economies of scale
• Glass-Steagall Act (1933) separation of commercial banking,
securities firms, & insurance
-- belief that abuses led to 1929 market crash
weakened in 1980s, 1990s repealed 1999
-- advantages for global banking,
economies of scale
Other RegulationsOther RegulationsOther RegulationsOther Regulations
• FDIC (1933) deposit insurance ($100,000) prevents bank panics
-- depositors won’t withdraw $ creates moral hazard
-- banks, depositors less careful
• FDIC (1933) deposit insurance ($100,000) prevents bank panics
-- depositors won’t withdraw $ creates moral hazard
-- banks, depositors less careful
• Capital Requirements ratio capital to assets cushion against investment losses since 1989, assets risk-wt.
-- low risk, low wt
-- Tbills, 0% wt.
-- high risk, high wt.
-- commercial loan, 100% wt.
• Capital Requirements ratio capital to assets cushion against investment losses since 1989, assets risk-wt.
-- low risk, low wt
-- Tbills, 0% wt.
-- high risk, high wt.
-- commercial loan, 100% wt.
III. Savings & LoansIII. Savings & LoansIII. Savings & LoansIII. Savings & Loans
• state or federal charter 1988 3500; 1998 1700
• created in 1933 to give mortgages
• state or federal charter 1988 3500; 1998 1700
• created in 1933 to give mortgages
RegulatorsRegulatorsRegulatorsRegulators
• FSLIC 1933-89, FDIC since 1989
• Office Thrift Supervision since 1989 federal
• state agencies
• Federal Reserve
• FSLIC 1933-89, FDIC since 1989
• Office Thrift Supervision since 1989 federal
• state agencies
• Federal Reserve
Balance SheetBalance SheetBalance SheetBalance Sheet
• assets (traditional) mortgages U.S. government securities
• asset choices expanded 1982 Garn-St. Germain Act
• assets (traditional) mortgages U.S. government securities
• asset choices expanded 1982 Garn-St. Germain Act
• Liabilities (traditional) savings accounts, CDs higher Regulation Q ceilings
• liabilities expanded 1980
• Liabilities (traditional) savings accounts, CDs higher Regulation Q ceilings
• liabilities expanded 1980
S&L CrisisS&L CrisisS&L CrisisS&L Crisis
• massive S&L failures in 1980s
• required taxpayer bailout to deposit insurance fund
• led to reform of industry regulation
• massive S&L failures in 1980s
• required taxpayer bailout to deposit insurance fund
• led to reform of industry regulation
Origins of problemOrigins of problemOrigins of problemOrigins of problem
• 1970s
• rising inflation leads to rising interest rates spread income disappears
• market interest rates rise above Reg. Q ceilings loss of deposits
• 1970s
• rising inflation leads to rising interest rates spread income disappears
• market interest rates rise above Reg. Q ceilings loss of deposits
DeregulationDeregulationDeregulationDeregulation
• DIDMCA 1980, Garn-St. Germain 1982
• expanded assets choices of S&Ls consumer, commercial loans corporate securities
• expanded liability choices NOW accounts, money market
accounts
• phased out Regulation Q
• DIDMCA 1980, Garn-St. Germain 1982
• expanded assets choices of S&Ls consumer, commercial loans corporate securities
• expanded liability choices NOW accounts, money market
accounts
• phased out Regulation Q
Continuing problemsContinuing problemsContinuing problemsContinuing problems
• does not solve interest rate problem
• regulators do not close insolvent S&Ls increase in fraud, risk taking
• does not solve interest rate problem
• regulators do not close insolvent S&Ls increase in fraud, risk taking
S&L Bailout 1989, 1991S&L Bailout 1989, 1991S&L Bailout 1989, 1991S&L Bailout 1989, 1991
• federal money to liquidate failed S&Ls and pay depositors
• created OTS
• FDIC takes over FSLIC risk-based FDIC premiums more power to close banks
• re-restricted S&L assets choices
• federal money to liquidate failed S&Ls and pay depositors
• created OTS
• FDIC takes over FSLIC risk-based FDIC premiums more power to close banks
• re-restricted S&L assets choices
IV. Credit UnionsIV. Credit UnionsIV. Credit UnionsIV. Credit Unions
• members must have “common bond”
• nonprofit, member owned
• 10,000 (but small in total assets)
• federal or state charter
• own deposit insurance fund
• members must have “common bond”
• nonprofit, member owned
• 10,000 (but small in total assets)
• federal or state charter
• own deposit insurance fund
Balance SheetBalance SheetBalance SheetBalance Sheet
• assets consumer loans mortgages U.S. gov’t securities
• liabilities member deposits
• assets consumer loans mortgages U.S. gov’t securities
• liabilities member deposits