History and Structure of the Banking Industry Chapter 10.
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Transcript of History and Structure of the Banking Industry Chapter 10.
History and Structureof the Banking Industry
History and Structureof the Banking Industry
Chapter 10Chapter 10
OverviewOverview
History of U.S. banking Commercial Bank Structure Thrift Industry Structure and Regulation The Rise of International Banking The Decline of Traditional Banking
History of U.S. banking Commercial Bank Structure Thrift Industry Structure and Regulation The Rise of International Banking The Decline of Traditional Banking
The History of the National BankThe History of the National Bank
Combination between central bank and ‘national bank’
1st National Bank: 1791-1811 Alexander Hamilton First charter allowed to lapse
2nd National Bank: 1816-1836 Abuses of state banks War of 1812
Combination between central bank and ‘national bank’
1st National Bank: 1791-1811 Alexander Hamilton First charter allowed to lapse
2nd National Bank: 1816-1836 Abuses of state banks War of 1812
The Battle of New OrleansThe Battle of New Orleans
No Central Banking PeriodNo Central Banking Period
1836-1863: no central control! Farmers distrust, advocate state charters Jackson, proponent of ‘states rights’ (before civil war) State banknotes become popular currency
Problems with state currency Lax regulations on bank capital Moral hazard and adverse selection Banknotes become worthless Fraud widespread
1836-1863: no central control! Farmers distrust, advocate state charters Jackson, proponent of ‘states rights’ (before civil war) State banknotes become popular currency
Problems with state currency Lax regulations on bank capital Moral hazard and adverse selection Banknotes become worthless Fraud widespread
National Bank Act of 1863National Bank Act of 1863
Attempt to address state currency issue Creation of Comptroller of Currency New federal chartered banking system Taxed state banknotes Civil War funding
Dual Banking system States get around taxing by inventing checking
accounts and demand deposits! Both state and federal banks survived, creating unique
system
Attempt to address state currency issue Creation of Comptroller of Currency New federal chartered banking system Taxed state banknotes Civil War funding
Dual Banking system States get around taxing by inventing checking
accounts and demand deposits! Both state and federal banks survived, creating unique
system
Increasing RegulationIncreasing Regulation Bank crashes and great depression Federal Reserve System - 1913
Not the same as a 3rd National Bank Required national banks to become members Members must follow tighter set of regulations
McFadden Act: 1927 Restricts interstate branching Required national banks to follow state rules
Bank crashes and great depression Federal Reserve System - 1913
Not the same as a 3rd National Bank Required national banks to become members Members must follow tighter set of regulations
McFadden Act: 1927 Restricts interstate branching Required national banks to follow state rules
More regulationMore regulation
Bank investing in securities and the stock market blamed for so many bank failures and the great depression
Glass-Steagall Act - 1933 Creation of FDIC No interest on demand deposits Commercial banks: no underwriting or dealing
securities Investment banks: no commercial bank activities Set ceilings on savings account interest
Bank investing in securities and the stock market blamed for so many bank failures and the great depression
Glass-Steagall Act - 1933 Creation of FDIC No interest on demand deposits Commercial banks: no underwriting or dealing
securities Investment banks: no commercial bank activities Set ceilings on savings account interest
This is getting confusing…This is getting confusing…
Office of Comptroller Supervises 2000 national banks (50%)
Federal Reserve and State Authorities 1000 state banks Holding companies
FDIC and State Authorities 5000 state banks not in Fed
Office of Comptroller Supervises 2000 national banks (50%)
Federal Reserve and State Authorities 1000 state banks Holding companies
FDIC and State Authorities 5000 state banks not in Fed
Erosion of Branching Restrictions
Erosion of Branching Restrictions
Early innovative strategies Bank holding companies Non-bank banks: just loans or ATM’s
Regional compacts in 70s and 80s Rise of super-regional banks
Riegle-Neal Act - 1994 Overturns McFadden Act of 1927 Extended regional compacts nationwide Holding companies can consolidate
Early innovative strategies Bank holding companies Non-bank banks: just loans or ATM’s
Regional compacts in 70s and 80s Rise of super-regional banks
Riegle-Neal Act - 1994 Overturns McFadden Act of 1927 Extended regional compacts nationwide Holding companies can consolidate
Big vs. SmallBig vs. Small
Small banks opposed until… Provision: Big banks must buy up small banks
Big banks like less restriction on branching Economies of scale Economies of scope Diversification benefits (interest rate risk) Technology (web) Big banks support
Result Banks drop from 14,000 to 8,000 Trend will continue
Small banks opposed until… Provision: Big banks must buy up small banks
Big banks like less restriction on branching Economies of scale Economies of scope Diversification benefits (interest rate risk) Technology (web) Big banks support
Result Banks drop from 14,000 to 8,000 Trend will continue
Erosion of Glass-Steagall Erosion of Glass-Steagall
1987: Bank holding companies can underwrite securities
Gramm-Leach-Bliley 1999 Banks can again underwrite securites, sell insurance,
and deal in real estate Pushed by large holding companies and mergers
Citigroup (Citicorp and Travers group) Holding companies become investment/commercial/insurance
Bank of America J.P Morgan Chase Wachovia
1987: Bank holding companies can underwrite securities
Gramm-Leach-Bliley 1999 Banks can again underwrite securites, sell insurance,
and deal in real estate Pushed by large holding companies and mergers
Citigroup (Citicorp and Travers group) Holding companies become investment/commercial/insurance
Bank of America J.P Morgan Chase Wachovia
New regulationNew regulation
States watch over insurance SEC watches over securities Comptroller watches banks that underwrite Fed watches holding companies that do
everything
States watch over insurance SEC watches over securities Comptroller watches banks that underwrite Fed watches holding companies that do
everything
For and againstFor and against
Against: Security and Insurance Depression argument Non-bank demand deposits no FDIC Sec. industry too risky
For: Banks Wanted ‘fair play’ Competition will lower underwriting costs Changing industry
Against: Security and Insurance Depression argument Non-bank demand deposits no FDIC Sec. industry too risky
For: Banks Wanted ‘fair play’ Competition will lower underwriting costs Changing industry
Decline of Traditional BankingDecline of Traditional Banking
Took away banks traditional liabilities Money market mutual funds Regulation Q eliminated
No interest on checkable deposits Ceiling on time deposits
Took away traditional assets too Junk bonds Commercial Paper Securitization Finance companies
Took away banks traditional liabilities Money market mutual funds Regulation Q eliminated
No interest on checkable deposits Ceiling on time deposits
Took away traditional assets too Junk bonds Commercial Paper Securitization Finance companies
What can banks do?What can banks do?
Be riskier With repeal of Glass-Steagall, start investment
banking Commercial real estate loans Finance takeovers Off-balance sheet services Innovate
Sweep accounts
Be riskier With repeal of Glass-Steagall, start investment
banking Commercial real estate loans Finance takeovers Off-balance sheet services Innovate
Sweep accounts
Savings and Loans (S&L)Savings and Loans (S&L)
Savings accounts and mortgages 2,000 in U.S. (dropped since crisis in 80’s, chap. 11)
1932: Federal Home Loan Bank System (like the Fed Reserve System) Fewer branching restrictions
S&L Insurance fund (FDIC, used to be something else before S&L crisis)
Office of Thrift Supervision Regulates asset, capital requirements, info reporting Audits
Savings accounts and mortgages 2,000 in U.S. (dropped since crisis in 80’s, chap. 11)
1932: Federal Home Loan Bank System (like the Fed Reserve System) Fewer branching restrictions
S&L Insurance fund (FDIC, used to be something else before S&L crisis)
Office of Thrift Supervision Regulates asset, capital requirements, info reporting Audits
Credit UnionsCredit Unions
Cooperative lending institutions 12,000 in U.S. Common bond (profession, religion) Tax-exempt and small
50% are chartered by Fed, rest by states Supervised by National Credit Union
Association Deposit Insurance
Cooperative lending institutions 12,000 in U.S. Common bond (profession, religion) Tax-exempt and small
50% are chartered by Fed, rest by states Supervised by National Credit Union
Association Deposit Insurance
International BankingInternational Banking
1969: 8 U.S. banks abroad ($4 billion) Now: 100 U.S. banks abroad ($1.5 trillion) Why?
More trade (WTO) means more integration International Banking Act (1978) End of Glass-Steagall and McFadden restrt. More eurodollars
Widely used currency Offshore low regulation
1969: 8 U.S. banks abroad ($4 billion) Now: 100 U.S. banks abroad ($1.5 trillion) Why?
More trade (WTO) means more integration International Banking Act (1978) End of Glass-Steagall and McFadden restrt. More eurodollars
Widely used currency Offshore low regulation
U.S. banks abroadU.S. banks abroad
Normal branches common now, less regulation Edge Act corporation (1919)
U.S. bank subsidiary overseas Can branch, as long as international business Own controlling interest in overseas banks
International Banking Facilities - IBF’s (1981) Within the U.S. to deal with foreigners Not subject to RR or Interest restrictions, taxes Treated like foreign banks, but within U.S.
Normal branches common now, less regulation Edge Act corporation (1919)
U.S. bank subsidiary overseas Can branch, as long as international business Own controlling interest in overseas banks
International Banking Facilities - IBF’s (1981) Within the U.S. to deal with foreigners Not subject to RR or Interest restrictions, taxes Treated like foreign banks, but within U.S.
Foreign Banks in U.S.Foreign Banks in U.S.
HSBC, UBS, Credit Suisse (since 1940!) 10% of total bank assets 16% of lenders to U.S. corporations U.S. subsidiaries and branch offices
Full service Subject to U.S. regulations
Agency office Can loan but not take deposits Not subject to U.S. regulations
HSBC, UBS, Credit Suisse (since 1940!) 10% of total bank assets 16% of lenders to U.S. corporations U.S. subsidiaries and branch offices
Full service Subject to U.S. regulations
Agency office Can loan but not take deposits Not subject to U.S. regulations
International Central BankingInternational Central Banking Universal Banking (Germany, Swiss)
Complete fusion of banking and securities industries U.K, Canada, now U.S.
Universal, but… more subsidiaries not much commercial equity holdings Banking and insurance combo less common
Japan Like U.S. before repeal of Glass-Steagall Can buy stock, and commercial equity common No holding companies allowed
Universal Banking (Germany, Swiss) Complete fusion of banking and securities industries
U.K, Canada, now U.S. Universal, but…
more subsidiaries not much commercial equity holdings Banking and insurance combo less common
Japan Like U.S. before repeal of Glass-Steagall Can buy stock, and commercial equity common No holding companies allowed