The Commercial Banking Industry

I. Commercial Banking History

• A. State Banking, 1714 - 1863– Chartering by Legislation, 1714– Free Banking, 1837

• B. Dual Banking, 1863 - 1914

• C. Central Banking, 1914 - 1980

• D. Deregulation, 1980 -

II. Industry Structure

• A. Industry Composition– National Banks and State Banks– Member Banks and Non-Member Banks– Insured Banks and Uninsured Banks– Unit Banks and Branching Banks

• Limited Branching

• Statewide Branching

• Interstate Branching

II. Industry Structure (Cont.)

• B. Market Concentration– Line of Commerce– Market Scope

• Uniform Price Criterion

• Political Boundary Criterion

• Service Area Criterion

– Measures• Concentration Ratio

• Herfindahl-Hirschman Index

Concentration Ratio

Institution Market ShareBank A 30%

Bank B 25%

Bank C 20%

Bank D 15%

Bank E 5%

: :

: :

Concentration Ratio 90%

Herfindahl-Hirschman Index

Institution Market Share (Market Share)2

Bank A 30% 900

Bank B 25% 625

Bank C 20% 400

Bank D 15% 225

Bank E 5% 25

Bank F 4% 16

Bank G 1% 1

HHI 2192

II. Industry Structure (Cont.)

• C. Correspondent Banking

Correspondent Bank - Upstream Bank

Respondent Bank - Downstream Bank

– Payment System• Check Collection

• Funds Transfers

• Automated Clearing-House Services

II. Industry Structure (Cont.)

• C. Correspondent Banking (Cont.)– Payment System– Liquidity Maintenance

• Overline and Liquidity Loans

• Federal Funds Transactions

• Supply of Currencies and Coins

II. Industry Structure (Cont.)

• C. Correspondent Banking (Cont.)– Asset Adjustments

• Loan Participation

• Collection of Non-Cash Items

• Security Safekeeping

• Trading Government Securities

• Trading Money Market Instruments

II. Industry Structure (Cont.)

• C. Correspondent Banking (Cont.)– Management Services

• Data Processing

• Investment Advice

• Capital Funding Advice

• Operational Advice

II. Industry Structure (Cont.)

• D. Bank Holding Companies– Definitions

• One-Bank Holding Company

• Multi-Bank Holding Company

– Reasons for the Growth• Economies of Scale

• Economies of Scope

II. Industry Structure (Cont.)

• D. Bank Holding Companies (Cont.)– Activities

• Permitted by Regulation– Extension of Credit

– Trust Company and Fiduciary Activities

– Data Processing Services

– Investment or financial Advising

– Securities Brokerage

II. Industry Structure (Cont.)

• D. Bank Holding Companies (Cont.)– Activities (Cont.)

• Permitted by Regulation

• Permitted by Order– Operating a Distressed Savings Institution

– Trading Precious Metals

– Employee Benefit

– Underwriting Corporate Bonds

• Denied

II. Industry Structure (Cont.)

• D. Bank Holding Companies (Cont.)– Activities (Cont.)

• Permitted by Regulation

• Permitted by Order

• Denied– Underwriting Life Insurance

– Land Investment/Development

– Travel Agency Services

– Management Consulting

II. Industry Structure (Cont.)

• E. Interstate Banking– Advantages

• Safety through Diversification

• Convenience and Accessibility

• Efficiency

• Competition

– Models of Interstate Banking• Host-State Regulation

• Home-State Regulation

II. Industry Structure (Cont.)

• A. Industry Composition

• B. Market Concentration

• C. Correspondent Banking

• D. Bank Holding Companies

• E. Interstate Banking

• F. Non-Bank Banks

F. Non-Bank Banks(Limited-Service Banks)

• 1980 Gulf & Western Case• 1983 Federal Reserve Action

Redefined commercial loans to include the purshase

of commercial paper, CDs, and bankers acceptances.

Redefined demand deposits to include interest- bearing checking accounts.

Prevented the investment in corporate securities.

• 1986 Court Decision• 1987 Competitive Equality in Banking Act.

III. Financial OperationsA. Goals of Financial Operations

• Safety

• Liquidity

• Profitability

III. Financial Operations

B. Banlance Sheet Analysis

0%10%20%30%40%50%60%70%80%90%

100%

1992

CashSecuritiesLoansOthersT. AssetsDepositsOthersT. Liab.Equity

•1. Assets

– Cash

– Securities

Treasury Bills

Treasury Bonds

Federal Agency Securities

Municipal Bonds

– Loans

Commercial and Industrial Loans

Agricultural Loans

Consumer Loans

Real Estate Loans

–Other Assets

•2. Liabilities

– Deposits

Non-Interest-Bearing Deposits

Interest-Bearing Deposits

– Other Liabilities

•3. Capital and Capital Requirements

•C. Profitability

– Loan Pricing

– Asset-Liability Management

The Commercial Banking Industry

• I. Commercial Banking History

• II. Industry Structure

• III. Financial Operations

The Commercial Banking Industry (cont.)

• I. Commercial Banking History

• II. Industry Structure

• III. Financial Operations

• IV. Bank Regulations

IV. Bank Regulations

– A. Regulators• Federal Regulators

– FDIC– Federal Reserve System– Comptroller of the Currency

• State Regulators

– A. Regulators

– B. The Regulated• National Banks

• State Banks– State Nonmember Noninsured Banks– State Nonmember Banks– State Member Banks

– A. Regulators– B. The Regulated– C. Regulations

• Public Protection– Examination and Supervision– Deposit Insurance– Consumer Protection and Enforcement– Investor Protection

– C. Regulations (Cont.)• Public Protection• Banking Structure

– Chartering– Branching– Merger and Acquisition– Bank Holding Company Activities– Insolvency

– C. Regulations (Cont.)• Public Protection

• Banking Structure

• Monetary Stability– Reserve Requirement– Discount Policy

– C. Regulations (Cont.)• Public Protection

• Banking Structure

• Monetary Stability

• Major Federal Legislation

Major Federal Legislation

• The Federal Reserve Act (1913)

• The Bank Holding Company Act (1956)

• The Bank Merger Act (1966)

• The Amendment to Bank Holding Company Act (1970)

• The Depository Institutions Deregulation and Monetary Control Act (1980)

• The Depository Institutions Act (The Garn-St. Germain Act) (1982)

• The Competitive Equality in Banking Act (CEBA) (1987)

• The Financial Institutions Reform, Recovery, and Enforcement Act (1989)

• The Federal Deposit Insurance Corporation Improvement Act (1991)