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)
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