 Important Features of the American Banking sector
 The decline of American Banks
 Regulation and other Factors
 Trends in American Banking
 Consolidation and Effects on International Banking
 American Banking Innovations
 Bank Holding Companies, ATMs, Non-Banks
 Unique US Financial Institutions
 Savings and Loans, Credit Unions

Important Features:
 US banking system has over 27,000 deposit taking institutions compared to just under 600 banks in the UK.
 Over the time the US banking sector has lost its dominance, particularly since 1974.
 The Bank of America remained in competition
(rank 1 or 2 in the world) during 1968-83. In 1984, they were in 41 st position.
 US banks weaknesses include developing country debt problems and decline in agriculture commodity and real estate prices.
 1981 was the year when large bank failure started - 10 individual failures in 1981 and 1000 in 1989.

 Overall, the competitiveness of the banking sector has declined in the USA due to the fact that companies with abundant liquid funds could obtain rates higher than commercial banks were offering.
 The failure of several reforms (e.g. the
Banking Reform Bill in 1991) meant reliance on an outdated regulatory system for a significant period of time (however, this is now changing).

 There are around 2800 commercial banks in the USA, for more than in any other country in the world.
 In Canada or UK usually five or six major banks dominate the industry but in USA ten largest banks hold only 36% of the assets in their industry.
 Two-thirds of deposits are held by commercial banks, and the remaining by thrift institutions (discussed later).
 Restrictions and regulations on branches had resulted in more banks in competition.

 In the past, it had been a case that an
American bank could open a branch in foreign country more easily than in other states within the USA.
 The McFadden-Pepper Act (1927), had effectively prohibited larger banks from opening branches across different states.
 But, from late 1990s, situation is changing.
 Regulation on branches particularly are being eased.

 Bank failures in late 1980s and early 1990s had provided the base for consolidation.
 Bank consolidation was further stimulated by the passage of Riegle-Neal Interstate
Banking and Branching Efficiency Act
(1994).
 This legislation effectively overturned the
McFadden Act which prohibited interstate banking.
 This Act had almost ensured interstate banking roughly in all 50 states.

 It is anticipated that after consolidation has run its course, there will be roughly
4000 commercial banks rather than present 8500
 Another important feature had been the separation of commercial banking from investment banking such as securities, insurance and real state business.
 Glass-Steagall Act (1933) had prohibited them from underwriting corporate securities or from engaging in brokerage activities.

 In turn, this Act had also prohibited investment banks and insurance companies from engaging in commercial banking activities
 In 1997, however, the Federal Reserve allowed holding companied to underwrite securities and stocks.
 Initially it was a restriction that the revenue from these activities should be no more than 10% of total revenue (raised to 25% later on).
 Restrictions on commercial bank securities and insurance activities put American banks at a comparative disadvantage relative to foreign banks.

 In 1999, US Congress had passed a bill, which effectively abolished the Glass-
Steagall Act.
 This legislation, which is called Gramm-
Leach-Bliley Financial Services
Modernisation Act, allowed securities firms and insurance companies to purchase banks and allowed banks to underwrite insurance and securities and engage in real estate activities.

 In 1960s eight US banks operated branches in foreign countries and their total assets were less than $4 billion.
 Currently there are more than 100 American banks working abroad with assets totalling over $500 billion.
 The growth in foreign banks can be explained by:
 Expansion of international trade.
 Expansion of efficiently selling investment banking services abroad.
 US banks had most of their branched in Latin
America, the Far East, the Caribbean and London.

 Due to trade expansion, foreign banks had been encouraged to do business in USA.
 These foreign banks had been very successful overall.
 These foreign banks are lending roughly the same amount of money to corporations as the
US banks.
 These foreign banks are operating by using the agency offices, subsidiary banks and branches.
 Before 1978, foreign banks were under fewer regulations with no reserve requirements.
 However, the 1978 International Banking Act put foreign and domestic banks on equal footing.


 Bank holding companies
 ‘Nonbank’ banks
 Automated Teller Machines (ATM)

 A holding company is a corporation that owns several different companies.
 The growth of holding companies over the time had been dramatic to avoid the branching restrictions, because the holding company can own a controlling interest in several banks even if branching is not permitted.
 These holding companies had been and can involve investment banking activities which were banned from commercial banking services.

 Another way banks used to avoid branching restrictions was due to loopholes in the Bank Holding Act of
1956, which defined a bank as a financial institution that accepts deposits and makes loans.
 Once bank holding companies had recognized this loophole, they open branches with one function only (means offering loan facility or taking deposits only).
 However, the Competitive Act passed in
1981 had effectively filled this loophole.

 The modern day facility of ‘ATM’ was originally invented to avoid branching restrictions in USA.
 Banks recognised that even if they don’t have ATM machines of their own, they could use rented machines to avoid branching restrictions.
 A number of these shared facilities such as Cirrus and NYCE have been established nationwide.
 States also had encouraged these ATM machines rather than “brick and mortar branches.”
 ATM machines gained in popularity with the advent of cheap computers.


 Savings and Loans
 Credit Unions

 Not surprisingly, the regulations and structure of the thrift industry closely parallel the regulations and restrictions of the commercial banking industry.
 Just as there is dual banking for commercial banks, savings and loan association can be charted by the Federal government or by the states
 The Savings Association Insurance Fund
(SAIF), a subsidiary of FDIC, provides
Federal Deposit Insurance (up to $100,000 per account) for S &LS

 The branching regulations for S&Ls were more liberal than for commercial banks:
 From 1980s federally charted S&Ls were allowed to branch state-wide in all states
 These S&Ls usually provides loans for mortgages on soft terms (low interest rates and longer repayment period).
 In late 1980s, these S&Ls started becoming involved in commercial banking activities.

 Credit unions are small cooperative lending institutions.
 They are the only financial institutions which are tax exempted and can be chartered either by the state or the federal government.
 The National Credit Union Share Insurance
Fund (NCUSIF) provides insurance for deposits.
 These unions are permitted to do branching in all states w/o any problems.