Topic: 5
Structure of the U.S. Commercial
Banking industry and the
Deregulation
•There are approximately 7,000 commercial
banks in the United States.
•Compared to other nations the 10 largest
banks in the U.S. hold only 50% of the total
assets in the Industry.
Why are there so many commercial
banks in the U.S.?
•This reflects past regulations and laws which restricted
the ability of these financial institutions to open branches
•Examples of Policies that backed these regulations
(McFadden Act of 1927 and the Douglas Amendments)
Bank Holding Companies
•A holding company is a corporation that owns several
different companies.
•Many advantages to this form of corporate management.
•Can engage in other activities related to banking.
Current Example
TD Ameritrade acquires 3 failed banks.
These banks include:
1.) Riverside National Bank of Florida
2.) First Federal Bank of North Florida
3.) American First Bank
Source: http://historiccity.com/2010/staugustine/news/florida/td-bank-acquires-threearea-failed-banks-3018
Structure of the U.S. Commercial Banking
Industry and the Deregulation
Structure of the U.S. Commercial
Banking Industry and the Deregulation
 From 1985-1992 bank failures were at a rate of over
100 per year. During this period banks declined by
3,000, more than double the number of failures.
 In the period 1992-2007, when the banking
industry returned to health the number of
commercial banks declined a little over 3,800, less
then 5% of which were bank failures.
Structure of the U.S. Commercial
Banking Industry and the Deregulation
Causes of Number of Banks Decreasing
in the U.S.
•Bank Failures
•Subprime Financial Crisis
•Bank Consolidation
Structure of the U.S. Commercial Banking
Industry and the Deregulation
 Consolidation- The combining of separate companies,
functional areas, or product lines, into a single one.
 Bank Consolidation-Banks merging to create larger
entities or have been buying up other banks.
Structure of the U.S. Commercial
Banking Industry and the Deregulation
Reasons for Bank Consolidation
•Loophole mining by banks, which states have
recognized its best interest in having banks
have ownership across state lines
•Banks recognizing benefits in diversification
of making loans in many states rather than
just one
•Economics of scales have increased with
improving computer technology
Structure of the U.S. Commercial
Banking Industry and the Deregulation
•The Riegle-Neal Interstate Banking and
Breaching Effiency Act of 1994.
•Overturned the McFadden Act and Douglas
Amendment which prohibited interstate
banking
•Established the basis for a true nationwide
banking system
Example of Nationwide bank: the merging of
Bank of America and NationsBank
Structure of the U.S. Commercial Banking
Industry and the Deregulation
 Bank Consolidation have increased substantially .
 One analysis is that the industry will wind up with only
couple of hundred banks .
 Experts predict that consolidation surge will settle down.
 Merger between Chase Manhattan Bank and Chemical
Bank and between Bank of America and NationsBank
shows that shift in assets from small to large banks
Structure of the U.S. Commercial Banking
Industry and the Deregulation
 Supporters of nationwide banking believe it will
increase competition while critics believe it will drive
out small banks, reduce competition and decrease
lending to small companies.
 When New York State liberized in the 1962 the small
banks were still doing well.
 Economist believe that bank consolidation will bring
in numerous benefits.
 Reduction in lending to small businesses and
inclination to take high risks are still major issues.
Separation of Banking and Other
Financial Services
The Glass-Steagall Act
•Allowed commercial banks to sell new offerings of
government securities
•Prohibited banks to underwrite corporate securities or
engaging in brokerage activities
•Prevented banks from real estate and insurance activities
Breaking down of the Separation
Erosion of Glass-Steagall Act
•Federal Reserve used loophole in the act to allow bank
holding companies to underwrite prohibited securities
•Allowing banks to underwrite corporate debt securities
•Allowing banks to underwrite stocks
•Engaging in some real estate and insurance activities
Breaking down of the Separation
The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999
•The merging of Citicorp and Travelers Group in 1998
•Allowed insurance companies and security firms to
purchase banks
•Allow banks to underwrite insurance and securities as well
as engage in real estate activities
Returning to a Separation of Banking?
Events Happening Now:
•President Obama wanting Finance Reform
•Senators wanting to reinstate the Glass-Steagall
Source: http://washingtonindependent.com/83193/a-guide-to-the-tangledfinancial-reform-bill
•Senate proposing to break up big banks
Source: http://dealbook.blogs.nytimes.com/2010/04/26/q-a-sanders-looks-atfinancial-bill-from-the-left/