Overview of Depository Institutions
Size, Structure and Composition of Depository FIs
 Definition of Commercial Bank
 Accept demand deposits and make commercial loans.
 Consolidation has created some very large depository FIs
 Depository institutions
 Commercial Banks
 Specialize in short-term business credit
 Largest depository institutions are commercial banks
 Shrinking number of banks: 14,416 commercial banks in 1985, 12,744 in
1989, 8,315 in 2000 and 6730 in 2014. Mostly the result of mergers and
acquisitions
 Commercial banks are also classified as
• Community banks
• Regional and Super-regional: Access to federal funds market to finance
their lending activities
• Money Center banks: Bank of New York, Citigroup, J.P. Morgan/Chase,
HSBC Bank USA
 Financial Services Modernization Act 1999: Allowed full authority to enter
investment banking (and insurance)
 Thrifts
 Savings & loan associations (S&Ls):
• Founded in mid-1800s
• Specialize in real estate loans
• Members pooled funds to loan to members to buy houses
• Originally all were mutual associations, the board elected by members;
now some are stock-issuing corporations
 Savings Banks:
• Founded in early 1800s
• Provided savings accounts for individuals
• Existed then and now only in New England
 Credit Unions
 Fields of membership requirements: employee groups, associations, religious
affiliations and residential areas
 Not- for-profit organization
 Offers lower average fees and more competitive rates than banks do
Understanding Commercial Bank’s Balance Sheets
 Balance Sheet
 Assets = Liabilities + Equity
 Bank assets

Cash and due from banks: vault cash, deposits held at the Fed and other
financial institutions, and cash items in the process of collection
1

Investment Securities: assets held to earn interest and help meet liquidity
needs

Loans: the major asset, generate the greatest amount of income, exhibit the
highest default risk and are relatively illiquid

Other assets: bank premises and equipment, interest receivable, prepaid
expenses, other real estate owned, and customers' liability to the bank
 Commercial banks primary assets:
2000
2009
Real Estate Loans:
$1,670.3 billion $3,799.3 billion
C&I loans:
$1,048.2 billion $1,210.7 billion
Loans to individuals:
$609.7 billion
$959.1 billion
Other loans:
$367.5 billion
Investment security portfolio:
$1,662.0 billion $3,335.2 billion
Of which, Treasury bonds:
$710.0 billion
$1,225.5 billion
 Bank liabilities and equity
 Assets = Liabilities + Equity
 Bank liabilities

Demand deposits: transactions accounts that pay no interest

Negotiable orders of withdrawal (NOWs) and automatic transfers from
savings (ATS) accounts: pay interest set by each bank without federal
restrictions

Money market deposit accounts (MMDAs): pay market rates, but a
customer is limited to no more than six checks or automatic transfers each
month

Savings and time deposits represent the bulk of interest-bearing liabilities at
banks:

Deposits held in foreign offices: balances issued by a bank subsidiary
located outside the U.S.

Rate-sensitive borrowings: Federal Funds purchased and Repos
 Core vs. volatile funds

Core deposits include: demand deposits, NOW accounts, MMDAs, and
small time deposits

Core deposits are stable deposits that are not highly interest rate-sensitive

Core deposits are more sensitive to the fees charged, services rendered, and
location of the bank

Volatile liabilities or net non-core liabilities include: large CDs (over
100,000), deposits in foreign offices, federal funds purchased, repurchase
agreements, and other borrowings with maturities less than one year

Large, or volatile, borrowings are liabilities that are highly rate-sensitive
 Commercial banks’ primary liabilities:
2000
2009
Deposits:
$4,176.6 billion
$8,178.2 billion
Borrowings:
$1,532.5 billion
$2,065.6 billion
Other liabilities:
$401.0 billion
$307.4 billion
2
 Stockholders equity

Subordinated notes and debentures: notes and bonds with maturities in
excess of one year

Ownership interest in the bank: common and preferred stock and retained
earnings
 The income statement
 Interest income (II): the sum of interest and fees earned on all of a bank's assets,
interest income includes interest from:

Loans

Deposits held at other institutions

Municipal and taxable securities, and

Investment and trading account securities
 Interest expense (IE) is the sum of interest paid on all interest-bearing liabilities
 Interest income less interest expense is net interest income (NII)
 Loan-loss provisions (PLL): represent management's estimate of potential lost
revenue from bad loans
 Noninterest income (OI)
 Noninterest expense (OE)

Personnel expense: salaries and fringe benefits paid to bank employees

Occupancy expense : rent and depreciation on equipment and premises, and

Other operating expenses: utilities and deposit insurance premiums
 Evaluating bank performance
 Return on equity (ROE)
 Return on assets (ROA)
 Trends of bank’ balance sheets
 Business loans have declined in importance
 Offsetting increase in securities and mortgages
 Increased importance of funding via commercial paper market
 Securitization of mortgage loans
3