Overview of Banking
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 7769 in 2003. 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, Bankers Trust, 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
Regulation of Depository Institutions
 Goals and Functions of Bank Regulation
 Ensure the Safety and Soundness of Banks
 Provide an Efficient and Competitive Financial System
 Provide Monetary Stability
 Maintain the Integrity of the Payments System
 Protect Consumers from Abuses
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 Dual Banking System: Coexistence of nationally and state-chartered banks.
 Office of the Comptroller of the Currency (OCC)
 Charters national banks
 Office of Thrift Supervision (OTS)
 Charters federal savings banks and savings associations
 National Credit Union Administration
 Charters federal credit unions
 State Banking Authorities
 Charter state banks
 State Savings Authorities
 Charter state savings banks
 State Credit Union Authorities
 Charter state credit unions
 Federal Deposit Insurance
 Depositors are currently insured up to $100,000 per qualify account per insured bank
 FDIC maintains the deposit insurance fund at 1.25% of insured deposits.
 Currently, the fund is “well-funded” and over 90% of banks pay no insurance
premium
 National versus State Charter
 All banks obtain FDIC deposit insurance as part of the chartering process
 National banks must join the Fed
 Primary regulator is the OCC
 State banks may join the Fed
 State banks are regulated by their state banking authority.
 State banks also have a primary federal regulator
 The primary federal regulator of state banks that are members of the Fed is the
Federal Reserve
 The primary federal regulator of Non-Fed member state banks is the FDIC
 What is Regulated?
 Initial creation of depository institutions
 Initial licensing and chartering
 Location and number of physical branches, offices
 Initial board of directors and officers
 Minimum cash and capital requirements to open
 On-going operations
 Mergers and acquisitions
 Opening or closing of offices, branches
 Many operations procedures
 What financial services/products may be offered
 Assets
 Diversification of assets
 Quality of assets
 Liquidity of assets
 Level of cash reserves
 Liabilities & equity
Types of liabilities created
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Distribution of financing of assets
Quality of liability and equity accounts
Minimum capital requirements
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Others
 Community involvement
 Degree of market share in each market area
 Non-discriminatory operating policies
 Degree of risk created through the use of derivatives and other financial
instruments
 Regulatory Process
 Examinations
 Federal Financial Institutions Examination Council (FFIEC)
 Securities & Exchange Commission
 State Regulatory Departments
 Reports
 Multiple agencies
 Multiple areas
 CAMELS Rating: C apital adequacy; A sset Quality; M anagement Quality;
arnings – amount & stability; L iquidity; S ensitivity to market risk
 One versus Multiple Regulators
 Multiple regulators
 Provide more ability to detect problems
 Provide cross-checks
 Are inefficient and costly to maintain
 One regulator
 More efficient and lower cost
 Too much power concentrated in one place
Fundamental Forces of Change in Banking
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Deregulation
Financial Innovation
Securitization
Globalization
Advances in Technology
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