chapter 16
Mishkin & Eakins
Banking Industry:
Structure and Competition
Historical Development of the
Banking Industry
Outcome: Multiple Regulatory Agencies
1.
Federal Reserve
2.
FDIC
3.
Office of the Comptroller of the Currency
4.
State Banking Authorities
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TM 10- 2
Federal Regulation
• 1913 - Federal Reserve System created
• The economic collapse of the banking system
during the Great Depression ushered in additional
regulation.
– 1933 - Federal Deposit Insurance Corporation (FCIC)
formed
– 1933 - Glass-Steagall Act of 1933 separating out
commercial banking from investment banking
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TM 10- 3
Structure of the Commercial
Banking Industry
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Ten Largest U.S. Banks
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Branching Regulations
Branching Restrictions: McFadden Act (1927) and Douglas
Amendments (1956)
Very anti-competitive results
Response to Branching Restrictions
1. Bank Holding Companies (BHCs)
A. Allowed purchases of banks outside state
B. BHCs allowed wider scope of activities by Fed
C. BHCs dominant form of corporate structure for banks
2. Nonbank Banks
Not subject to branching regulations, but loophole closed in 1987
3. Automated Teller Machines
Not considered to be branch of bank, so networks allowed
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TM 10- 6
Bank Consolidation and Number
of Banks
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TM 10- 7
Bank Consolidation and
Nationwide Banking
Bank Consolidation: Why?
1. Branching restrictions weakened
2. Development of super-regional banks
Riegle-Neal Act of 1994
1. Overturns McFadden and Douglas - allows for
full interstate branching
2. Promoted further consolidation due primarily to
economics of scale (Examples: Bank of America
and Banc One)
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TM 10- 8
Future of Industry Structure in
the United States
• Fewer and larger commercial banks
• We will become more like other countries, but not
exactly similar due the effects of historical
realities
• Research work expects several thousand
institutions in the U.S. rather than the more typical
several hundred
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TM 10- 9
Bank Consolidation and
Nationwide Banking
Cons:
1. Fear of decline of small banks and small business lending
2. Fear of monopoly by public (no such fear by experts)
3. Rush to consolidation may increase risk taking
Pros:
1. Community banks have and will continue to survive
2. Increased competition for banks means consumers gain
the benefits of competition among suppliers
3. Increased diversification of bank loan portfolios will
lessen the likelihood of bank failures
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TM 10- 10
Separation of Banking and
Securities Industries
Erosion of 1933 Glass-Steagall Act provisions over time
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TM 10- 11
Gramm-Leach-Bliley Financial
Services Act of 1999
The Repeal of Glass-Steagall
1. Allows securities firms and insurance companies to purchase
banks
2. Banks allowed to underwrite insurance and engage in real
estate activities
3. OCC regulates bank subsidiaries engaged in securities
underwriting
4. Fed oversee bank holding companies under which all real
estate, insurance and large securities operations are housed
5. Banking institutions become larger and more complex
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TM 10- 12
A Brief Overview - The Thrift
Industry
Beyond commercial banking…
• Savings and Loans Associations
• Mutual Savings Banks
• Credit Unions
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TM 10- 13
Savings and Loans
Regulators
1. Office of Thrift Supervision
2. Federal Home Loan Bank System (FHLBS)
3. FDIC’s Saving Association Insurance Fund (SAIF)
4. State banking authorities
Structure
1. Fewer restrictions on branching
2. Strong vestiges of “single-purpose” origin
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S&Ls - Assets and Liabilities
• Primary Assets for S&Ls
–
–
–
–
–
Mortgages (60.1%)
US Govt and Federal Agency Securities (15.5%)
State and Local Bonds (6.2%)
Consumer credit (4.6%)
Loans to business are only 1.9%.
• Primary liabilities for S&Ls
– Small time and savings deposits (41.4%)
– Checkable deposits (16.4%)
– Borrowings from the Federal Home Loan banks and other banks
(14.2%)
– Large time deposits of over $100,000 (10.2%)
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TM 10- 15
Mutual Savings Banks
Regulators
1. FDIC
2. States
Structure
1. 400 or so and similar to S&Ls
2. Within state branching, regulations not restrictive, so there are
few small MSBs
3. Located primarily in the Northeast US
4. May insure deposits with the FED: S&Ls may not
5. Not as heavily invested in home mortgages as S&Ls
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TM 10- 16
Credit Unions
Regulators
1. National Credit Union Administration (NCUA)
2. States
Structure
1. Because must have “common bond” among
depositors
2. Tax exempt status linked to “common bond”
3. Mostly institutions are small with deposits < $10
million
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TM 10- 17
Credit Unions
Rapid growth over the last few decades…
U.S. Assets in 1980
$68,974 m
U.S. Assets in 1990
$221,759 m
U.S. Assets in 1996
$336,452 m
Worldwide in 1996
• 36,244 Credit Unions
• 89,658,210 Members
• $379.3 billion (U.S) in Assets
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TM 10- 18
Credit Unions
• Primary Assets for Credit Unions
–
–
–
–
Consumer Installment Loads (39.6%)
Home mortgage and equity loans (25.3%)
US Govt and Federal Agency Securities (18.9%)
Time and Savings Deposits (4.9%)
• Primary liabilities for Credit Unions
– Small time and savings deposits (82.1%)
– Checkable deposits (11.34%)
– Large time deposits of over $100,000 (4.8%).
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TM 10- 19
Separation – Other Countries
Separation in Other Countries
1. Universal banking: Germany
2. British-style universal banking
3. Japanese-style separation
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TM 10- 20
International Banking
• Spectacular growth over the last 40 years
1. Rapid growth of international trade and multinational
corporations
2. Banks abroad can pursue profitable activities that are
precluded by the regulatory environment in home
country
3. Tap into Eurodollar market
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TM 10- 21
International Banking
U.S. Banks Overseas
1. Regulators
A. Federal Reserve (Regulation K)
2. Structure
A. Edge Act Corporations
B. International Banking Facilities
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TM 10- 22
International Banking
Foreign Banks in U.S.
1. Regulators
Same as for U.S. domestic banks under the
International Banking Act of 1978
Foreign Bank Supervision Act of 1991
2. Structure
A. 500 offices in U.S.
B. 20% of total U.S. bank assets
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TM 10- 23
Ten Largest Banks in the World
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TM 10- 24
Financial Innovation and Decline
in Traditional Banking
Innovations Increasing Competition
1. Money market mutual funds
Avoids deposit rate ceilings and reserve requirements
2. Junk bonds
Result of better information in credit markets
3. Commercial paper market
Result of better information in credit markets and rise in
money market mutual funds
4. Securitization
Result of better information in credit markets and
computer technology
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TM 10- 25
The Decline in Banks as a Source
of Finance
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TM 10- 26
Bank
Profitability
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TM 10- 27
Share of
Noninterest
Income
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TM 10- 28
Disintermediation – the decline of
Traditional Banking
Loss of Cost Advantages in Acquiring Funds (Liabilities)
Disintermediation occurred due to
1. Deposit Rate Ceilings and Regulation Q
2. Money Market Mutual Funds
3. Foreign banks have cheaper source of funds: Japanese banks can
tap large savings pool
Loss of Income Advantages on Uses of Funds (Assets)
1. Easier to use securities markets to raise funds: commercial paper,
junk bonds, securitization
2. Finance companies more important because easier for them to raise
funds
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TM 10- 29
Bank Failures
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TM 10- 30
Banks’ Response
Loss of cost advantages in raising funds and income
advantages in making loans causes reduction in
profitability in traditional banking
1. Expand lending into riskier areas: e.g., real estate
2. Expand into off-balance sheet activities
3. Creates problems for U.S. regulatory system
Similar problems for banking industry in other countries
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TM 10- 31