2. 2-2
Overview of Depository Institutions
In this segment, we explore the depository
FIs:
Size, structure and composition
Balance sheets and recent trends
Regulation of depository institutions
Depository institutions performance
3. 2-3
Products of U.S. FIs
Comparing the products of FIs in 1950, to
products of FIs in 2007:
Much greater distinction between types of FIs in
terms of products in 1950 than in 2007
Blurring of product lines and services over time
Wider array of services offered by all FI types
(Refer to Tables 2-1A and 2-1B in the text)
4. 2-4
Specialness of Depository FIs
Products on both sides of the balance sheet
Loans
Business and Commercial
Deposits
5. 2-5
Other outputs of depository FIs
Other products and services 1950:
Payment services, Savings products, Fiduciary
services
By 2007, products and services further
expanded to include:
Underwriting of debt and equity, Insurance and
risk management products
6. 2-6
Size of Depository FIs
Consolidation has created some very large
FIs
Combined effects of disintermediation,
global competition, regulatory changes,
technological developments, competition
across different types of FIs
7. 2-7
Largest US Depository Institutions
Citigroup $1,746.2
Bank of America 1,451.6
J.P.Morgan Chase 1,338.0
Wachovia 559.9
Wells Fargo 483.4
HSBC North America 473.7
Taurus 430.4
Washington Mutual 348.9
U.S. Bancorp 216.9
Countrywide Financial 193.2
Total Assets ($Billions)
8. 2-8
Depository Institutions
Commercial Banks
Largest depository institutions are commercial banks.
Differences in operating characteristics and
profitability across size classes.
• Notable differences in ROE and ROA as well as the spread
Thrifts
S&Ls
Savings Banks
Credit Unions
Mix of very large banks with very small banks
9. 2-9
Functions & Structural Differences
Functions of depository institutions
Regulatory sources of differences across types
of depository institutions.
Structural changes generally resulted from
changes in regulatory policy.
Example: changes permitting interstate
branching
Reigle-Neal Act
10. 2-10
Commercial Banks, December 2006
Primary assets:
Real Estate Loans: $3,207.1 billion
C&I loans: $1,117.2 billion
Loans to individuals: $846.9 billion
Investment security portfolio: $1,632.9 billion
Of which, Treasury securities: $1,070.6 billion
Inference: Importance of Credit Risk
14. 2-14
Structure and Composition
Shrinking number of banks:
14,416 commercial banks in 1985
12,744 in 1989
7,450 in 2007
Mostly the result of Mergers and
Acquisitions
M&A prevented prior to 1980s, 1990s
Consolidation has reduced asset share of small
banks
15. 2-15
Structure & Composition
of Commercial Banks
Financial Services Modernization Act 1999
Allowed full authority to enter investment
banking (and insurance)
Limited powers to underwrite corporate
securities have existed only since 1987
16. 2-16
Composition of
Commercial Banking Sector
Community banks
Regional and Super-regional
Access to federal funds market to finance their
lending and investment activities
Money Center banks
Bank of New York, Deutsche Bank (Bankers
Trust), Citigroup, J.P. Morgan Chase, HSBC
Bank USA
declining in number
17. 2-17
Balance Sheet and Trends
Business loans have declined in importance
Offsetting increase in securities and
mortgages
Increased importance of funding via
commercial paper market
Securitization of mortgage loans
Temporary effects: credit crunch during
recessions of 1989-92 and 2001-02
18. 2-18
Some Terminology
Transaction accounts
Negotiable Order of Withdrawal (NOW)
accounts
Money Market Mutual Fund
Negotiable CDs: Fixed-maturity interest
bearing deposits with face values over
$100,000 that can be resold in the
secondary market.
19. 2-19
Off-balance Sheet Activities
Heightened importance of off-balance sheet
items
OBS assets
OBS liabilities
Large increase in derivatives positions is a
major issue
Standby letters of credit
Loan commitments
When-issued securities
20. 2-20
Trading and Other Risks
Allied Irish / Allfirst Bank
$750 million loss
National Australian Bank
$450 million loss
21. 2-21
Other Fee-generating Activities
Trust services
Correspondent banking
Check clearing
Foreign exchange trading
Hedging
Participation in large loan and security
issuances
Payment usually in terms of noninterest bearing
deposits
22. 2-22
Key Regulatory Agencies
FDIC
DIF
Role in preventing contagious runs or panics
OCC: Primary function is to charter national banks.
FRS: monetary policy, lender of last resort.
National banks are automatically members of the FRS.
State-chartered banks can elect to become members.
State bank regulators
Dual Banking System: Coexistence of nationally and state-
chartered banks.
24. 2-24
Web Resources
For more detailed information on the
regulators, visit:
http://www.fdic.gov
http://www.occ.treas.gov
http://federalreserve.gov
26. 2-26
Key Regulatory Legislation
1927 McFadden Act: Controls branching of
national banks.
1933 Glass-Steagall: separates securities
and banking activities, established FDIC,
prohibited interest on demand deposits.
1956 Bank Holding Company Act and
subsequent amendments specifies
permissible activities and regulation by FRS
of BHCs.
27. 2-27
Legislation (continued)...
1970 Amendments to the Bank Holding
Company Act: Extension to one-bank
holding companies
1978 International Banking Act: Regulated
foreign bank branches and agencies in USA
28. 2-28
Legislation (continued)
1980 DIDMCA and 1982 DIA (Garn-St.
Germain Depository Institutions Act)
Mainly deregulation acts.
Phased out Regulation Q.
Authorized NOW accounts nationwide
Increased deposit insurance from $40,000 to
$100,000
Reaffirmed limitations on bank powers to
underwrite and distribute insurance products.
29. 2-29
Legislation (continued)
1987 Competitive Equality in Banking Act
(CEBA)
Redefined bank to limit growth of nonbank
banks.
1989 FIRREA
Imposed restrictions on investment activities
Replaced FSLIC with FDIC-SAIF
Replaced FHLB with Office of Thrift
Supervision
Created Resolution Trust Corporation
30. 2-30
Legislation (continued)
1991 FDIC Improvement Act
Introduced Prompt Corrective Action
Risk-based deposit insurance premiums
Limited “too big to fail”
Extended federal regulation over foreign bank
branches and agencies
31. 2-31
Legislation (continued)
1994 Riegle-Neal Interstate Banking and
Branching Efficiency Act
Permits BHCs to acquire banks in other states.
Invalidates some restrictive state laws.
Permits BHCs to convert out-of-state subsidiary
banks to branches of single interstate bank.
Newly chartered branches permitted interstate if
allowed by state law.
32. 2-32
1999 Financial Services Modernization
Act
Financial Services Modernization Act
Allowed banks, insurance companies, and
securities firms to enter each others’ business
areas
Provided for state regulation of insurance
Streamlined regulation of BHCs
Prohibited FDIC assistance to affiliates and
subsidiaries of banks and savings institutions
Provided for national treatment of foreign banks
34. 2-34
Industry Performance
Economic expansion and falling interest
rates through 1990s
Brief downturn in early 2000 followed by
strong performance improvements
Record earnings $106.3 billion 2003
Only 2 failures in 2006 versus 206 in 1989
Performance remained strong through mid
2000s as interest rates rose
35. 2-35
Banking and Ethics
Bank of America and Fleet Boston Financial
2004
J.P. Morgan Chase and Citigroup 2003 role
in Enron
Riggs National Bank and money laundering
concerns 2003, 2004
Effects of entry into internet banking
services
36. 2-36
Savings Institutions
Comprised of:
Savings and Loans Associations
Savings Banks
Effects of changes in Federal Reserve’s policy
of interest rate targeting combined with
Regulation Q and disintermediation.
Effects of moral hazard and regulator
forbearance.
Qualified Thrift Lender (QTL) test.
38. 2-38
Primary Regulators
Office of Thrift Supervision (OTS).
Charters and examines all federal S&Ls.
FDIC-DIF Fund.
FDIC Oversaw and managed Savings
Association Insurance Fund (SAIF).
SAIF and BIF merged in January 2007 to form
DIF
Same regulatory structure applied to
commercial banks
39. 2-39
Web Resources
For more information on the regulation of
savings institutions, visit:
Treasury www.ots.treas.gov
FDIC www.fdic.gov
40. 2-40
Savings Banks
Mutual organizations
Primarily East Coast
Not exposed to the oil-based shocks of 1980s
Real estate price exposure
Demutualization
May be regulated at both state and federal
level
41. 2-41
Credit Unions
Nonprofit depository institutions owned by
member-depositors with a common bond.
Exempt from taxes and Community
Reinvestment Act (CRA).
Expansion of services offered in order to
compete with other FIs.
Claim of unfair advantage of CUs over small
commercial banks
2006: 66.4 percent of CUs federally
chartered and regulated by NCUA
42. 2-42
Web Resources
For information on credit unions visit:
American Bankers Association
www.aba.com
43. 2-43
Global Issues
Narrowing margins and flattening yield
curves
Mortgages dominating retail growth
Personal bankruptcies rising
Near crisis in Japanese Banking
China
Deterioration in early 2000s, NPLs at 50%
levels
Opening to foreign banks (WTO entry) slow
44. 2-44
Pertinent Websites
American Bankers Association www.aba.com
Federal Reserve www.federalreserve.gov
Credit Union National Association
www.cuna.org
FDIC www.fdic.gov
National Credit Union Administration
www.ncua.gov
Office of Comptroller of the Currency
www.occ.treas.gov
Office of Thrift Supervision www.ots.treas.gov