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History and Structure of the Banking Industry

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1 History and Structure of the Banking Industry
Chapter 10

2 Overview History of U.S. banking Commercial Bank Structure
Thrift Industry Structure and Regulation The Rise of International Banking The Decline of Traditional Banking

3 The History of the National Bank
Combination between central bank and ‘national bank’ 1st National Bank: Alexander Hamilton First charter allowed to lapse 2nd National Bank: Abuses of state banks War of 1812

4 The Battle of New Orleans

5 No Central Banking Period
: no central control! Farmers distrust, advocate state charters Jackson, proponent of ‘states rights’ (before civil war) State banknotes become popular currency Problems with state currency Lax regulations on bank capital Moral hazard and adverse selection Banknotes become worthless Fraud widespread

6 National Bank Act of 1863 Attempt to address state currency issue
Creation of Comptroller of Currency New federal chartered banking system Taxed state banknotes Civil War funding Dual Banking system States get around taxing by inventing checking accounts and demand deposits! Both state and federal banks survived, creating unique system

7 Increasing Regulation
Bank crashes and great depression Federal Reserve System Not the same as a 3rd National Bank Required national banks to become members Members must follow tighter set of regulations McFadden Act: 1927 Restricts interstate branching Required national banks to follow state rules

8 More regulation Bank investing in securities and the stock market blamed for so many bank failures and the great depression Glass-Steagall Act Creation of FDIC No interest on demand deposits Commercial banks: no underwriting or dealing securities Investment banks: no commercial bank activities Set ceilings on savings account interest

9 This is getting confusing…
Office of Comptroller Supervises 2000 national banks (50%) Federal Reserve and State Authorities 1000 state banks Holding companies FDIC and State Authorities 5000 state banks not in Fed

10 Erosion of Branching Restrictions
Early innovative strategies Bank holding companies Non-bank banks: just loans or ATM’s Regional compacts in 70s and 80s Rise of super-regional banks Riegle-Neal Act Overturns McFadden Act of 1927 Extended regional compacts nationwide Holding companies can consolidate

11 Big vs. Small Small banks opposed until…
Provision: Big banks must buy up small banks Big banks like less restriction on branching Economies of scale Economies of scope Diversification benefits (interest rate risk) Technology (web) Big banks support Result Banks drop from 14,000 to 8,000 Trend will continue

12 Erosion of Glass-Steagall
1987: Bank holding companies can underwrite securities Gramm-Leach-Bliley 1999 Banks can again underwrite securites, sell insurance, and deal in real estate Pushed by large holding companies and mergers Citigroup (Citicorp and Travers group) Holding companies become investment/commercial/insurance Bank of America J.P Morgan Chase Wachovia

13 New regulation States watch over insurance SEC watches over securities
Comptroller watches banks that underwrite Fed watches holding companies that do everything

14 For and against Against: Security and Insurance For: Banks
Depression argument Non-bank demand deposits no FDIC Sec. industry too risky For: Banks Wanted ‘fair play’ Competition will lower underwriting costs Changing industry

15 Decline of Traditional Banking
Took away banks traditional liabilities Money market mutual funds Regulation Q eliminated No interest on checkable deposits Ceiling on time deposits Took away traditional assets too Junk bonds Commercial Paper Securitization Finance companies

16 What can banks do? Be riskier Commercial real estate loans
With repeal of Glass-Steagall, start investment banking Commercial real estate loans Finance takeovers Off-balance sheet services Innovate Sweep accounts

17 Savings and Loans (S&L)
Savings accounts and mortgages 2,000 in U.S. (dropped since crisis in 80’s, chap. 11) 1932: Federal Home Loan Bank System (like the Fed Reserve System) Fewer branching restrictions S&L Insurance fund (FDIC, used to be something else before S&L crisis) Office of Thrift Supervision Regulates asset, capital requirements, info reporting Audits

18 Credit Unions Cooperative lending institutions
12,000 in U.S. Common bond (profession, religion) Tax-exempt and small 50% are chartered by Fed, rest by states Supervised by National Credit Union Association Deposit Insurance

19 International Banking
1969: 8 U.S. banks abroad ($4 billion) Now: 100 U.S. banks abroad ($1.5 trillion) Why? More trade (WTO) means more integration International Banking Act (1978) End of Glass-Steagall and McFadden restrt. More eurodollars Widely used currency Offshore low regulation

20 U.S. banks abroad Normal branches common now, less regulation
Edge Act corporation (1919) U.S. bank subsidiary overseas Can branch, as long as international business Own controlling interest in overseas banks International Banking Facilities - IBF’s (1981) Within the U.S. to deal with foreigners Not subject to RR or Interest restrictions, taxes Treated like foreign banks, but within U.S.

21 Foreign Banks in U.S. HSBC, UBS, Credit Suisse (since 1940!)
10% of total bank assets 16% of lenders to U.S. corporations U.S. subsidiaries and branch offices Full service Subject to U.S. regulations Agency office Can loan but not take deposits Not subject to U.S. regulations

22 International Central Banking
Universal Banking (Germany, Swiss) Complete fusion of banking and securities industries U.K, Canada, now U.S. Universal, but… more subsidiaries not much commercial equity holdings Banking and insurance combo less common Japan Like U.S. before repeal of Glass-Steagall Can buy stock, and commercial equity common No holding companies allowed

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