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FUNDAMENTAL FORCES OF CHANGE IN BANKING Chapter 1 Bank Management 5th edition. Timothy W. Koch and S. Scott MacDonald Bank Management, 5th edition. Timothy.

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Presentation on theme: "FUNDAMENTAL FORCES OF CHANGE IN BANKING Chapter 1 Bank Management 5th edition. Timothy W. Koch and S. Scott MacDonald Bank Management, 5th edition. Timothy."— Presentation transcript:

1 FUNDAMENTAL FORCES OF CHANGE IN BANKING Chapter 1 Bank Management 5th edition. Timothy W. Koch and S. Scott MacDonald Bank Management, 5th edition. Timothy W. Koch and S. Scott MacDonald Copyright © 2003 by South-Western, a division of Thomson Learning

2 What makes a bank ‘special?’ LAW ENVIRONMENT The implementation of THREE ACTS: The Glass-Steagall Act :commercial banking, investment banking, and insurance( 分业经营 ). The Bank Holding Act: determined activities closely related to banking and limited the scope of bank activities (业务限制). The McFadden Act :limited the geographic market of banking (intra- or inter-state) (分支机构设置). Result: ◆ a large number of smaller banks; ◆ limited in the scope of products and services offered; ◆ limited in the geographic areas covered by banks.

3 The banking industry :Consolidating and Diversifying The bank has been dramatically expanded the scope of activities that banks engage in and where products and services are offered. accepted demand deposits made commercial loans. offered by many financial services companies: including commercial banks, savings banks, credit unions, insurance companies, investment banks, finance companies, retailers, and pension funds. products and services are NOT LIMITED in geographic markets and financial company.

4 Competition for financial products and services offer largest banks. The United States currently has several banks that operate in different regions and products

5 Increased competition Competition also means geography no longer limits a financial institution’s trade area or the markets in which it competes (银行之间发生了力量的相 对变化,强的更强,弱的更弱). Deposit competition( 不仅减少了银行吸收存款的数量,而 且提高了银行吸收存款的成本 ) Loan competition (不仅减少了优质客户,而且降低了贷 款收益) Non-interest service competition (各种机构的混业经营, 使银行的传统业务受到了严重冲击)

6 Five fundamental forces have transformed the financial services market 1. Deregulation/re-regulation 2. Financial innovation 3. Securitization 4. Globalization 5. Advances in technology. The latter factors actually represent responses to deregulation and re-regulation.

7 The RESULTS from repeal of the Glass-Steagall Act via the Financial Services Modernization Act (Gramm- Leach-Bliley Act of 1999). The Gramm-Leach-Bliley Act effectively eliminates the majority of the remaining restrictions that have separated commercial banking, investment banking and insurance industries for over 50 years. The Glass-Steagall Act shaped the structure, products and business (这是关键,促进了混业经营) models of the banking industry for the later half of the 20th century.

8 The fundamental forces of change … increased competition Competition for deposits Competition for loans Competition for payment services Competition for other financial services

9 Competition for deposits High inflation abruptly ended the guaranteed spread between asset yields and liability costs in the late 1970s. (通货膨胀的 出现改变了稳定的利差,利率风险在银行中有显著的影响) In 1973 several investment banks created money market mutual funds (MMMFs). Without competing instruments, MMMFs increased from $10.4 billion in 1978 to almost $189 billion in 1981. Congress passed legislation enabling banks and thrifts to offer similar accounts including money market deposit accounts (MMDAs) and Super NOWs. 需要注意的是,金融创新的一个重要动机就是规避影响银行发展的相关 法规。所以本次金融危机众多学者认为是金融创新缺乏监管,从这 来看恰恰相反,金融创新本身就是要规避监管。

10 Competition for loans Loan yields fell relative to borrowing costs, as lending institutions competed for a decreasing pool of quality credits. High loan growth also raises bank capital requirements. Junk bonds, commercial paper, auto finance companies, credit unions, and insurance companies compete directly for the same good quality customers.

11 Competition for loans (continued) As bank funding costs rose, competition for loans put downward pressure on loan yields and interest spreads. Prime corporate borrowers have always had the option to issue commercial paper or long-term bonds rather than borrow from banks. Because the Glass-Steagall Act prevented commercial banks from underwriting commercial paper, banks lost corporate borrowers, who now bypassed them by issuing commercial paper at lower cost.

12 Competition for loans (continued) The competition for loans comes in many forms: Commercial paper Captive automobile finance companies Other finance companies The development of the junk bond market extended loan competition to medium-sized companies representing lower-quality borrowers. (从来不考虑的低质量客户也必须考 虑) The growth in junk bonds reduced the pool of good-quality loans and lowered risk-adjusted yield spreads over bank borrowing costs.

13 Today, different size banks generally pursue different strategies. Small- to medium-size banks continue to concentrate on loans but seek to strengthen the customer relationship by offering personal service. (零售业务快速发展) These same banks have generally rediscovered the consumer loan. The largest banks, in contrast, are looking to move assets off the balance sheet. Regulatory capital requirements and the new corporate debt substitutes often make the remaining loans too expensive and too risky.

14 Loan concentrations: Consumer and commercial credits Credit Risk Diversification 69% 67% 65% 64% 62% 60% 58% 57% 55% 57% 59% 60% 59% 31% 33% 35% 36% 38% 40% 42% 43% 45% 43% 41% 40% 41% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 1986198719881989199019911992199319941995199619971998199920002001 Commercial borrowers Consumer loans Percent of loans

15 Captive automobile finance companies The three largest U.S. automobile manufacturers as well as most foreign automobile manufactures are aggressively expanding in the financial services industry as part of their long-term strategic plans. 这种新的金融机构本身对商业银行产生了严重冲 击

16 Although cash remains the dominate form of payment, the average payment size of cash is the smallest ( 结算方式发生了变革) 2000 % Total 2000 % of Cashless Payments 2000 Growth: 1995- 200019952000 % Total 2000 Growth: 1995- 2000 Cash550,000 82.3%#N/A 2,200,000 0.3%4.00$ Cheques issued69,000 10.3%58.2%1.8%73,515,000 85,000,000 10.9%2.9%1,231.88$ Electronic Transactions: ACH6,900 1.0%5.8%14.6%12,231,500 20,300,000 2.6%10.7%2,942.03$ ATM13,200 2.0%11.1%6.4%656,600 800,000 0.1%4.0%60.61$ Credit Card20,000 3.0%16.9%6.0%879,000 1,400,000 0.2%9.8%70.00$ Debit Card9,275 1.4%7.8%42.1%59,100 400,000 0.1%46.6%43.13$ Total retail electronic49,375 7.4%41.7%10.7%13,826,200 22,900,000 2.9%10.6%463.80$ Chips58 0.0% 2.6%310,021,200 292,147,000 37.4%-1.2%5,037,017$ Fed Wire108 0.0%0.1%7.3%222,954,100 379,756,000 48.6%11.2%3,516,259$ Total wholesale electronic166 0.0%0.1%5.5%532,975,300 671,903,000 85.9%4.7%4,047,608$ Total Electronic49,541 7.4%41.8%10.7%546,801,500 694,803,000 88.8%4.9%14,025$ Volume of TransactionsValue of Transactions Average Transaction Size 2000

17 Competition for other bank services Banks and their affiliates offer many products and services in addition to deposits and loans. Trust services Brokerage Data processing Securities underwriting Real estate appraisal Credit life insurance Personal financial consulting

18 “Non-bank” activities of banks …the Gramm-Leach-Bliley Act. (混业经营的规范) Since the Glass-Steagall and Bank Holding Company acts, banks could not directly underwrite securities domestically. Today, a bank can enter this line of business by forming a financial holding company through provisions of the Gramm-Leach- Bliley Act. A financial holding company owns a bank or bank holding company as well as an investment subsidiary. The investment subsidiary of a financial holding company is not restricted in the amount or type of investment underwriting engaged in.

19 Investment banking already offer many banking services to prime commercial customers and high net worth individuals and sell a wide range of products not available through banks. can compete in any geographic market without the heavy regulation of the FRS, FDIC, and OCC.FRS FDICOCC earn extraordinarily high fees for certain types of transactions and can put their own capital at risk in selected investments.

20 Investment banking (functions) 1. underwriting public offerings of new securities 2. trading existing securities 3. advising and financing mergers and acquisitions

21 Deregulation and re-regulation Deregulation is the process of eliminating regulations, such as the elimination of Regulation Q (interest rate ceilings imposed on time and demand deposits offered by depository institutions.) Deregulation is often confused with reregulation, which is the process of implementing new restrictions or modifying existing controls on individuals and activities associated with banking.

22 Efforts at deregulation and re- regulation generally address: Pricing issues removing price controls on the maximum interest rates paid to depositors and the rate charged to borrowers (usury ceilings). Allowable geographic market penetration The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 has eliminate branching restrictions. New products and services Gramm-Leach-Bliley Act of 1999 has dramatically expanded the banks’ product choices; i.e., insurance, brokerage services, and securities underwriting.

23 Financial innovation Financial innovation is the catalyst behind the evolving financial services industry. Innovations take the form of new securities and financial markets, new products and services, new organizational forms, and new delivery systems. Regulation Q brought about financial innovation as depository institutions tried to slow disintermediation.

24 Financial innovation (continued) Banks developed new vehicles to compete with Treasury bills, money market mutual funds, and cash management accounts. Regulators: ally responded by imposing marginal reserve requirements against the new instrument, raising the interest rate ceiling, and then authorizing a new deposit instrument. Recent innovations : new futures, options, options-on-futures, and the development of markets for a wide range of securitized assets.

25 Response of banks One competitive response to asset quality problems and earnings pressure has been to substitute fee income for interest income by offering more fee-based services. Banks also lower their capital requirements and reduce credit risk by selling assets and servicing the payments between borrower and lender rather than holding the same assets to earn interest. This process of converting assets into marketable securities is called securitization.

26 Securitization Securitization is the process of converting assets into marketable securities. It enables banks to move assets off-balance sheet and increase fee income. It increases competition for standardized products such as: mortgages and other credit-scored loans Eventually lowers the prices paid by consumers by increasing the supply and liquidity of these products.

27 The objectives behind securitization include the following: Free capital for other uses Improve ROE via servicing income Diversify credit risk Obtain new sources of liquidity Reduce interest rate risk

28 Off-balance sheet activities, asset sales and Enron Enron engaged in questionable activities including not reporting losses from business activities that the firm inappropriately moved off-balance sheet. Enron was thus able to hide losses on the business activities and/or use its off-balance sheet activities to artificially inflate reported earnings. Many banks also enter into agreements that do not have a balance sheet reporting impact until a transaction is effected. An example might be a long-term loan commitment to a potential borrower. Until the customer actually borrows the funds, no loan is reported on the bank’s assets. Obviously, off-balance sheet positions generate noninterest income but also entail some risk as the bank must perform under the contracts.

29 Globalization The gradual evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. Financial markets and institutions are becoming increasingly global in scope. Firms must recognize that businesses in other countries as well as their own are competitors, and that international events affect domestic operations.

30 Increased consolidation The dominant trend regarding the structure of financial institutions is that of consolidation. With the asset quality problems of Texas banks in the 1980, regulators authorized acquisitions by out-of-state banks. By 1998, effectively all interstate branching restrictions had been eliminated this has lead to consolidation frenzy in which we have almost half as many banks as compared to the 1980’s

31 The later half of the 1990s saw not only a large number of bank mergers but also several of the largest bank consolidations: Citicorp merges with Travelers Chase Manhattan acquires Chemical Banking Chase Manhattan acquires J.P. Morgan Mellon Bank acquires Dreyfus NationsBank acquires BankAmerica Bank of New York acquires Irving Bank Corp Fleet Financial Group acquires BankBoston Bank One acquires First USA Southern National acquires BB&T Financial

32 The removal of restrictive branching laws as well as “merger mania” of the late 1990s has dramatically reduced the number of banks. The primary factor leading the reduction in the number of banks from a high of 14,364 in 1979 to about 8,000 at the beginning of 2002 can be attributed to the removal of branching restrictions provided by Riegle- Neal Interstate Banking and Branching Efficiency Act of 1994

33 Most of the legal and regulatory differences which have historically separated various types of depository institutions are gone. Banks now compete with: traditional depository institution local commercial bank, savings bank, or credit unions brokerage firms such as Charles Schwab or Merrill Lynch, nonbank firm such as GE Capital, State Farm Insurance, and AT&T. All of these firms compete for business, pay and charge market interest rates, and are generally not limited in the scope of products and services they offer or the geographic regions where they offer these products.

34 我国银行业的发展历程(改革开放以 来)引用 成思危 体系重建阶段( 1977—1986 年) 扩大发展阶段( 1987—1996 年) 深化改革阶段( 1997—2002 年) 改革攻坚阶段( 2003 年至今)

35 体系重建阶段( 1977—1986 年) 1978 年 3 月中国人民银行总行恢复了其独立的部级单位的地位,但 其所担负的商业银行与中央银行的双重职能并未改变。 1983 年 9 月 17 日,国务院发文明确规定中国人民银行专门行使中央银行的职能。 形成四大专业银行(主管农村金融业务的中国农业银行;主管外贸 信贷和外汇业务的中国银行 ;主管长期投资和贷款业务的中国人民 建设银行 ;负责接受国际金融机构贷款及其他资金转贷给国内企业 的中国投资银行 ;中国工商银行,接办中国人民银行原有的信贷和 储蓄等商业银行业务 )。 1985 年人民银行出台了专业银行业务可以适当交叉和 “ 银行可以选择 企业、企业可以选择银行 ” 的政策措施,鼓励四家专业银行之间开展 适度竞争 。

36 扩大发展阶段( 1987—1996 年) 1987 年中国人民银行提出要建立以中央银行为领导,各类银行为主 体、多种金融机构并存和分工协作的社会主义金融体系。 1994 年相继成立了专门办理政策性信贷业务的国家开发银行、中国 进出口银行及中国农业发展银行,行使政策性银行功能。 1995 年 5 月 10 日,《中华人民共和国商业银行法》公布,明确了商 业银行的性质、地位及与其他金融市场主体之间的关系。 其他类型的银行迅速发展。交通银行、中信实业银行、招商银 行、 深圳发展银行、烟台住房储蓄银行、蚌埠住房储蓄银行、福建兴业 银行、广东发展银行、中国光大银行、华夏银行、上海浦东发展银 行、海南发展银行、民生银行等 12 家股份制全国性银 行 。邮政储蓄 遍布全国 。在 16 个城市进行在城市信用社的基础上组建城市合作银 行的试点 。

37 深化改革阶段( 1997—2002 年) 中国政府不断推进商业银行的改革,加强对商业 银行的监管。 商业银行转变经营机制、健全管理制度、变更业 务范围、调整营业网点。

38 改革攻坚阶段( 2003 年至今) 改革的重点已经转移到制度(包括体制和机制) 的变革,向建立现代金融企业的方向迈进。 银监会于 2003 年 4 月 28 日正式挂牌成立,行使原 由中国人民银行行使的银行监督管理职权。 商业银行股份制改造,整体上市 改善公司治理和内部控制

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