Structure & Management Banking in the U. S. Structure & Management ECO 473 Dr. D. Foster

Institutions . . . Commercial Banks Savings Institutions Credit Unions “Money Center” banks Regional (& Super-) banks Community Banks Savings Institutions Lost 50% of deposits 1989 - 2001 1980s - Congress relaxes lending rules Credit Unions 1934-strict member rules; relaxed since. no fed’l tax -  deposit rates &  loan rates

Commercial Bank Assets ($ Billions), June 2008 Dec. 2014 Commercial & industrial loans 1,507 13.5% Consumer loans 831 7.5% Real estate loans 3,645 32.7% Interbank loans 454 4.1% Other loans (net) 918 8.2% Total loans 7,355 66.1% U.S. government securities 1,113 10.0% Other securities 1,358 12.2% Total securities 2,471 22.2% Cash assets 300 2.7% Other assets 1,004 9.0% Total assets 11,130 100.0% 1,784 11.9% 1,198 8.0% 3,629 24.2% 86 0.6% 1,195 8.0% 7,892 52.6% 2,045 13.6% 884 5.9% 2,929* 19.5% 2,821 18.8% 1,363 9.1% 15,005 100.0% * $1,393 bill. is in mortgaged-backed securities (MBS)

Commercial Bank Liabilities and Equity Capital ($ Billions), June 2008 Dec. 2014 Transactions deposits 603 Small time and savings deposits 4,180 Large time deposits 2,126 Total deposits 6,909 Borrowings from banks 480 Other borrowings 1,829 Total borrowings 2,309 Trading liabilities --- Other liabilities 674 Net due to foreign offices -18 Equity capital 1,155 Total liabilities & equity 11,029 5.5% 37.9% 19.3% 62.6% 4.4% 16.6% 20.9% --- 6.1% -0.2% 10.5% 100.0% --- --- 8,736 58.2% 1,700 11.3% 10,436 69.5% 118 0.8% 1,663 11.1% 1,781 11.9% 226 1.5% 423 2.8% 505 3.4% 1,642 10.9% 15,013 100.0%

Misc. Data on Banks & Savings Institutions (FDIC) 1990 to 2010: Bank offices: 63,200 to 94,300 --main offices: 12,300 to 6,700 --branches: 51,000 to 88,000

Misc. Data on Credit Unions (FDIC) 2010: Fed’l CU: 4,600 State CU: 2,750 Tot. Assets: $914 billion

Equity as a Percentage of Bank Assets in the U. S. 1840–Present From a depositor’s point of view, were banks in the mid-1800s especially at risk to collapse?

Evolution of theories of bank management & risk. Real bills doctrine Shiftability theory Anticipated income Conversion of funds Gap management Duration gap management

Real bills doctrine – managing liquidity risk Shiftability theory Anticipated income Conversion of funds Gap management Duration gap management Make low-risk loans with high liquidity… Lend to finance shipment of goods: -- paid off quickly to known buyer. -- earns low return. Lend for production… -- “self-liquidating” loans; repaid as sold. -- relatively low risk.

Shiftability theory – managing credit risk Real bills doctrine Shiftability theory – managing credit risk Anticipated income Conversion of funds Gap management Duration gap management  Return with longer-term loans… -- adds to the default risk. -- offset with purchases of gov’t. securities. - “Secondary reserves” add liquidity. Popular until the Crash of 1929: -- falling prices means converting to cash involves a capital loss. -- exacerbated circumstances, as loans were going into default as well.

Does this also help a bank to avoid a bank run/panic? Real bills doctrine Shiftability theory Anticipated income - managing interest rate risk Conversion of funds Gap management Duration gap management Initiation of the “installment loan”… -- mitigates default risk through ongoing payments. -- gives the bank a highly predictable stream of income. -- has features that make it a “super- liquidating” loan. Does this also help a bank to avoid a bank run/panic?

Conversion of funds - managing interest rate risk Real bills doctrine Shiftability theory Anticipated income Conversion of funds - managing interest rate risk Gap management Duration gap management Match asset & liability maturities… -- long-term loans with CDs. -- short-term loans with deposits. Events that change interest rates will be neutralized.

Gap Management – managing profit Real bills doctrine Shiftability theory Anticipated income Conversion of funds Gap Management – managing profit Relate assets & liabilities by interest… -- manage the “gap” to bank’s advantage. -- if interest rates are expected to rise … make gap positive. -- if interest rates are expected to fall … make gap negative. Assets Liabilities Cash Reserves $50,000 Demand Deposits $300,000 US Treasuries $150,000 Credit Card loans $400,000 Savings Deposits $575,000 Short Term Consumer Loans $200,000 Long Term Business Loans $250,000 Certificates of Dep. $950,000 Mortgage Loans $825,000 Equity $50,000 $1,875,000

Duration gap management Real bills doctrine Shiftability theory Anticipated income Conversion of funds Gap Management – managing profit Duration gap management Measure ave. time for payments (in or out)… -- if positive and interest rates fall, bank profits rise. -- if positive and interest rates fall, bank profits fall. Assets Liabilities … Auto Loans (5 yr.) $400,000 3-5 yr. CDs $575,000 Portfolio average payoff = 36 months Portfolio average payout = 32 mo.

Structure & Management Banking in the U. S. Structure & Management ECO 473 Dr. D. Foster