McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Three The Organization and Structure of Banking and the Financial-Services Industry

3-2 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Assets Held by U.S. FDIC-insured Commercial Banks, 2005

3-3 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Number of U.S. FDIC-insured Commercial Banks, 2005

3-4 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Community Banks ‘Typical’ Size is $250 Million Organizational Chart is Not Complicated Significantly Affected by Health of Local Economy Limited Opportunities for Advancement Generally Know their Customers Well

3-5 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Money Center or Wholesale Banks Generally Multi-Billion Dollar Company Organizational Chart is Much More Complex Serve Many Different Markets with Many Different Services Better Able to Withstand Risks of Fluctuating Economy Able to Raise Large Amounts of Capital at Relatively Low Costs

3-6 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Classifications of U.S. Banks, 2005

3-7 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Deposits Held By Banks in 2005

3-8 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Unit Banks Offer All Services From One Office One of the Oldest Kinds of Banks New Banks are Generally Unit Banks Advantages –Less costly to operate than more expensive full –service branches –Personalized services Disadvantages –Heavy dependence on single market area increasing risk of failure –May not be able to afford technology driven delivery services

3-9 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Branch Banks Offer Full Range of Services from Several Locations Senior Management at the Home Office Each Branch has its Own Management Team with Limited Decision Making Ability Some Functions are Highly Centralized, While Others are Decentralized

3-10 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Growth of Branching Exodus of Population to Suburban Communities Increased Bank Failures in Recent Years. (With branches spread over different areas branch banks produce more stable earnings and revenue flows) Business Growth Majority of states now allowing statewide branching – however branch location most important Growth has slowed in recent years due to rising costs of real estate and growth of ATMs and electronic banking.

3-11 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Electronic Branches Internet Banking Services Automated Teller Machines (ATMs) Point of Sale (POS) Terminals

3-12 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Virtual Banks Provides their services Exclusively Through the Web Can Generate Cost Savings Over Traditional Brick and Mortar Banks Have Not Yet Demonstrated They Can Be Consistently Profitable

3-13 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Bank Holding Companies (BHC) A Corporation Chartered for the Purpose of Holding the Stock of One or More Banks Control of a bank is Assumed When 25% or More of the Stock is Owned Must Get Approval from Federal Reserve Board to Control a Bank – by increasing ownership or acquiring new banks Allowed to own non bank businesses as long as they are related to banking

3-14 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nonbank Businesses of BHCs (must be related to financial services) Finance Companies Mortgage Companies Data Processing Companies Factoring Companies Security Brokerage Firms Financial Advising Credit Insurance Underwriters Merchant Banking Investment Banking Firms Trust Companies Credit Card Companies Leasing Companies Insurance Companies and Agencies Real Estate Services Savings Associations

3-15 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for the Growth of BHCs Geographic Diversification Product Line Diversification Tax Sheltering Double Leveraging Source of Strength A Way Around Regulatory Restrictions Note: On the other hand, non – bank businesses could stretch management skills and cause bank failures

3-16 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Full-Service Interstate Banking Need to Bring New Capital to Revive Struggling Local Economies The Expansion by Non Bank Financial Institutions with Fewer Restrictions A Strong Desire by Large Banks to Expand Geographically Belief Among Regulators that Large Banks are More Efficient and Less Prone to Failure Advances in Technology

3-17 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Allows BHCs to Acquire Banks Anywhere in the U.S. Allows BHCs to Convert Banks to Branches – June 1997 States Can ‘Opt Out’ and Not Allow BHCs to Convert to Branches Limits Deposits of One BHC to 10% Nationwide and 30% Within One State Allows banks to diversify into different geographic markets and meets the demand of the public to follow businesses as they move across the landscape

3-18 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Proponents and Opponents of Interstate Banking Proponents Efficient Use of Scarce Resources Lower Prices for Services Geographic Diversification Efficient Flow of Credit in the System Opponents Increased Bank Concentration Less Competition Higher Prices for Services Drain Resources from Community

3-19 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Holding Companies Special Type of Holding Company Offers the Broadest Range of Services List of Activities Offered May Expand as Regulators Decide What Services are ‘Compatible’ with Banking Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss