Chapter 16 commercial banking industry: structure and competition Chapter 17 Thrifts: savings and loans and credit unions Chapter 18 Banking Regulation

Chapter 16 commercial banking industry: structure and competition 路洋谊

commercial banking industry historical development structure of the U.S.’s Bank consolidation and nationwide banking Separation of the banking and securities industries Financial Innovation and the decline of traditional banking Outline ☞ ☞ ☞ ☞ ☞ ☺

Historical development of the banking system ♬ major controversy involving the industry in its early years was whether the federal government or the states should charter banks. ♬ multiple regulatory agencies ☜

Structure of the U.S. commercial banking industry More competitive? ♬ Size distribution and shares of ten largest U.S. banks ♬ Number of commercial banks :compare with other industries Is commercial banking more competitive than other industries?

Restrictions and Response: Branches: additional offices for the conduct of banking operations Restrictions on Branching Response to Branching Restrictions

Three kinds of financial innovations Bank Holding Companies Nonbank Bank Automated Teller Machines Restrictions on Branching

♫ Banking holding company : A corporation that owns several different companies. ♫ Nonbank banks: the bank holding company act of 1956 defined a bank as a financial institution that accepts deposits and makes loans. a nonbank bank is a limited-service banks that either took deposits but did not make commercial loans or did not take deposits but made commercial loans.

Automated teller machine (ATM): the bank did not own or rent the ATM but instead let it be owned by someone else and paid for each transaction with a fee, the ATM would probably not be considered a branch of the bank and thus would not be subject to branching regulations. ☜

Bank consolidation and nationwide banking Superregional banks: bank holding companies that have begun to rival the money center banks in size but whose headquarters are not based in one of the money center cities. Riegle-Neal interstate banking and branching efficiency act of 1994 What will the structure of the U.S. banking industry look like in the future? Are bank consolidation and nationwide banking good things? ☜

Separation of the banking and securities industries The case for allowing banks to enter the securities business The case against allowing banks to enter the securities business Repeal of the Glass-Steagall Act Future Prospects

The case for allowing banks to enter the securities business ♫ It is unfair: Brokerage firms have been able to pursue traditional banking activities with the development of money market mutual funds and cash management accounts. ♫ increased competition lower price

The case against allowing banks to enter the securities business Opponents: ♫ banks have an unfair advantage in competing against brokerage firms. ♫ commercial banks face a potential conflict of interest if they engage in underwriting of securities. Proponents: ♫ regulatory authorities’ greater power ♫ erection of “fire walls” can separate various bank operation and help prevent conflicts of interest. ☞ ☜

Financial innovation and the decline of traditional banking Money Market Mutual Funds Junk bonds Commercial paper market Securitization The decline of traditional banking ReasonsResponses

Reasons: ♫ decline in cost advantages in acquiring funds (liabilities) ♫ decline in income advantages on uses of funds (assets)

Responses: ♫ attempt to maintain their traditional lending activity by expanding into new and riskier areas of lending. ♫ pursue new off-balance-sheet that are more profitable. ☺

Chapter 17 Thrifts: savings and loans and credit unions 路洋谊

Thrifts: savings and loans and credit unions Mutual saving banksSavings and loan associationsCredit unions mortgage loans Other types of loans notOnly to members The northeasternall Insure deposits with the state or FDIC not Less concentrated in mortgages and have more flexibility in their investing practices Thrift crisis Economic forces Political forces History and organization Sources of funds Uses of funds Advantage and disadvantages Future of credit unions not Today and the future ☞ ☺

mutual savings banks: ♫ mutual savings banks: first established by philanthropists in Scotland and England to encourage saving by the poor. ♫ Advantage: (1)great safer; (2)Managers are more risk-averse than in the corporate form. ♫ Disadvantage: (1)the mutual form of ownership accentuates the principal- agent problem that exists in corporations. ☜ ☜

savings and loan associations: ♫ savings and loan associations: to accomplish the part of the American dream of home ownership. to aggregate depositor’s funds and use the money to make long-term mortgage loans. ♫ Character: (1)the single largest provider of mortgage loans in the country; (2)regulations differed from state to state; then in 1934 get support from congress; (3) successful and low-risk businesses;

Mutual ownership Common bond membership Nonprofit, Tax-exempt status Regulation And insurance Central Credit unions Credit Union size Trade associations organization ☜

Chapter 18 Banking Regulation 路洋谊

Outline ♫ asymmetric information and bank regulation ♫ the 1980s U.S. banking crisis ♫ federal deposit insurance corporation improvement act of 1991

Asymmetric information and bank regulation Seven types Government safety net Restrictions on bank asset holdings and capital requirements Bank supervision Disclosure requirements Consumer protection Restrictions on competition Separation of the banking and securities industries

Federal deposit insurance corporation improvement act of 1991 The 1980s U.S. banking crisis Limits on the scope of deposit insurance Prompt corrective action Risk-based insurance premiums Other FDICIA provisions The burst of financial innovation Highly leveraged transaction loans Existence of deposit insurance New financial instruments Brokered deposits The effect of DID and MCA of 1980

Other proposed changes in banking regulations Regulatory consolidation Market-value accounting for capital requirements