1. Banking in the U. S. I. Structures II. Management
ECO 473 Dr. D. Foster

2. I. Banking Structure in the U. S.

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

4. Commercial Bank Assets ($ Billions), June 2008
Dec. 2014
Commercial & industrial loans 1, %
Consumer loans %
Real estate loans 3, %
Interbank loans %
Other loans (net) %
Total loans 7, %
U.S. government securities 1, %
Other securities 1, %
Total securities 2, %
Cash assets %
Other assets 1, %
Total assets 11, %
1, %
1, %
3, %
86 0.6%
1, %
7, %
2, % %
2,929* 19.5%
2, %
1, %
15, %
* $1,393 bill. is in mortgaged-backed securities (MBS)

5. 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% %
-0.2%
10.5%
100.0%
8, %
1, %
10, % %
1, %
1, %
% % %
1, %
15, %

6. Commercial Bank Asset Allocations
Dec. 2014
60%
20%

7. Commercial Bank Liabilities and Equity Capital
Dec. 2014
70%
19%
11%

8. 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: ,000 to 88,000

9. Misc. Data on Credit Unions (FDIC)
2010:
Fed’t CU: ,600
State CU: 2,750
Tot. Assets: $914 billion

10. The Top Twenty Banks* [based on assets] in the U. S.
*As of March, 2016

11. Sources of Commercial Bank Revenues
Commercial Bank Expenses

12. Equity as a Percentage of Bank Assets in the United States, 1840–Present

13. II. Banking Management in the U. S.

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

15. 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.

16. Real bills doctrine – managing liquidity risk
Shiftability theory
Anticipated income
Conversion of funds
Gap management
Duration gap management
Assets
Liabilities
Cash Reserves $5,000
Equity $50,000
Shipping Loans $35,000
[payable in days]
Production Loans $10,000
[payable in days]
$50,000

17. 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.

18. Shiftability theory – managing credit risk
Real bills doctrine
Shiftability theory – managing credit risk
Anticipated income
Conversion of funds
Gap management
Duration gap management
Assets
Liabilities
Cash Reserves $50,000
Demand Deposits $250,000
US Treasuries $200,000
Savings Deposits $500,000
Short Term Loans $200,000
Long Term Loans $325,000
Equity $25,000
$775,000
During a panic, depositors withdraw funds. Cash reserves are quickly depleted but US Treasuries can be liquidated to cover what is needed … up to a point. In the GD, failing loans encouraged withdrawals and flooding the market with UST depressed prices.

19. Anticipated income - managing interest rate risk
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.

20. Anticipated income - managing interest rate risk
Real bills doctrine
Shiftability theory
Anticipated income - managing interest rate risk
Conversion of funds
Gap management
Duration gap management
Assets
Liabilities
Cash Reserves $50,000
Demand Deposits $250,000
US Treasuries $200,000
Savings Deposits $500,000
Short Term Installment Loans $200,000
Long Term Installment Loans $325,000
Equity $25,000
$775,000
A panic will have less of an impact in that the loans now generate predictable income and defaulting loans are less likely to burden the bank.

21. 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.

22. 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
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
As interest rates rise and fall both sides of the balance sheet are approximately equally affected.

23. 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 ie is rising, then make gap positive. -- if ie is falling, then 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

24. 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 negative and interest rates rise, profits rise.
Assets
Liabilities …
Auto Loans (5 yr.) $400,000
3-5 yr. CDs $575,000
Portfolio average payoff = 36 months
Portfolio average payout = 32 mo.

25. Does Bank Size Matter?
Economies of scale -- Efficient structure theory. -- Cost savings seem minor; mgt. savings.
Concentration will . . .
-- raise costs?
-- lower costs?
Consolidation stats:
Community bank % of all banks: % (ICBA, 2015) Community bank % of total bank assets: 14% (FDIC, 2011)

26. Universal Banking
Banks own firms -- Better informed about financial condition. -- Conflict of interest?
Firms own banks -- Does the FED regulate the firm as well?
Banks do Whatever (economies of scope): -- Insurance. -- Real estate. -- Stock brokers.

27. Banking in the U. S. I. Structures II. Management
ECO 473 Dr. D. Foster