1. McFadden Act (1927) and Douglas Amendment (1956) limit interstate branching
Interstate Banking and Branching Efficiency Act (1994) deregulates branching
Gramm-Leach-Biley Financial Services Modernization Act (1999) abolishes
Glass-Steagall

2. Primary Supervisory Responsibility of Bank Regulatory Agencies
Comptroller of the Currency—national banks chartered by Federal government sine 1863
Federal Reserve and state banking authorities—state banks that are members of the Federal Reserve System
Fed also regulates bank holding companies
FDIC—insured state banks that are not Fed members
State banking authorities—state banks without FDIC insurance

3. Innovation: Response to Interest Rate Volatility
Adjustable-rate mortgages
Financial Derivatives
Innovation: Response to Information Technology
Bank credit and debit cards
Electronic banking
ATM/Home banking/ABM/Virtual banking
Junk bonds
Commercial paper market
Securitization
Innovation: Avoiding Regulation/Loophole Mining
Sweep accounts … reserve requirements
Money Market Mutual Funds … Regulation Q

4. Decline of Traditional Banking
Decline in cost advantages in acquiring funds (liabilities)
Rising inflation  rise in interest rates and disintermediation
Low-cost source of funds, checkable deposits, declined in importance
Decline in income advantages on uses of funds (assets)
Information technology  less need for banks to finance short-term credit
and issue loans
Information technology  lower transaction costs for other financial institutions
Bank Responses:
Riskier Lending … Commercial real estate, leveraged buyouts, takeovers
Off balance sheet activities

6. Ten Largest Banks in the World, 2007 $ Revenues
ING Group, Netherlands BNP Paribas, France
Fortis, Belgium/Netherlands Credit Agricole, France
Citigroup, US Deutsche Bank, Germany
Dexia Group, Belgium Bank of America, US
HSBC Holdings, UK UBS, Switzerland

7. Bank Consolidation Interstate Banking Skirting branch restrictions
and Branching
Efficiency Act, 1994
Skirting branch restrictions
ATMs, Bank Holding Cos.
 Geographic deregulation
Findings:
Net interest margin up
ROA, ROE up for big
banks
Intrastate deregulation
more positive for all but
big banks
Interstate deregulation
helps big banks most
Non-performing loans
down for biggest banks
but up for smaller banks
State of economy has
stronger impact on bank
performance than
branching deregulation
Benefits of bank consolidation
Increased competition  close inefficient banks
Efficiencies from economies of scale and scope
Lower chance of failure -- diversified portfolios
Costs
Fewer community banks  less lending to small business
Banks in new areas  increased risks/failures