1. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-1 McGraw-Hill/Irwin Chapter Eleven Commercial Banks: Industry Overview

2. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-2 McGraw-Hill/Irwin Definition of a Commercial Bank Represent the largest group of depository institutions Function similar savings institutions and credit unions Liabilities include nondeposit sources of funds Loans are broader in range Regulated separately from savings institutions and credit unions Represent the largest group of depository institutions Function similar savings institutions and credit unions Liabilities include nondeposit sources of funds Loans are broader in range Regulated separately from savings institutions and credit unions

3. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-3 McGraw-Hill/Irwin Differences in Balance Sheets Commercial Banks Nonfinancial Firms Assets Liabilities Loans Deposits Deposits Loans Other financial financial assets assets Other Other non- liabilities non- liabilities financial and financial and assets equity assets equity Commercial Banks Nonfinancial Firms Assets Liabilities Loans Deposits Deposits Loans Other financial financial assets assets Other Other non- liabilities non- liabilities financial and financial and assets equity assets equity

4. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-4 McGraw-Hill/Irwin Commercial Bank Balance Sheet Assets Total cash assets………………. $ 416.9 U.S. gov securities…………… $ 1047.4 Fed Funds/Repurchase………. 384.6 Other…………………………. 447.3 Investment securities………….. 1,879.3 Interbank loans………………. 193.6 Loans exc. Interbank………… 4,624.3 Comm. and Indust…………..$ 890.1 Real estate…………………… 2,544.9 Individual……………………. 806.3 All other……………………… 383.0 Less: Reserve for losses……… 78.1 Total loans……………………… $4,739.8 Other assets…………………….. 1,208.4 Total assets…………………….. $8,244.4 Assets Total cash assets………………. $ 416.9 U.S. gov securities…………… $ 1047.4 Fed Funds/Repurchase………. 384.6 Other…………………………. 447.3 Investment securities………….. 1,879.3 Interbank loans………………. 193.6 Loans exc. Interbank………… 4,624.3 Comm. and Indust…………..$ 890.1 Real estate…………………… 2,544.9 Individual……………………. 806.3 All other……………………… 383.0 Less: Reserve for losses……… 78.1 Total loans……………………… $4,739.8 Other assets…………………….. 1,208.4 Total assets…………………….. $8,244.4

5. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-5 McGraw-Hill/Irwin Commercial Bank Balance Sheet Liabilities and Equity Transaction accounts…………… $ 712.9 Nontransaction accounts………... 4,689.1 Total deposits…………………… $5,406.0 Borrowings……………………… 1,769.6 Other liabilities………………….. 247.4 Total liabilities………………….. $7,423.4 Equity…………………………… 821.4 Liabilities and Equity Transaction accounts…………… $ 712.9 Nontransaction accounts………... 4,689.1 Total deposits…………………… $5,406.0 Borrowings……………………… 1,769.6 Other liabilities………………….. 247.4 Total liabilities………………….. $7,423.4 Equity…………………………… 821.4

6. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-6 McGraw-Hill/Irwin Distribution of Assets

7. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-7 McGraw-Hill/Irwin Distribution of Liabilities and Equity

8. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-8 McGraw-Hill/Irwin Balance Sheet Items Assets Liabilities Equity Off-Balance-Sheet activities Trust services Correspondent banking Assets Liabilities Equity Off-Balance-Sheet activities Trust services Correspondent banking

9. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-9 McGraw-Hill/Irwin Economies of Scale and Scope Economies of scale Economies of scope Megamerger X efficiencies Economies of scale Economies of scope Megamerger X efficiencies

10. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-10 McGraw-Hill/Irwin Economies of Scope By offering more services to a given customer: –revenue can be enhanced –costs can be reduced Cost economies of scope –investments in one financial service (such as lending) may reduce costs to produce financial services in other areas (such as securities underwriting or brokerage) Revenue economies of scope By offering more services to a given customer: –revenue can be enhanced –costs can be reduced Cost economies of scope –investments in one financial service (such as lending) may reduce costs to produce financial services in other areas (such as securities underwriting or brokerage) Revenue economies of scope

11. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-11 McGraw-Hill/Irwin Bank Size and Concentration Community bank Regional or superregional bank Federal funds market Money center bank Community bank Regional or superregional bank Federal funds market Money center bank

12. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-12 McGraw-Hill/Irwin Bank Size and Concentration Retail banking –provide residential and consumer loans and accepting small deposits Wholesale banking –provide commercial and industrial loans funded with purchased funds Retail banking –provide residential and consumer loans and accepting small deposits Wholesale banking –provide commercial and industrial loans funded with purchased funds

13. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-13 McGraw-Hill/Irwin Bank Size and Activities Large banks have easier access to capital Large banks tend to use more purchased funds and have fewer core deposits Large banks lend to larger corporations which means that their interest rate spread is narrower –the difference between lending and deposit rates Large banks are more diversified and generate more noninterest income Large banks have easier access to capital Large banks tend to use more purchased funds and have fewer core deposits Large banks lend to larger corporations which means that their interest rate spread is narrower –the difference between lending and deposit rates Large banks are more diversified and generate more noninterest income

14. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-14 McGraw-Hill/Irwin Industry Performance Provision for loan losses Net charge-offs Net operating income Noncurrent loans Provision for loan losses Net charge-offs Net operating income Noncurrent loans

15. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-15 McGraw-Hill/Irwin Wholesale Banking Services Controlled disbursement accounts Account reconciliation Lockbox services Electronic lockbox Funds concentration Electronic funds transfer Check deposit services Controlled disbursement accounts Account reconciliation Lockbox services Electronic lockbox Funds concentration Electronic funds transfer Check deposit services

16. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-16 McGraw-Hill/Irwin Wholesale Banking Services Electronic initiation of letters of credit Treasury management software Electronic data interchange Facilitate business-to-business e-commerce Electronic billing Verifying identities Assist small business entry in e-commerce Electronic initiation of letters of credit Treasury management software Electronic data interchange Facilitate business-to-business e-commerce Electronic billing Verifying identities Assist small business entry in e-commerce

17. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-17 McGraw-Hill/Irwin Retail Banking Services Automated teller machines (ATMs) Point-of-sale debit (POS) cards Preauthorized debits/credits Paying bills via telephone On-line banking Smart cards (stored-value cards) Automated teller machines (ATMs) Point-of-sale debit (POS) cards Preauthorized debits/credits Paying bills via telephone On-line banking Smart cards (stored-value cards)

18. ©2007, The McGraw-Hill Companies, All Rights Reserved 11-18 McGraw-Hill/Irwin Regulators Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC) Federal Reserve System State Authorities Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC) Federal Reserve System State Authorities