1. Chapter 3 – Depository Institutions
BA 543 Financial Markets and Institutions

2. Chapter 3 – Depository Institutions
Types
Commercial Banks (Check-writing Institutions)
Savings and Loans (NOW accounts)
Savings Banks (NOW accounts)
Credit Units (Share Draft accounts)
Basic Business
Receive Deposits (Funds Borrowed from Customers) – Demand Deposits
Charge Fees for Services
Invest: Loans to Customers or Securities
Provide Conveniences (Checking or NOW Accounts)

3. Chapter 3 – Depository Institutions
Commercial Banks
Two major Types
Banking Act of 1863 established National Banks
Office of the Comptroller of Currency Regulation Authority
National Banks – Federal Charter and must be insured by Bank Insurance Fund or BIF (administered by FDIC)
State Banks – State Chartered each State Regulates
State Banks may elect to join Federal System and if they do must insure with BIF (about 15% elect to join)
Federal Reserve Act of Established Federal Reserve System
Today about 7,100 FDIC insured or supervised

4. Chapter 3 – Depository Institutions
Savings and Loan Association
Assets – Traditionally Mortgages and Mortgage Backed Securities
Liabilities (Funding) – Passbook Savings
Today NOW accounts
Regulation
Originally - Home Owners Loan Act of 1933
Now – Federal S&Ls by Office of Thrift Supervisor
S&L Crisis of the 1980s - Disintermediation

5. Chapter 3 – Depository Institutions
Savings Banks
Similar to S&Ls
Broader Assets and so they weathered the interest changes of the 80s
Credit Unions
Common Bond among members
Cooperative or Mutual – No Corporate Stock
Numbers bigger than commercial banks but total assets very small compared to commercial banks
Typically strong local player in banking

6. Chapter 3 – Depository Institutions
Bank Funding
Demand Deposits – Checking and Savings
Regional Banks rely primarily on demand deposits
Time Deposits – Certificates of Deposit
Borrowed Funds – Fed Window (Bank of last resort)
Selling of Securities
Short Term Notes, Bonds, Repos, etc.
Money Center Banks rely on this form of funding
Reserve Requirement – More Later

7. Chapter 3 – Depository Institutions
Income Generation
Individual Banking – charges for services
Fees for checking, mortgage origination, credit cards, trusts, etc.
Spread on consumer loans
Institutional Banking –charges for services
Commercial and Real Estate Financing, Leasing, Factoring Accounts Receivable, etc.
Global Banking
Bond Dealers, Currency Dealers, Banker’s Acceptance, Letters of Credit, etc.
Financial Products such as SWAPS

8. Chapter 3 – Depository Institutions
Asset/Liability Problem
Credit (Default) Risk
Loans are not fully backed by assets
Defaults on personal loans
Regulatory Risk
Rule changes adversely impact income of bank
Interest Rate Risk – Example
Borrow $1 million for 1 year at 5%
Buy $1 million Five year Zero Coupon Bond at 7%
Interest rates raise to 8% in year two
Liquidity Issues
Ways to pay off demand deposits

9. Chapter 3 – Depository Institutions
Capital Requirements
Very Low Equity Stake
Equity Stake is the “risk” position of owners
Tier One and Tier Two
Different types of Equity Holdings
Risk Weights of Assets
TABLE 3-3 Page 50
Arrived at on no particular scientific basis
Basle Committee on Banking Regulations and Supervisory Practices 1988 (G-10 Countries)

10. Chapter 3 – Depository Institutions
Regulations
McFadden Act 1927 – States Right to Set Rules for Banking – Unit Banking States, Branches Allowed or Not Allowed
Banking Act Glass-Steagall (Sections 16, 20, 21, and 32) Separate Investment Banking and Commercial Banking - WHY?
Garn-St. Germain Act 1982 – NOW Accounts
Interstate Banking and Branching Act – 1994
Gramm-Leach-Bliley Act 1999