3-1 TABLE 3–2 Growth of Commercial Bank Branch Offices in the United States Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-2 The Array of Organizational Structures and Types in the Banking Industry (continued) Electronic Branching – Websites and Electronic Networks: An Alternative or a Supplement to Traditional Bank Branch Offices? Electronic branches Internet banking services Automated teller machines (ATMs) Point-of-sale (POS) terminals Personal computers Call-center systems Virtual banks Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-3 EXHIBIT 3–7 Electronic Banking Systems, Computer Networks, and Web Banking: An Effective Alternative to Full-Service Branches? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-4 The Array of Organizational Structures and Types in the Banking Industry (continued) Holding Company Organizations A bank holding company is simply a corporation chartered for the purpose of holding the stock of at least one bank, often along with other businesses The growth of holding companies has been rapid in recent decades The principal reasons for this rapid upsurge: Access to capital markets in raising funds Ability to use higher leverage Tax advantages Ability to expand into businesses outside banking Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-5 TABLE 3–3 The 10 Largest Bank Holding Companies Operating in the United States (Total Assets as Reported on June 30, 2010) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-6 The Array of Organizational Structures and Types in the Banking Industry (continued) Most registered bank holding companies in the United States are one- bank companies However, these one-bank companies frequently control one or more nonbank businesses as well The principal advantage for holding companies entering nonbank lines of business is the prospect of diversifying sources of revenue and profits and reducing risk exposure A minority of bank holding company organizations are multibank holding companies Multibank companies control more than 70 percent of the total assets of all U.S. banking organizations One dramatic effect of holding company expansion has been a sharp decline in the number of independently owned banking organizations Banks acquired by holding companies are referred to as affiliated banks Banks not owned by holding companies are known as independent banks Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-7 TABLE 3–4 The Most Important Nonbank Financially Related Businesses That Registered Holding Companies Can Acquire under U.S. Banking Regulations Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

EXHIBIT 3–8 The Multibank Holding Company 3-8 EXHIBIT 3–8 The Multibank Holding Company Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-9 The Array of Organizational Structures and Types in the Banking Industry (continued) Holding company banking has been blamed for reducing competition by critics Supporters of the holding company movement claim greater efficiency, more services, lower probability of organizational failure, and higher and more stable profits The holding company as a whole tends to be more profitable than banking organizations that do not form holding companies Moreover, the failure rate for holding company banks appears to be below that of comparable-size independent banks However, there is anecdotal evidence that multibank holding companies may drain scarce capital from some communities and weaken smaller towns and rural areas Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-10 Interstate Banking Organizations and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Riegle-Neal allows holding companies to acquire banks throughout the United States without needing any state’s permission to do so and to establish branch offices across state lines Why did the federal government eventually enact and the states support interstate banking laws? The need to bring in new capital to revive struggling local economies The expansion of financial-service offerings by nonbank financial institutions that faced few restrictions on their ability to expand nationwide A strong desire on the part of the largest financial firms to geographically diversify their operations and open up new marketing opportunities The belief among regulators that larger financial firms may be more efficient and less prone to failure Advances in the technology of financial-services delivery, permitting service to customers over broader geographic areas Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-11 An Alternative Type of Banking Organization Available as the 21st Century Opened: Financial Holding Companies (FHCs) Under the terms of the Gramm-Leach-Bliley (GLB) Act, financial holding companies (FHCs) are defined as a special type of holding company that may offer the broadest range of financial services, including dealing in and underwriting securities and selling and underwriting insurance With the FHCs, each affiliated financial firm has its own Capital Management Profits or losses separate from the profits or losses of other affiliates of the FHC Some protection against companywide losses Led to consolidation and convergence within the industry Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

EXHIBIT 3–9 The Financial Holding Company (FHC) 3-12 EXHIBIT 3–9 The Financial Holding Company (FHC) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-13 TABLE 3–5 Leading Financial Holding Companies (FHCs) Registered with the Federal Reserve Board Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-14 Mergers and Acquisitions Reshaping the Structure and Organization of the Financial-Services Sector The rise of branching, bank holding companies, and financial holding companies has been fueled by multiple factors Another powerful factor spurring these organizational types forward is their ability to carry out mergers and acquisitions Bigger companies have pursued smaller financial-service providers and purchased their assets in great numbers Since 1980 more than 12,000 bank mergers have occurred in the United States Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-15 The Changing Organization and Structure of Banking’s Principal Competitors Banking’s principal competitors – credit unions, savings associations, finance companies, insurance firms, security dealers, hedge funds, and other financial firms All are affected by powerful forces such as rising operating costs and rapidly changing technology A notable exception until very recently has been hedge funds All financial firms are starting to look alike, especially in the menu of services offered Convergence Great structural and organizational changes have “spilled over” into one financial-service industry after another Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost? 3-16 Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost? If not, then why have some financial institutions become some of the largest businesses on the planet? Two possible sources of cost savings Economies of scale Economies of scope For financial firms, there is evidence for at least moderate economies of scale in banking, though most studies find only weak evidence or none at all for economies of scope Studies of selected nonbank financial firms often reach conclusions that roughly parallel the results for banking firms Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-17 EXHIBIT 3–10 The Most Efficient Sizes for Banks and Selected Other Financial Firms Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-18 Financial Firm Goals: Their Impact on Operating Cost, Efficiency, and Performance Expense-Preference Behavior When the management of a financial firm decides that benefits for managers (and not the stockholders or the public) should be the primary objective of the company Opposite of cost control and efficiency Agency Theory Analyzes relationships between a firm’s owners (stockholders) and its managers, who legally are agents for the owners Explores whether mechanisms exist in a given situation to compel managers to maximize the welfare of their firm’s owners Lower agency costs and better company performance depend upon the effectiveness of corporate governance Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3-19 Quick Quiz What trends are affecting the way banks and their competitors are organized today? What trend in branch banking has been prominent in the United States in recent years? What is a bank holding company? Are there any significant advantages or disadvantages for holding companies or the public if these companies acquire banks or nonbank business ventures? Can you see any advantages to allowing interstate banking? What about potential disadvantages? What relationship appears to exist between bank size, efficiency, and operating costs per unit of service produced and delivered? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.