Chapter Three The Organization and Structure of Banking and the Financial- Services Industry Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Topics The Organization and Structure of the Commercial Banking Industry The Array of Organizational Structures in Banking Interstate Banking and the Riegle-Neal Act The Financial Holding Company Mergers and Acquisition Banking Structure and Organization in Europe and Asia The Changing Organization and Structure of Banking’s Principal Competitors Economies of Scale and Scope 3-2

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Assets Held by U.S. FDIC-Insured Commercial Banks,

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Number of U.S. FDIC-insured Commercial Banks,

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Community Banks or Retail Banks ‘Typical’ Size is $300 Million Organizational Chart is Not Complicated Significantly Affected by Health of Local Economy Generally Know their Customers Well – Relationship Lending 3-5

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Money Center or Wholesale Banks Generally Multi-Billion Dollar Company Organizational Chart is Much More Complex Serve Many Different Markets with Many Different Services so are Better Diversified Geographically and by Product Able to Raise Large Amounts of Capital at Relatively Low Costs 3-6

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Quick Quiz What are the general trends in the size distribution and asset concentration of American banking industry? Describe differences between a typical organizational structure of smaller community bank and a larger money-center bank. What trends are affecting the way banks and their competitors are organized today? 3-7

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Classifications of U.S. Banks Source: FRB and FDIC,

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Deposits Held By Banks Source: FRB and FDIC,

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Unit Banks Offer All Services From One Office One of the Oldest Kinds of Banks New Banks are Generally Unit Banks Until Can Grow and Attract More Resources 3-10

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Branch Banks Offer Full Range of Services from Several Locations Senior Management at the Home Office Each Branch has its Own Management Team with Limited Decision Making Ability Some Functions are Highly Centralized, While Others are Decentralized 3-11

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Growth of Branching Exodus of Population to Suburban Communities Increased Bank Failures in Recent Years Business Growth 3-12

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. What Trend in Branch Banking Has Been Prominent in the U.S. in Recent Years? Year# of Bank Main Offices # of Branch Offices Total of U.S. Bank Offices Ave # of Branches/ U.S. Bank ,1462,98517, ,51121,81035, ,45139,78454, ,24177,94785, From Table 3-2; Source: FDIC 3-13

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Electronic Branches Internet Banking Services Automated Teller Machines (ATMs) Point of Sale (POS) Terminals 3-14

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Virtual Banks Provide their Services Exclusively Through the Web Can Generate Cost Savings Over Traditional Brick-and-Mortar Banks Have Not Yet Demonstrated They Can Be Consistently Profitable 3-15

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Bank Holding Companies (BHC) A Corporation Chartered for the Purpose of Holding the Stock of One or More Banks Control of a bank is Assumed When 25% or More of the Stock is Owned Must Get Approval from Federal Reserve Board to Control a Bank One-Bank Holding Companies vs. Multibank Holding Companies 3-16

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Organizational Structure of a BHC 3-17

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nonbank Businesses of BHCs Finance Companies Mortgage Companies Data Processing Companies Factoring Companies Security Brokerage Firms Financial Advising Credit Insurance Underwriters Merchant Banking Investment Banking Firms Trust Companies Credit Card Companies Leasing Companies Insurance Companies and Agencies Real Estate Services Savings Associations 3-18

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for the Growth of BHCs Geographic Diversification Product Line Diversification Tax Sheltering Double Leveraging Source of Strength A Way Around Regulatory Restrictions 3-19

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Full-Service Interstate Banking Need to Bring New Capital to Revive Struggling Local Economies The Expansion by Non Bank Financial Institutions with Fewer Restrictions A Strong Desire by Large Banks to Expand Geographically Belief Among Regulators that Large Banks are More Efficient and Less Prone to Failure Advances in Technology 3-20

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Allows BHCs to Acquire Banks Anywhere in the U.S. Allows BHCs to Convert Banks to Branches – June 1997 States Can ‘Opt Out’ and Not Allow BHCs to Convert to Branches States Can ‘Opt In’ Early Limits Deposits of One BHC to 10% Nationwide and 30% Within One State 3-21

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Proponents and Opponents of Interstate Banking Proponents Efficient Use of Scarce Resources Lower Prices for Services Geographic Diversification Efficient Flow of Credit in the System Opponents Increased Bank Concentration Less Competition Higher Prices for Services Drain Resources from Community 3-22

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Holding Companies: GLB Act of 1999 Special Type of Holding Company Offers the Broadest Range of Services List of Activities Offered May Expand as Regulators Decide What Services are ‘Compatible’ with Banking Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss 3-23

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Bank Holding Company Securities Subsidiaries Insurance Subsidiary Thrift Holding Company Real Estate Subsidiary Financial Holding Company Subsidiaries and Service Companies Thrift Company Nonbank Subsidiaries Commercial Banking Company Sample Organizational Structure of FHC 3-24

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Bank Subsidiaries Bank Controls One or More Subsidiaries Subsidiaries Offer Other Services Such as Insurance and Security Brokerage Services Profits and Losses of Each Subsidiary Impact Parent Bank 3-25

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. The Changing Organization and Structure Rise in Branching, BHCs, and FHCs Consolidation among Banks and Nonbanks Convergence Other forces of change: ▫ Deregulation/Reregulation ▫ Financial Innovation ▫ Securitization ▫ Globalization ▫ Advances in Technology 3-26

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Do Bigger Firms Operate at Lower Cost? Economies of Scale Exhibit 3-10 Economies of Scope Banking and Financial Firm Goals and Motivations Expense-Preference Behavior Agency Theory Corporate Governance 3-27

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Structure and Organization of Banks in Europe Germany – Largest European Banking Industry ▫ Private Sector Banks ▫ Public Sector Banks France – Second in Number of Banks Belgium – Dominated by Five Large Banks Great Britain – Dominated by a Half Dozen Banking Firms Switzerland – Credit Suisse and UBS and Many Smaller Firms Italy Privatized Banking in the 1990’s 3-28

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Structure and Organization of Banks in Asia China – Large Dominating Government Sector, Although Private Banks are Expanding Japan – Dominated by the Big Four Financial Group with More than One Hundred Smaller Domestic Banks and Seventy Foreign Banks 3-29

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Quick Quiz Which type of corporations chartered for the simple purpose of holding the stock of at least one bank? What were the reasons for the Riegle Neal Act of1994? When the banking industry moves toward larger but fewer organizations, what is it known as? What relationship appears to exist between bank size, efficiency, and operating costs per unit of service produced and delivered? 3-30