Chapter 14 Commercial Banking Structure, Regulation, and Performance ©2000 South-Western College Publishing

2 Comptroller of the Currency The federal agency that charters national banks

3 Federal Deposit Insurance Corporation (FDIC) The federal agency that insures the deposits of banks and savings associations

4 Charter... Permission to engage in the business of commercial banking Banks must obtain a charter before opening

5 National Bank A bank that has received a charter from the Comptroller of the Currency

6 Dual Banking System The system whereby banks may have either a national or a state charter

7 FDIC Insured Banks as of June 30, 1998 Number Number Deposits of Banks of Offices (billions) Domestic Banks 8,983 68,977 $2, National Charter 2,546 36,171 1, Fed Member , Fed Non-member 5,449 22, Exhibit 14-1

8 Regulatory Responsibilities FDIC: Exhibit 14-2 Regulates state chartered insured non-Fed members and insured branches of foreign banks Regulates national banks which are not bank holding companies and federally chartered branches of foreign banks Regulates state chartered insured members of the Fed, all bank holding companies, and branches of foreign banking organizations operating in the U.S. and the parent bank Regulate state chartered, non-Fed members, non- FDIC insured banks The States: The Comptroller of the Currency: The Fed:

9 Bank Failures Since the Inception of the FDIC Number of Failures Figure Year

10 McFadden Act The 1927 act by Congress that outlawed interstate branching and made national banks conform to the intrastate branching laws of the state in which they are located

11 Interstate Banking and Branching Efficiency Act (BBEA) Signed into law in September 1994, an act by Congress that effectively allows unimpeded nationwide branching

12 Asset Size # % of Cum Total % of Cum Instit. total % Assets total % Instit. total % Assets total % < $25 Million 1,338 15% 15 % $ 21,812.4%.4% $25 - $49.99 M. 1, , $50 - $99.99 M. 2, , $100 - $ M. 2, , $300 - $ M , $500 - $ M , $1 - $2.99 Billion , $3 - $9.99 Billion , >$10 Billion ,324, Total 8, % 100% $5,269, %100% Exhibit 14.4 Size Distribution of FDIC Insured Banks 9/30/98

13 Bank Holding Company A corporation that owns several firms, at least one of which is a bank A one-bank holding company owns only one bank A multi-bank holding company owns more than one bank

14 The Declining Number of Banks Year Number of FDIC Insured Banks , , , , , , , , ,024 Exhibit 14.7

15 Asymmetric Information When a potential borrower knows more about the risks and returns of an investment project than the bank loan officer

16 Adverse selection problem... When the least desirable borrowers pursue a loan most diligently

17 Moral Hazard Problem When the borrower has an incentive to use the proceeds of a loan for a more risky venture after the loan is funded

18 Adjustable (Variable) Rate Loans When the interest rate on a loan is adjusted up or down as the cost of funds rises or falls

19 Asset-Liability Committee The committee that is responsible for shaping a bank’s basic borrowing and lending strategy

20 Movement in Bank Stock Prices Relative to Stock Prices in General Exhibit

21 Nonbanks Other intermediaries and nonfinancial companies that have taken an increasing share of intermediation

22 The Declining Share of Commercial Banks in Intermediation 100% 20% 60% 40% 80% Exhibit Commercial Banks Savings & Loans Life Insurance Companies All others 0