Irwin/McGraw-Hill 1 Depository Institutions Chapter 1 Financial Institutions Management, 3/e By Anthony Saunders

Irwin/McGraw-Hill 2 Depository Institutions Commercial Banks »Largest depository institutions are commercial banks. »Differences in operating characteristics and profitability across size classes. Thrifts »S&Ls »Savings Banks »Credit Unions

Irwin/McGraw-Hill 3 Functions and Structural Differences Functions of depository institutions »Regulatory sources of differences across types of depository institutions. Structural changes generally resulted from changes in regulatory policy. »Example: changes permitting interstate branching.

Irwin/McGraw-Hill 4 Commercial Banks n Primary assets: Real Estate Loans ~$1,197 billion C&I loans ~$830 billion Loans to individuals ~$521 billion n Primary liabilities: Deposits ~$3,029 billion Borrowings ~$750 billion

Irwin/McGraw-Hill 5 Trends n U.S. Banking industry: Low concentration ratios and mostly smaller banks. Primary cause: Regulatory effect. Prominent recent trend is consolidation resulting from combined effects of deregulation, disintermediation, technological change & innovation. Merger activity results in excess supply of bank personnel. The emergence of many new (small) banks is noteworthy.

Irwin/McGraw-Hill 6 Other Trends n Number of banks continues to decline. n Increase in off-balance-sheet activities. n Increase in income derived from fees-for- service rather than spread income. n Increased competition between banks and across financial services sectors. n Increased competition from foreign FIs.

Irwin/McGraw-Hill 7 Some Terminology Transaction accounts Negotiable Order of Withdrawal (NOW) accounts Money Market Mutual Fund Negotiable CDs: Fixed-maturity interest bearing deposits with face values over $100,000 that can be resold in the secondary market.

Irwin/McGraw-Hill 8 More Terminology Federal Funds Market: An interbank market for short-term borrowing and lending of bank reserves. Money center bank: A bank that is heavily reliant on nondeposit or borrowed sources of funds. Dual Banking System: Coexistence of nationally and state-chartered banks.

Irwin/McGraw-Hill 9 Key Regulatory Agencies FDIC OCC: Primary function is to charter national banks. FRS: monetary policy, lender of last resort. »National banks are automatically members of the FRS. State-chartered banks can elect to become members.

Irwin/McGraw-Hill 10 Key Regulatory Legislation McFadden Act: Controls branching of national banks. Glass-Steagall: separates securities and banking activities. Regulation Q Bank Holding Company Act and subsequent amendments specifies permissible activities and regulation by FRS of BHCs.

Irwin/McGraw-Hill 11 Legislation (continued) DIDMCA and DIA (Garn-St. Germain Depository Institutions Act) »Mainly deregulation acts. »Phased out Regulation Q. Competitive Equality in Banking Act (CEBA) »Redefined bank to limit growth of nonbank banks. Community Reinvestment Act (CRA) »Meant to address discrimination in lending.

Irwin/McGraw-Hill 12 Legislation (continued) FIRREA »Imposed restrictions on investment activities »Replaced FSLIC with FDIC-SAIF »Replaced FHLB with Office of Thrift Supervision »Created Resolution Trust Corporation

Irwin/McGraw-Hill 13 Legislation (continued) n FDIC Improvement Act Introduced Prompt Corrective Action Risk-based deposit insurance premiums Limited “too big to fail”

Irwin/McGraw-Hill 14 Legislation (continued) Riegle-Neal Interstate Banking and Branching Efficiency Act »Permits BHCs to acquire banks in other states. »Invalidates some restrictive state laws. »Permits BHCs to convert out-of-state subsidiary banks to branches of single interstate bank. »Newly chartered branches permitted interstate if allowed by state law.

Irwin/McGraw-Hill 15 Savings Institutions Comprised of: »Savings and Loans Associations »Savings Banks Effects of changes in Federal Reserve’s policy of interest rate targeting combined with Regulation Q and disintermediation. Effects of regulator forbearance. Qualified Thrift Lender (QTL) test.

Irwin/McGraw-Hill 16 Primary Regulators n Office of Thrift Supervision (OTS). Charters and examines all federal S&Ls. n FDIC-SAIF Fund. Oversees and manages Savings Association Insurance Fund (SAIF).

Irwin/McGraw-Hill 17 Credit Unions Nonprofit depository institutions owned by member-depositors with a common bond. Exempt from taxes and Community Reinvestment Act (CRA). Expansion of services offered in order to compete with other FIs. Approximately 2/3 federally chartered and subject to NCUA regulation.