Banking in the U. S. ECO 473 Dr. D. Foster

Institutions... Commercial Banks  “Money Center” banks  Regional (& Super-) banks  Community Banks Savings Institutions  Lost 50% of deposits  1980s - Congress relaxes lending rules Credit Unions  1934-strict member rules; relaxed since.  no fed’l tax -  deposit rates &  loan rates

Commercial Bank Assets ($ Billions), June 2008 Commercial & industrial loans 1, % Consumer loans % Real estate loans 3, % Interbank loans % Other loans (net) % Total loans 7, % U.S. government securities 1, % Other securities 1, % Total securities 2, % Cash assets % Other assets 1, % Total assets 11, % Dec , % 1,1988.0% 3, % 860.6% 1,1958.0% 7, % 2, % % 2,929* 19.5% 2, % 1, % 15, % * $1,393 bill. is in mortgaged- backed securities (MBS)

Commercial Bank Liabilities and Equity Capital ($ Billions), June 2008 Transactions deposits 603 Small time and savings deposits 4,180 Large time deposits 2,126 Total deposits 6,909 Borrowings from banks 480 Other borrowings 1,829 Total borrowings 2,309 Trading liabilities --- Other liabilities 674 Net due to foreign offices-18 Equity capital 1,155 Total liabilities & equity 11, % 37.9% 19.3% 62.6% 4.4% 16.6% 20.9% % -0.2% 10.5% 100.0% Dec , % 1, % 10, % % 1, % 1, % % % % 1, % 15, %

Commercial Bank Asset Allocations Dec %20%20%

Commercial Bank Liabilities and Equity Capital Dec %19%11%

Misc. Data on Banks & Savings Institutions (FDIC)

Misc. Data on Credit Unions (FDIC)

The Top Fifteen Banks* [based on assets] in the United States (FRS) FRS *Bank Holding Companies As of September 30, 2014 Assets in thousands of dollars.

Sources of Commercial Bank Revenues Commercial Bank Expenses

Equity as a Percentage of Bank Assets in the United States, 1840–Present

Evolution of theories of bank management & risk. Real bills doctrineReal bills doctrine Shiftability theoryShiftability theory Anticipated incomeAnticipated income Conversion of fundsConversion of funds Gap managementGap management Duration gap managementDuration gap management

Real bills doctrine – managing liquidity riskReal bills doctrine – managing liquidity risk Shiftability theory Anticipated income Conversion of funds Gap management Duration gap management  Make low-risk loans with high liquidity…  Lend to finance shipment of goods:  Lend to finance shipment of goods: -- paid off quickly to known buyer. -- earns low return.  Lend for production…  Lend for production… -- “self-liquidating” loans; repaid as sold. -- relatively low risk.

Real bills doctrine Shiftability theory – managing credit riskShiftability theory – managing credit risk Anticipated income Conversion of funds Gap management Duration gap management   Return with longer-term loans…   Return with longer-term loans… -- adds to the default risk. -- offset with purchases of gov’t. securities. - “Secondary reserves” add liquidity.  Popular until the Crash of 1929:  Popular until the Crash of 1929: -- falling prices means converting to cash involves a capital loss. -- exacerbated circumstances, as loans were going into default as well.

Real bills doctrine Shiftability theory Anticipated income - managing interest rate riskAnticipated income - managing interest rate risk Conversion of funds Gap management Duration gap management  Initiation of the “installment loan”…  Initiation of the “installment loan”… -- mitigates default risk through ongoing payments. -- gives the bank a highly predictable stream of income. -- has features that make it a “super- liquidating” loan.

Real bills doctrine Shiftability theory Anticipated income Conversion of funds - managing interest rate riskConversion of funds - managing interest rate risk Gap management Duration gap management  Match asset & liability maturities…  Match asset & liability maturities… -- long-term loans with CDs. -- short-term loans with deposits.  Events that change interest rates will be neutralized.

Real bills doctrine Shiftability theory Anticipated income Conversion of funds Gap Management – managing profit Duration gap managementGap Management – managing profit Duration gap management  Relate assets & liabilities by interest…  Relate assets & liabilities by interest… -- manage the “gap” to bank’s advantage. -- if r e is rising, then make gap positive. -- if r e is falling, then make gap negative.  Measure ave. time for payments (in or out)…  Measure ave. time for payments (in or out)… -- if positive and interest rates fall, bank profits rise. -- if negative and interest rates rise, profits rise.

Does Bank Size Matter? Economies of scale -- Efficient structure theory. -- Cost savings seem minor; mgt. savings. Concentration will raise costs? -- lower costs? 92% 14% Consolidation stats (1990 vs. 2007): Community bank % of all banks: 92% Community bank % of total bank assets: 14%

Universal Banking Banks own firms -- Better informed about financial condition. -- Conflict of interest? Firms own banks -- Does the FED regulate the firm as well? Banks do... Whatever (economies of scope): -- Insurance. -- Real estate. -- Stock brokers.

Banking in the U. S. ECO 473 Dr. D. Foster