Chapter 8 Commercial Banking Structure, Regulation, and Performance

2  Banking holding company and financial holding companies Banking holding company and financial holding companies  Ongoing changes in the structure of the banking industry Ongoing changes in the structure of the banking industry  The evolution of international banking The evolution of international banking  Banking management: managing risk and profits Banking management: managing risk and profits  Bank performance Bank performance

3 Bank Holding Companies  A bank holding company is a corporation that owns several firms, at least one of which is a bank 银行控股公司：一个拥有几个企业的公司，其 中至少一个是银行。  the remaining firms are engaged is activities that are closely related to banking  this corporate form allows banks to diversify into other product areas  prior to 1997, bank holding companies to circumvent （回避、绕道 ) restrictions on interstate branching

4 Financial Holding Companies  A financial holding company is an organization that engages in a broad array of financial-related activities 金融控股公司：该公司从事比银行控股公司范 围还要广泛的、与金融相关的经济活动，包 括证券承销与交易，保险代理和承销，商人 银行业务等；也可按照联储的要求从事其他 金融或非金融活动。  securities underwriting and dealing  insurance agency and underwriting activities  merchant banking activities （商人银行业务：直 接权益投资于一个新建或正在成长的公司）  any other activity that the Fed determines to be financial in nature or complementary to financial activity

5 Financial Holding Companies  Financial holding companies were first allowed under the Gramm-Leach-Bliley Act (GLBA) of 1999  this act also allows these holding companies to own up to 100% of commercial, nonfinancial businesses  must be for investment purposes only  cannot be involved in the day-to-day management  the investment must be for 10 years or less

6 Ongoing Changes – The Number of Banks  Between 1980 and 2003  over 1,465 banks failed  9,800 mergers occurred  4,700 new banks were started  The result is a net decline in the number of banks from 14,400 to about 7,800  the number of branches has risen

7 The Declining Number of Banks

8 Ongoing Changes – The Share of Banks Assets  There was an increase in the concentration of banking assets from 1980 to 2004  in 1980, the 100 largest banking organizations accounted of 1/2 of total banking assets  by early 2004, the largest 20 banking organizations accounted for over 1/2 of total banking assets

9 The Evolution of International Banking  An increase in international borrowing and lending by domestic banks began in the 1970s  led by the expansion in world trade that occurred shortly after the OPEC oil crisis  “petrodollars” flowed into the OPEC nations in payment for oil  the OPEC nations deposited the funds in U.S. and European banks  many banks also loaned funds to less- developed nations

10 The Evolution of International Banking  By the 1980s, many foreign banks were operating in the U.S.  Some banks operate agencies rather than set up branches  an agency of a foreign bank is a more restrictive form of operation in that the agency can raise funds only in the wholesale and money markets 外国银行机构：外国银行在美国设立的办事处， 只能在批发市场上和货币市场上借入资金，不 允许经营零售业务。

11 The Evolution of International Banking  Advances in electronics and telecommunications allow domestic and foreign banks to participate in worldwide transactions without leaving home  funds can now be easily transmitted  This increased competition has resulted in disappointing profits

12 Risk Management  Bank managers face many decisions  what kinds of loans are to be made  what the prime interest rate should be  what interest rate to offer on each type of deposit  Managers must consider the bank’s liquidity, safety, and earnings objectives along with the environment in which it operates

13 Risk Management  Bank managers face many different types of risk that must be quantified  credit (default) risk  interest rate risk  liquidity risk  exchange rate risk

14 Risk Management  Loan officers must also be aware that they are making decisions under conditions of asymmetric information( 信息不对称：相对于银 行贷款发放者来说，潜在的借款者更了解该投资 项目的风险收益）  a potential borrower knows more about the risks and returns of an investment project than the bank loan officer  those with the most to hide and those most willing to take risks are most likely to be less than forthright  the result is an adverse selection problem 逆向选择：当条件最差的借款者努力争取拿到贷款 时就可能产生逆向选择.

15 Risk Management  After the loan is made, it may be difficult to guarantee that the loan is used for the stated purpose and not for a more risky venture  this is called the moral hazard problem 道德风险：当贷款发放后，借款者具有将该贷款 的收益用于更高风险的动机。

16 Risk Management  Banks can use financial futures, options, and swaps to manage interest rate risk  Adjustable (variable) rate loans can also be used to hedge interest rate risk

17 Risk Management  A large proportion of bank liabilities are payable on demand  implies that liquidity must be managed  banks can hold Treasury bills or excess reserves  banks can also borrow from the Fed or in the federal funds market

18 Bank Performance  Banks are facing increasing competition from other FIs and have confronted a volatile economic and regulatory environment  Profitability was low in the 1980s but increased significantly in the 1990s  Banks will face more competition in the future from “nonbanks” that have taken an increasing share of intermediation

19 Commercial Banks’ Declining Share of Intermediation

20 Summary of Major Points  Banking is a heavily regulated industry  regulatory policy aims at promoting competition and efficiency, while preserving the safety and soundness of institutions  the Glass-Steagall Act of 1933 was enacted in response to the financial collapse in the Great Depression  established interest rate ceilings  separated investment and commercial banking  created the FDIC

21 Summary of Major Points  Banks in the U.S. are chartered by either the federal government or one of the 50 state governments  federally chartered banks are called national banks and must belong to the Fed and subscribe to FDIC deposit insurance  state-chartered banks can, if they choose, belong to the Fed or subscribe to FDIC insurance  nearly all banks subscribe to FDIC insurance

22 Summary of Major Points  The McFadden Act outlawed interstate branching by national banks  with regard to intrastate branching, the act required national banks to abide by the branching laws of the state in which they were located

23 Summary of Major Points  Restrictions were imposed on entry and branching as a result of fears that more competition in local banking markets might lead to more failures and that letting big city banks enter markets served by small community banks might result in concentration

24 Summary of Major Points  Under the holding company corporate umbrella, banks have been expanding the geographical areas they serve and the array of financial services they offer  the expansion by banks into areas traditional served by other more specialized FIs has been matched by other FIs and nonfinancial institutions expanding into areas traditionally served mainly by banks

25 Summary of Major Points  Banking has become international as U.S. banks have increased their participation in international lending and domestic banks have faced competition from foreign banks  electronic and telecommunication advances have helped to increase the competitiveness of international lending, thereby reducing the profit margin

26 Summary of Major Points  Bank managers supervise a bank’s balance sheet  in the process, they have to face and deal with default risk, interest rate risk, liquidity risk, and exchange rate risk  they must make decisions despite asymmetric information, adverse selection, and moral hazard

27 Summary of Major Points  Regulators periodically audit (examine) banks  conducting more of a management appraisal than a financial audit, the examiners pay particular attention to the quality of a bank’s assets and, thus, how the bank is managing risk

28 Summary of Major Points  In the early 1990s, the cost of liabilities fell faster than the earnings on bank assets, resulting in record profits  these record profits continued into the late 1990s  banks stocks stumbled in the early 2000s, but by early 2004 they were close to previous highs