McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 Banking Structure and Organization in Europe and Asia 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. 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 3-3

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 3-4

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 3-5

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, Source: FDIC 3-6

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 Must Get Approval from Federal Reserve Board to Control a Bank (25% ) One-Bank Holding Companies vs. Multibank Holding Companies 3-7

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Organizational Structure of a BHC 3-8

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 Double Leveraging A Way Around Regulatory Restrictions 3-9

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 3-10

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 Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss 3-11

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 3-12

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 3-13

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 Economies of Scope Banking and Financial Firm Goals and Motivations Expense-Preference Behavior Agency Theory Corporate Governance 3-14

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 Great Britain – Dominated by a Half Dozen Banking Firms Italy- Privatized Banking in the 1990’s 3-15

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 3-16