1. 3-1
TABLE 3–2 Growth of Commercial Bank Branch Offices in the United States
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2. 3-2
The Array of Organizational Structures and Types in the Banking Industry (continued)
Electronic Branching – Websites and Electronic Networks: An Alternative or a Supplement to Traditional Bank Branch Offices?
Electronic branches
Internet banking services
Automated teller machines (ATMs)
Point-of-sale (POS) terminals
Personal computers
Call-center systems
Virtual banks
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3. 3-3
EXHIBIT 3–7 Electronic Banking Systems, Computer Networks, and Web Banking: An Effective Alternative to Full-Service Branches?
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4. 3-4
The Array of Organizational Structures and Types in the Banking Industry (continued)
Holding Company Organizations
A bank holding company is simply a corporation chartered for the purpose of holding the stock of at least one bank, often along with other businesses
The growth of holding companies has been rapid in recent decades
The principal reasons for this rapid upsurge:
Access to capital markets in raising funds
Ability to use higher leverage
Tax advantages
Ability to expand into businesses outside banking
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5. 3-5
TABLE 3–3 The 10 Largest Bank Holding Companies Operating in the United States (Total Assets as Reported on June 30, 2010)
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6. 3-6
The Array of Organizational Structures and Types in the Banking Industry (continued)
Most registered bank holding companies in the United States are one- bank companies
However, these one-bank companies frequently control one or more nonbank businesses as well
The principal advantage for holding companies entering nonbank lines of business is the prospect of diversifying sources of revenue and profits and reducing risk exposure
A minority of bank holding company organizations are multibank holding companies
Multibank companies control more than 70 percent of the total assets of all U.S. banking organizations
One dramatic effect of holding company expansion has been a sharp decline in the number of independently owned banking organizations
Banks acquired by holding companies are referred to as affiliated banks
Banks not owned by holding companies are known as independent banks
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7. 3-7
TABLE 3–4 The Most Important Nonbank Financially Related Businesses That Registered Holding Companies Can Acquire under U.S. Banking Regulations
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8. EXHIBIT 3–8 The Multibank Holding Company
3-8
EXHIBIT 3–8 The Multibank Holding Company
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9. 3-9
The Array of Organizational Structures and Types in the Banking Industry (continued)
Holding company banking has been blamed for reducing competition by critics
Supporters of the holding company movement claim greater efficiency, more services, lower probability of organizational failure, and higher and more stable profits
The holding company as a whole tends to be more profitable than banking organizations that do not form holding companies
Moreover, the failure rate for holding company banks appears to be below that of comparable-size independent banks
However, there is anecdotal evidence that multibank holding companies may drain scarce capital from some communities and weaken smaller towns and rural areas
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10. 3-10
Interstate Banking Organizations and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Riegle-Neal allows holding companies to acquire banks throughout the United States without needing any state’s permission to do so and to establish branch offices across state lines
Why did the federal government eventually enact and the states support interstate banking laws?
The need to bring in new capital to revive struggling local economies
The expansion of financial-service offerings by nonbank financial institutions that faced few restrictions on their ability to expand nationwide
A strong desire on the part of the largest financial firms to geographically diversify their operations and open up new marketing opportunities
The belief among regulators that larger financial firms may be more efficient and less prone to failure
Advances in the technology of financial-services delivery, permitting service to customers over broader geographic areas
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11. 3-11
An Alternative Type of Banking Organization Available as the 21st Century Opened: Financial Holding Companies (FHCs)
Under the terms of the Gramm-Leach-Bliley (GLB) Act, financial holding companies (FHCs) are defined as a special type of holding company that may offer the broadest range of financial services, including dealing in and underwriting securities and selling and underwriting insurance
With the FHCs, each affiliated financial firm has its own
Capital
Management
Profits or losses separate from the profits or losses of other affiliates of the FHC
Some protection against companywide losses
Led to consolidation and convergence within the industry
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12. EXHIBIT 3–9 The Financial Holding Company (FHC)
3-12
EXHIBIT 3–9 The Financial Holding Company (FHC)
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13. 3-13
TABLE 3–5 Leading Financial Holding Companies (FHCs) Registered with the Federal Reserve Board
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14. 3-14
Mergers and Acquisitions Reshaping the Structure and Organization of the Financial-Services Sector
The rise of branching, bank holding companies, and financial holding companies has been fueled by multiple factors
Another powerful factor spurring these organizational types forward is their ability to carry out mergers and acquisitions
Bigger companies have pursued smaller financial-service providers and purchased their assets in great numbers
Since 1980 more than 12,000 bank mergers have occurred in the United States
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15. 3-15
The Changing Organization and Structure of Banking’s Principal Competitors
Banking’s principal competitors – credit unions, savings associations, finance companies, insurance firms, security dealers, hedge funds, and other financial firms
All are affected by powerful forces such as rising operating costs and rapidly changing technology
A notable exception until very recently has been hedge funds
All financial firms are starting to look alike, especially in the menu of services offered
Convergence
Great structural and organizational changes have “spilled over” into one financial-service industry after another
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16. Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost?
3-16
Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost?
If not, then why have some financial institutions become some of the largest businesses on the planet?
Two possible sources of cost savings
Economies of scale
Economies of scope
For financial firms, there is evidence for at least moderate economies of scale in banking, though most studies find only weak evidence or none at all for economies of scope
Studies of selected nonbank financial firms often reach conclusions that roughly parallel the results for banking firms
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17. 3-17
EXHIBIT 3–10 The Most Efficient Sizes for Banks and Selected Other Financial Firms
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18. 3-18
Financial Firm Goals: Their Impact on Operating Cost, Efficiency, and Performance
Expense-Preference Behavior
When the management of a financial firm decides that benefits for managers (and not the stockholders or the public) should be the primary objective of the company
Opposite of cost control and efficiency
Agency Theory
Analyzes relationships between a firm’s owners (stockholders) and its managers, who legally are agents for the owners
Explores whether mechanisms exist in a given situation to compel managers to maximize the welfare of their firm’s owners
Lower agency costs and better company performance depend upon the effectiveness of corporate governance
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19. 3-19
Quick Quiz
What trends are affecting the way banks and their competitors are organized today?
What trend in branch banking has been prominent in the United States in recent years?
What is a bank holding company?
Are there any significant advantages or disadvantages for holding companies or the public if these companies acquire banks or nonbank business ventures?
Can you see any advantages to allowing interstate banking? What about potential disadvantages?
What relationship appears to exist between bank size, efficiency, and operating costs per unit of service produced and delivered?
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