1. Chapter Three
The Organization and Structure of Banking and the Financial-Services Industry
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

2. 3-2
Key Topics
The Organization and Structure of Banks and the Banking Industry
The Array of Organizational Structures in Banking: Unit, Branch, Holding Company, and Electronic Services
Interstate Banking and the Riegle-Neal Act
The Financial Holding Company (FHC)
Mergers and Acquisitions
Banking Structure and Organization in Europe and Asia
The Changing Organization and Structure of Banking’s Principal Competitors
Economies of Scale and Scope and Expense Preference Behavior
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3. 3-3
Introduction
Chapter 1 explored many of the roles and services of the modern bank and competitors of banks
Over the years, bankers and the managers of competing financial institutions have evolved into different organizational forms
A financial institution’s role and size are not the only determinants of how it is organized or how well it performs
In this chapter, we will discuss the causes that have dramatically changed the structure, size, and types of organizations dominating the financial-services industry today
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4. The Organization and Structure of the Commercial Banking Industry
3-4
The Organization and Structure of the Commercial Banking Industry
Advancing Size and Concentration of Assets
Commercial banking is the dominant supplier of credit and payments services to businesses and households
Many banks in the United States are small by global standards
These smallest financial institutions, numerous as they are, held little more than one percent of total industry assets
In contrast, the American banking industry also contains some of the largest financial service organizations on the planet
Citigroup, JP Morgan Chase, and the Bank of America hold about 6 trillion dollars combined
Thus, banking continues to be increasingly concentrated not only in the smallest, but also in the very largest of all financial firms
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5. 3-5
EXHIBIT 3–1 The Structure of the U.S. Commercial Banking Industry, December 31, 2009
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

6. 3-6
EXHIBIT 3–1 The Structure of the U.S. Commercial Banking Industry, December 31, 2009
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

7. Internal Organization of the Banking Firm
3-7
Internal Organization of the Banking Firm
The great differences in size across the industry that have appeared in recent years have led to marked differences in the way banks and other service providers are organized internally and in the variety of financial services each institution sells in the markets it chooses to serve
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

8. 3-8
EXHIBIT 3–2 Small and Medium-Size U.S. Banks Lose Market Share to the Largest Banking Institutions
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9. Internal Organization of the Banking Firm (continued)
3-9
Internal Organization of the Banking Firm (continued)
Community Banks and Other Community-Oriented Financial Firms
Devoted principally to the markets for smaller, locally based deposits and loans and are often referred to as a retail bank
Financial firms of this type stand in sharp contrast to wholesale banks
Close contact between top management and management and staff of each division is common
Community banks are usually significantly impacted by changes in the health of the local economy and keeping up with new regulations
These institutions have been losing ground, both in numbers of institutions and in industry shares
Around 14,000 community banks in 1985 and about 6,000 in 2010
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

10. EXHIBIT 3–3 Organization Chart for a Smaller Community Bank
3-10
EXHIBIT 3–3 Organization Chart for a Smaller Community Bank
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

11. Internal Organization of the Banking Firm (continued)
3-11
Internal Organization of the Banking Firm (continued)
Larger Banks – Money Center, Wholesale and Retail
A large money center bank is usually located in a large city and has a focus towards wholesale or wholesale plus retail
Some of the largest banks have moved toward the profit- centered or performance approach
Each major department strives to maximize its contribution to profitability or to some other performance indicator
The largest money-center banks possess some important advantages over community oriented institutions
Better diversified – both geographically and by product line
Can better withstand the risks of a fluctuating economy
Able to raise huge amounts of financial capital at relatively low cost
Can attract top managerial talent
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

12. 3-12
EXHIBIT 3–4 Organization Chart for a Money Center or Wholesale Bank Serving Domestic and International Markets
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

13. Internal Organization of the Banking Firm (continued)
3-13
Internal Organization of the Banking Firm (continued)
Trends in Organization
The tendency in recent years has been for most financial institutions to become more complex organizations over time
When a financial firm begins to grow, it usually adds new services and new facilities
Another significant factor influencing financial organizations today is the changing makeup of the skills financial-service providers need to function effectively
Financial firms have needed growing numbers of people with computer skills
Call centers have grown in the industry to sell profitable services and respond to customer problems
Automated bookkeeping has reduced the time managers spend in routine operations
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

14. 3-14
The Array of Organizational Structures and Types in the Banking Industry
There are so many different types of financial institutions today that the distinctions between these different types of organizations often get very confusing
Insured banks
State chartered banks
National banks
Member banks
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

15. 3-15
EXHIBIT 3–5 U.S. Commercial Banks with Federal versus State Charters, Membership in the Federal Reserve System, and Deposit Insurance from the Federal Government (as of December 31, 2009)
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

16. 3-16
The Array of Organizational Structures and Types in the Banking Industry (continued)
Unit Banking Organizations
Unit banks, one of the oldest kinds, offer all of their services from one office
Some services (such as taking deposits, cashing checks, or paying bills) may be offered from limited-service facilities, such as drive-up windows and automated teller machines (ATMs)
These organizations are still common today
One reason for the large numbers of unit banks is the continuing formation of new banks
Many customers still seem to prefer smaller banks, which often seem to know their customers better than larger banks
Many new banks start out as unit organizations
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

17. TABLE 3–1 Entry and Exit in U.S. Banking
3-17
TABLE 3–1 Entry and Exit in U.S. Banking
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

18. 3-18
The Array of Organizational Structures and Types in the Banking Industry (continued)
Branching Organizations
As a unit financial firm grows larger in size it usually decides at some point to establish a branching organization
They offer the full range of services from several locations, including a head office and one or more full-service branch offices
Likely to offer limited services through a supporting network of drive-in windows, ATMs, computers networked with the bank’s computers, point-of-sale terminals in stores and shopping centers, the Internet, and other advanced communications systems
Senior management of a branching organization is usually located at the home office, though each full-service branch has its own management team with limited authority to make decisions
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

19. EXHIBIT 3–6 The Branch Banking Organization
3-19
EXHIBIT 3–6 The Branch Banking Organization
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.