1. Structure & Management
Banking in the U. S.
Structure & Management
ECO 473 Dr. D. Foster

2. Institutions . . . Commercial Banks Savings Institutions Credit Unions
“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

3. Commercial Bank Assets ($ Billions), June 2008
Dec. 2014
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, %
1, %
1, %
3, %
86 0.6%
1, %
7, %
2, % %
2,929* 19.5%
2, %
1, %
15, %
* $1,393 bill. is in mortgaged-backed securities (MBS)

4. Commercial Bank Liabilities and Equity Capital ($ Billions), June 2008
Dec. 2014
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 11,029
5.5%
37.9%
19.3%
62.6%
4.4%
16.6%
20.9% %
-0.2%
10.5%
100.0%
8, %
1, %
10, % %
1, %
1, %
% % %
1, %
15, %

5. Misc. Data on Banks & Savings Institutions (FDIC)
1990 to 2010:
Bank offices: 63,200 to 94,300
--main offices: 12,300 to 6,700
--branches: ,000 to 88,000

6. Misc. Data on Credit Unions (FDIC)
2010:
Fed’t CU: ,600
State CU: 2,750
Tot. Assets: $914 billion

7. Equity as a Percentage of Bank Assets in the U. S. 1840–Present
From a depositor’s point of view, were banks in the mid-1800s especially at risk to collapse?

8. Evolution of theories of bank management & risk.
Real bills doctrine
Shiftability theory
Anticipated income
Conversion of funds
Gap management
Duration gap management

9. Real 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: -- paid off quickly to known buyer. -- earns low return.
Lend for production… -- “self-liquidating” loans; repaid as sold. -- relatively low risk.

10. Shiftability theory – managing credit risk
Real bills doctrine
Shiftability theory – managing credit risk
Anticipated income
Conversion of funds
Gap management
Duration gap management
 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: -- falling prices means converting to cash involves a capital loss. -- exacerbated circumstances, as loans were going into default as well.

11. Does this also help a bank to avoid a bank run/panic?
Real bills doctrine
Shiftability theory
Anticipated income - managing interest rate risk
Conversion of funds
Gap management
Duration gap management
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.
Does this also help a bank to avoid a bank run/panic?

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

13. Gap Management – managing profit
Real bills doctrine
Shiftability theory
Anticipated income
Conversion of funds
Gap Management – managing profit
Relate assets & liabilities by interest… -- manage the “gap” to bank’s advantage. -- if interest rates are expected to rise … make gap positive. -- if interest rates are expected to fall … make gap negative.
Assets
Liabilities
Cash Reserves $50,000
Demand Deposits $300,000
US Treasuries $150,000
Credit Card loans $400,000
Savings Deposits $575,000
Short Term Consumer Loans $200,000
Long Term Business Loans $250,000
Certificates of Dep. $950,000
Mortgage Loans $825,000
Equity $50,000
$1,875,000

14. Duration gap management
Real bills doctrine
Shiftability theory
Anticipated income
Conversion of funds
Gap Management – managing profit
Duration gap management
Measure ave. time for payments (in or out)… -- if positive and interest rates fall, bank profits rise. -- if positive and interest rates fall, bank profits fall.
Assets
Liabilities …
Auto Loans (5 yr.) $400,000
3-5 yr. CDs $575,000
Portfolio average payoff = 36 months
Portfolio average payout = 32 mo.

15. Structure & Management
Banking in the U. S.
Structure & Management
ECO 473 Dr. D. Foster