1. History and Structure of the Banking Industry
Chapter 10

2. Overview History of U.S. banking Commercial Bank Structure
Thrift Industry Structure and Regulation
The Rise of International Banking
The Decline of Traditional Banking

3. The History of the National Bank
Combination between central bank and ‘national bank’
1st National Bank:
Alexander Hamilton
First charter allowed to lapse
2nd National Bank:
Abuses of state banks
War of 1812

4. The Battle of New Orleans

5. No Central Banking Period
: no central control!
Farmers distrust, advocate state charters
Jackson, proponent of ‘states rights’ (before civil war)
State banknotes become popular currency
Problems with state currency
Lax regulations on bank capital
Moral hazard and adverse selection
Banknotes become worthless
Fraud widespread

6. National Bank Act of 1863 Attempt to address state currency issue
Creation of Comptroller of Currency
New federal chartered banking system
Taxed state banknotes
Civil War funding
Dual Banking system
States get around taxing by inventing checking accounts and demand deposits!
Both state and federal banks survived, creating unique system

7. Increasing Regulation
Bank crashes and great depression
Federal Reserve System
Not the same as a 3rd National Bank
Required national banks to become members
Members must follow tighter set of regulations
McFadden Act: 1927
Restricts interstate branching
Required national banks to follow state rules

8. More regulation
Bank investing in securities and the stock market blamed for so many bank failures and the great depression
Glass-Steagall Act
Creation of FDIC
No interest on demand deposits
Commercial banks: no underwriting or dealing securities
Investment banks: no commercial bank activities
Set ceilings on savings account interest

9. This is getting confusing…
Office of Comptroller
Supervises 2000 national banks (50%)
Federal Reserve and State Authorities
1000 state banks
Holding companies
FDIC and State Authorities
5000 state banks not in Fed

10. Erosion of Branching Restrictions
Early innovative strategies
Bank holding companies
Non-bank banks: just loans or ATM’s
Regional compacts in 70s and 80s
Rise of super-regional banks
Riegle-Neal Act
Overturns McFadden Act of 1927
Extended regional compacts nationwide
Holding companies can consolidate

11. Big vs. Small Small banks opposed until…
Provision: Big banks must buy up small banks
Big banks like less restriction on branching
Economies of scale
Economies of scope
Diversification benefits (interest rate risk)
Technology (web)
Big banks support
Result
Banks drop from 14,000 to 8,000
Trend will continue

12. Erosion of Glass-Steagall
1987: Bank holding companies can underwrite securities
Gramm-Leach-Bliley 1999
Banks can again underwrite securites, sell insurance, and deal in real estate
Pushed by large holding companies and mergers
Citigroup (Citicorp and Travers group)
Holding companies become investment/commercial/insurance
Bank of America
J.P Morgan Chase
Wachovia

13. New regulation States watch over insurance SEC watches over securities
Comptroller watches banks that underwrite
Fed watches holding companies that do everything

14. For and against Against: Security and Insurance For: Banks
Depression argument
Non-bank demand deposits no FDIC
Sec. industry too risky
For: Banks
Wanted ‘fair play’
Competition will lower underwriting costs
Changing industry

15. Decline of Traditional Banking
Took away banks traditional liabilities
Money market mutual funds
Regulation Q eliminated
No interest on checkable deposits
Ceiling on time deposits
Took away traditional assets too
Junk bonds
Commercial Paper
Securitization
Finance companies

16. What can banks do? Be riskier Commercial real estate loans
With repeal of Glass-Steagall, start investment banking
Commercial real estate loans
Finance takeovers
Off-balance sheet services
Innovate
Sweep accounts

17. Savings and Loans (S&L)
Savings accounts and mortgages
2,000 in U.S. (dropped since crisis in 80’s, chap. 11)
1932: Federal Home Loan Bank System (like the Fed Reserve System)
Fewer branching restrictions
S&L Insurance fund (FDIC, used to be something else before S&L crisis)
Office of Thrift Supervision
Regulates asset, capital requirements, info reporting
Audits

18. Credit Unions Cooperative lending institutions
12,000 in U.S.
Common bond (profession, religion)
Tax-exempt and small
50% are chartered by Fed, rest by states
Supervised by National Credit Union Association
Deposit Insurance

19. International Banking
1969: 8 U.S. banks abroad ($4 billion)
Now: 100 U.S. banks abroad ($1.5 trillion)
Why?
More trade (WTO) means more integration
International Banking Act (1978)
End of Glass-Steagall and McFadden restrt.
More eurodollars
Widely used currency
Offshore low regulation

20. U.S. banks abroad Normal branches common now, less regulation
Edge Act corporation (1919)
U.S. bank subsidiary overseas
Can branch, as long as international business
Own controlling interest in overseas banks
International Banking Facilities - IBF’s (1981)
Within the U.S. to deal with foreigners
Not subject to RR or Interest restrictions, taxes
Treated like foreign banks, but within U.S.

21. Foreign Banks in U.S. HSBC, UBS, Credit Suisse (since 1940!)
10% of total bank assets
16% of lenders to U.S. corporations
U.S. subsidiaries and branch offices
Full service
Subject to U.S. regulations
Agency office
Can loan but not take deposits
Not subject to U.S. regulations

22. International Central Banking
Universal Banking (Germany, Swiss)
Complete fusion of banking and securities industries
U.K, Canada, now U.S.
Universal, but…
more subsidiaries
not much commercial equity holdings
Banking and insurance combo less common
Japan
Like U.S. before repeal of Glass-Steagall
Can buy stock, and commercial equity common
No holding companies allowed