1. The Commercial Banking Industry

2. I. Commercial Banking History A. State Banking, 1714 - 1863 –Chartering by Legislation, 1714 –Free Banking, 1837 B. Dual Banking, 1863 - 1914 C. Central Banking, 1914 - 1980 D. Deregulation, 1980 -

3. II. Industry Structure A. Industry Composition –National Banks and State Banks –Member Banks and Non-Member Banks –Insured Banks and Uninsured Banks –Unit Banks and Branching Banks Limited Branching Statewide Branching Interstate Branching

4. II. Industry Structure (Cont.) B. Market Concentration –Line of Commerce –Market Scope Uniform Price Criterion Political Boundary Criterion Service Area Criterion –Measures Concentration Ratio Herfindahl-Hirschman Index

5. Concentration Ratio InstitutionMarket Share Bank A30% Bank B25% Bank C20% Bank D15% Bank E 5% : : Concentration Ratio 90%

6. Herfindahl-Hirschman Index InstitutionMarket Share(Market Share) 2 Bank A30%900 Bank B25%625 Bank C20%400 Bank D15%225 Bank E 5% 25 Bank F 4% 16 Bank G 1% 1 HHI 2192

7. II. Industry Structure (Cont.) C. Correspondent Banking Correspondent Bank - Upstream Bank Respondent Bank - Downstream Bank –Payment System Check Collection Funds Transfers Automated Clearing-House Services

8. II. Industry Structure (Cont.) C. Correspondent Banking (Cont.) –Payment System –Liquidity Maintenance Overline and Liquidity Loans Federal Funds Transactions Supply of Currencies and Coins

9. II. Industry Structure (Cont.) C. Correspondent Banking (Cont.) –Asset Adjustments Loan Participation Collection of Non-Cash Items Security Safekeeping Trading Government Securities Trading Money Market Instruments

10. II. Industry Structure (Cont.) C. Correspondent Banking (Cont.) –Management Services Data Processing Investment Advice Capital Funding Advice Operational Advice

11. II. Industry Structure (Cont.) D. Bank Holding Companies –Definitions One-Bank Holding Company Multi-Bank Holding Company –Reasons for the Growth Economies of Scale Economies of Scope

12. II. Industry Structure (Cont.) D. Bank Holding Companies (Cont.) –Activities Permitted by Regulation –Extension of Credit –Trust Company and Fiduciary Activities –Data Processing Services –Investment or financial Advising –Securities Brokerage

13. II. Industry Structure (Cont.) D. Bank Holding Companies (Cont.) –Activities (Cont.) Permitted by Regulation Permitted by Order –Operating a Distressed Savings Institution –Trading Precious Metals –Employee Benefit –Underwriting Corporate Bonds Denied

14. II. Industry Structure (Cont.) D. Bank Holding Companies (Cont.) –Activities (Cont.) Permitted by Regulation Permitted by Order Denied –Underwriting Life Insurance –Land Investment/Development –Travel Agency Services –Management Consulting

15. II. Industry Structure (Cont.) E. Interstate Banking –Advantages Safety through Diversification Convenience and Accessibility Efficiency Competition –Models of Interstate Banking Host-State Regulation Home-State Regulation

16. II. Industry Structure (Cont.) A. Industry Composition B. Market Concentration C. Correspondent Banking D. Bank Holding Companies E. Interstate Banking F. Non-Bank Banks

17. F. Non-Bank Banks (Limited-Service Banks) 1980 Gulf & Western Case 1983 Federal Reserve Action Redefined commercial loans to include the purshase of commercial paper, CDs, and bankers acceptances. Redefined demand deposits to include interest- bearing checking accounts. Prevented the investment in corporate securities. 1986 Court Decision 1987 Competitive Equality in Banking Act.

18. III. Financial Operations A. Goals of Financial Operations Safety Liquidity Profitability

19. III. Financial Operations B. Banlance Sheet Analysis

20. 1. Assets – Cash – Securities Treasury Bills Treasury Bonds Federal Agency Securities Municipal Bonds

21. – Loans Commercial and Industrial Loans Agricultural Loans Consumer Loans Real Estate Loans –Other Assets

22. 2. Liabilities – Deposits Non-Interest-Bearing Deposits Interest-Bearing Deposits – Other Liabilities 3. Capital and Capital Requirements

23. C. Profitability – Loan Pricing – Asset-Liability Management

24. The Commercial Banking Industry I. Commercial Banking History II. Industry Structure III. Financial Operations

25. The Commercial Banking Industry (cont.) I. Commercial Banking History II. Industry Structure III. Financial Operations IV. Bank Regulations

26. –A. Regulators Federal Regulators –FDIC –Federal Reserve System –Comptroller of the Currency State Regulators

27. –A. Regulators –B. The Regulated National Banks State Banks –State Nonmember Noninsured Banks –State Nonmember Banks –State Member Banks

28. –A. Regulators –B. The Regulated –C. Regulations Public Protection –Examination and Supervision –Deposit Insurance –Consumer Protection and Enforcement –Investor Protection

29. –C. Regulations (Cont.) Public Protection Banking Structure –Chartering –Branching –Merger and Acquisition –Bank Holding Company Activities –Insolvency

30. –C. Regulations (Cont.) Public Protection Banking Structure Monetary Stability –Reserve Requirement –Discount Policy

31. –C. Regulations (Cont.) Public Protection Banking Structure Monetary Stability Major Federal Legislation

32. The Federal Reserve Act (1913) The Bank Holding Company Act (1956) The Bank Merger Act (1966) The Amendment to Bank Holding Company Act (1970) The Depository Institutions Deregulation and Monetary Control Act (1980)

33. The Depository Institutions Act (The Garn- St. Germain Act) (1982) The Competitive Equality in Banking Act (CEBA) (1987) The Financial Institutions Reform, Recovery, and Enforcement Act (1989) The Federal Deposit Insurance Corporation Improvement Act (1991)