1. Lesson 2 (added Chapter)
The Organization and Structure of Banking and the Financial-Services Industry

2. Key Topics
The Organization & Structure of Banks & the Banking Industry
The Different types of Structures in Banking
Interstate Banking and the Riegle-Neal Act
The Financial Holding Company (FHC)
Mergers and Acquisitions
The Structure of Banking’s Main Competitors
Economies of Scale and Scope

3. Introduction
Chapter 1 looked at many of the roles and services of the modern bank and competitors of banks
Over the years, banks & competing financial institutions have changed into different forms
A financial institution’s role and size are not the only way to know how well it performs
In this chapter, we will discuss the causes that have changed the structure, size, and types of organizations in the financial-services industry today

4. The Organization and Structure of the Commercial Banking Industry
Size and Assets held by Banks
Commercial banking is the main supplier of credit and payments services to businesses and households
Many banks in the United States are small
They hold little more than one percent of total industry assets
In contrast, the American banking industry also contains some of the largest financial service organizations in the world
Citigroup, JP Morgan Chase, and the Bank of America hold about 6 trillion dollars combined. ICBC in China 3 trillion alone, the largest bank in the world!
Thus, banking continues to be concentrated in the very largest of all financial firms. The ones “TOO BIG TO FAIL”

5. The Structure of the U.S. Commercial Banking Industry, December 31, 2009

6. Organization of the Banking Firm
The great difference in size across the industry in recent years led to many differences in the way banks and other service providers are organized and in the diversity of financial services each institution sells in their market.

7. Small and Medium-Size U. S
Small and Medium-Size U.S. Banks Lose Market Share to the Largest Banking Institutions

8. Organization of the Banking Firm (cont)
Community Banks (Banks in neighborhoods & small towns
These smaller banks focus mainly on deposits and loans and are called retail banks.
Banks like this are quite different from wholesale banks, which deal with large corporations or even government.
Closer contact between top management and staff
Community banks are greatly affected by changes in the local economy and keeping up with new regulations
These institutions have been going out of business
Around 14,000 community banks in 1985 and about 6,000 in 2010

9. Organization Chart for a Smaller Community Bank

10. Internal Organization of the Banking Firm (continued)
Larger Banks – Money Center, Wholesale and Retail
Large banks are located in big cities and serve large & small retail customers (households) as well as large business
The largest money-center banks have advantages over the smaller community banks
Better diversified – both geographically and by product line
Can better withstand the risks of a changing economy
Able to raise huge amounts of capital at low cost
Can attract top managerial talent

11. Organization Chart for a Money Center or Wholesale Bank Serving Domestic and International Markets

12. Entry and Exit in U.S. Banking

13. The Organizational Structure of Large Banks
BANK BRANCHES
Like a tree has many branches, as a bank 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
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

14. The Branch Banking Organization

15. The Organizational Structure of Large Banks (cont)
BRANCH BANKING GROWTH
During the Great Depression of the 1930s, only one in five American banks had a full-service branch office
By the beginning of the 21st century, the average U.S. bank operated close to 12 full-service branch offices
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994 provided the basis for expanding into new states.

16. OTHER TYPES OF STRUCTURES
Electronic Branching – Websites and Electronic Networks: An Alternative or a Supplement to Bank Branch Offices
Electronic branches
Internet banking services
Automated teller machines (ATMs)
Point-of-sale (POS) terminals
Personal computers
Call centers

17. OTHER TYPES OF STRUCTURES (cont)
Financial Holding Companies
A bank holding company is a corporation created 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 (debt)
Tax advantages
Ability to expand into businesses outside banking
These banks hold up to 70% of the total assets of all banks in the US

18. The 10 Largest Bank Holding Companies Operating in the United States (Total Assets as Reported on June 30, 2010)

19. The Most Important Nonbank Financially Related Businesses That Registered Holding Companies Can Acquire under U.S. Banking Regulations

20. EXHIBIT 3–8 The Multibank Holding Company

21. FINANCIAL HOLDING COMPANIES (cont)
As a review from last semester what are some of advantages and disadvantages of these large financial companies?
FOR (PROS) AGAINST (CONS)

22. FINANCIAL HOLDING COMPANIES (cont)
Holding company banking has been blamed for reducing competition
Supporters say they are more efficient, have more services, lower chance of failure, and higher and more profits
Moreover, the failure rate for holding company banks appears to be below that of same size independent banks
However, there is evidence that multibank holding companies may drain capital from some communities and weaken smaller towns

23. Interstate Banking Organizations and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Riegle-Neal allows holding companies to buy banks across the USA without needing any state’s permission to do so and to establish branch offices across state lines
Why do you think the US government created this law to allow banks to operate in different states? Discuss in your group.

24. Interstate Banking Organizations and Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
The need to bring in new capital to help struggling local economies
The growth of financial-service products by nonbank financial institutions that did not have the same regulations
The largest financial firms wanted to diversify their operations and open up new marketing opportunities in new locations.
The idea 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 large geographic areas

25. What do we call these 2 concepts (size and diversity)?
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 1999, financial holding companies (FHCs) are defined as a special type of holding company that offers many financial services, including dealing in selling securities and insurance
Led to consolidation ( getting bigger ) and convergence (many different kinds of products) within the industry. Investment banks can once again join together with commercial banks
What do we call these 2 concepts (size and diversity)?

26. The Financial Holding Company (FHC)

27. Leading Financial Holding Companies (FHCs) Registered with the Federal Reserve Board

28. Mergers and Acquisitions Reshaping the Structure and Organization of the Financial-Services Sector
Bigger companies have been buying up 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.
I was involved in training bankers in 3 mergers while I worked with the bank. We many banks and non-depository firms as well.

29. The Changing Organization and Structure of Banking’s Principal Competitors
Banking’s principal competitors – credit unions, savings associations, finance companies, insurance firms, pension fund and mutual fund companies, security dealers, hedge funds, investment banks and other financial firms.
It’s all becoming blurry in many ways to know banks from other financial service companies.
All are affected by powerful forces such as rising operating costs and rapidly changing technology
The one-stop shop has become almost normal.

30. 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

31. Quick Quiz – HOMEWORK FOR 3/23/15
3. What trends are affecting the way banks and their competitors are organized today?
7. What trend in branch banking has been prominent in the United States in recent years?
9. What is a bank holding company?

32. Quick Quiz – HOMEWORK FOR 3/23/15
12. Are there any significant advantages or disadvantages for holding companies or the public if these companies buy banks or nonbank business ventures? 14. Can you see any advantages to allowing interstate banking? What about potential disadvantages? 16. What relationship appears to exist between bank size, efficiency, and operating costs per unit of service produced and delivered?