2. Chapter Sixteen Commercial Banking Industry: Structure and Competition

3. Slide 16–3 Historical Development of the Banking Industry Figure 16-1: Time Line of the Early History of Commercial Banking in the United States

4. Slide 16–4 Historical Development of the Banking Industry Outcome: Multiple Regulatory Agencies 1.Federal Reserve 2.FDIC 3.Office of the Comptroller of the Currency 4.State Banking Authorities

5. Slide 16–5 Structure of the Commercial Banking Industry FDIC statistics on banking http://www.fdic.gov/bank/statistical/index.html

6. Slide 16–6 Ten Largest U.S. Banks World’s 100 largest banks http://interactive.wsj.com/public/resources/documents/wb00-100-fpublic-2000-09-25.htm

7. Slide 16–7 Branching Regulations Branching Restrictions: Very Anti-competitive Response to Branching Restrictions 1.Bank Holding Companies Allowed purchases of banks outside state BHCs allowed wider scope of activities by Fed BHCs dominant form of corporate structure for banks 2.Nonbank Banks Not subject to branching regulations, but loophole closed in 1987 3.Automated Teller Machines Not considered to be branch of bank, so networks allowed

8. Slide 16–8 Bank Consolidation and Number of Banks Figure 16-2: Number of Insured Commercial Banks in the United States, 1934–2001 Quarterly banking profile http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP

9. Slide 16–9 Nationwide Banking and Bank Consolidation Bank Consolidation: Why? 1.Branching restrictions weakened 2.Development of superregional banks Riegle-Neal Act of 1994 1.Allows full interstate branching 2.Promotes further consolidation Future of Industry Structure –Will become more like other countries, but not quite: Several thousand, not several hundred

10. Slide 16–10 Nationwide Banking and Bank Consolidation Bank Consolidation: A Good Thing? –Cons 1.Fear of decline of small banks and small business lending 2.Rush to consolidation may increase risk taking –Pros 1.Community banks will survive 2.Increase competition 3.Increased diversification of bank loan portfolios: lessens likelihood of failures

11. Slide 16–11 Separation of Banking and Securities Industries: Glass-Steagall Case for Glass-Steagall 1.FDIC gives unfair advantage to banks 2.Allowing banks into underwriting is dangerous because FDIC promotes too much risk taking 3.Potential conflicts of interest Case Against Glass-Steagall 1.Decreases competition 2.Unfair to banks 3.Hinders diversification

12. Slide 16–12 Separation of Banking and Securities Industries: Glass-Steagall Will Separation Continue? –Fed, OCC, FDIC are allowing banks to engage in underwriting activities –Separation in Other Countries 1.Universal banking: Germany 2.British-style universal banking 3.U.S./Japan separation

13. Slide 16–13 International Banking Why Rapid Growth 1.Rapid growth of international trade 2.Banks abroad can pursue activities not allowed in home country 3.Tap into Eurodollar market U.S. Banks Overseas 1.Regulators Federal Reserve (Regulation K) 2.Structure Edge Act Corporations International Banking Facilities

14. Slide 16–14 International Banking Foreign Banks in U.S. 1.Regulators Same as for U.S. domestic banks 2.Structure 500 offices in U.S. 20% of total U.S. bank assets

15. Slide 16–15 Ten Largest Banks in the World

16. Slide 16–16 Financial Innovation and Decline in Traditional Banking Innovations Increasing Competition 1.Money market mutual funds Avoids deposit rate ceilings and reserve requirements 2.Junk bonds Result of better info in credit markets 3.Commercial paper market Result of better info in credit markets and rise in money market mutual funds 4.Securitization Result of better info in credit markets and computer technology

17. Slide 16–17 The Decline in Banks as a Source of Finance Figure 16-3: bank Share of Total Nonfinancial Borrowing, 1960–2001

18. Slide 16–18 Bank Profitability Figure 16-4: Commercial Bank Profitability, 1970–2001

19. Slide 16–19 Share of Noninterest Income Figure 16-1: Share of Noninterest Income in Total Bank Income, 1960–2001

20. Slide 16–20 Decline in Traditional Banking Loss of Cost Advantages in Acquiring Funds (Liabilities) –π  i  then disintermediation because 1.Deposit rate ceilings and regulation Q 2.Money market mutual funds 3.Foreign banks have cheaper source of funds: Japanese banks can tap large savings pool

21. Slide 16–21 Decline in Traditional Banking Loss of Income Advantages on Uses of Funds (Assets) 1.Easier to use securities markets to raise funds: commercial paper, junk bonds, securitization 2.Finance companies more important because easier for them to raise funds

22. Slide 16–22 Figure 16-9: Bank Failures in the United States, 1934–2001

23. Slide 16–23 Banks' Response Loss of cost advantages in raising funds and income advantages in making loans causes reduction in profitability in traditional banking 1.Expand lending into riskier areas (e.g., real estate) 2.Expand into off-balance sheet activities 3.Creates problems for U.S. regulatory system Similar problems for banking industry in other countries