2. Chapter Sixteen Commercial Banking Industry: Structure and Competition

3. Copyright © 2004 Pearson Education Canada Inc. Slide 16–3 Historical Development of the Banking Industry

4. Copyright © 2004 Pearson Education Canada Inc. Slide 16–4 Historical Developments 1.The Free Banking Experiment 2.The Provincial Notes Act, 1866 3.The Dominion Notes Act, 1870 4.The First Bank Act, 1871 5.Revisions of the Bank Act, 1881-1913 6.The Finance Act, 1914 7.Bank of Canada, 1935

5. Copyright © 2004 Pearson Education Canada Inc. Slide 16–5

6. Copyright © 2004 Pearson Education Canada Inc. 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. Copyright © 2004 Pearson Education Canada Inc. Slide 16–7 Branching Regulations in the U.S. 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. Copyright © 2004 Pearson Education Canada Inc. Slide 16–8 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

9. Copyright © 2004 Pearson Education Canada Inc. Slide 16–9

10. Copyright © 2004 Pearson Education Canada Inc. Slide 16–10

11. Copyright © 2004 Pearson Education Canada Inc. Slide 16–11

12. Copyright © 2004 Pearson Education Canada Inc. Slide 16–12 Ten Largest Banks in the World

13. Copyright © 2004 Pearson Education Canada Inc. Slide 16–13 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

14. Copyright © 2004 Pearson Education Canada Inc. Slide 16–14 The Decline in Banks as a Source of Finance

15. Copyright © 2004 Pearson Education Canada Inc. Slide 16–15 Bank Profitability

16. Copyright © 2004 Pearson Education Canada Inc. Slide 16–16 Share of Noninterest Income

17. Copyright © 2004 Pearson Education Canada Inc. Slide 16–17 Decline in Traditional Banking Loss of Cost Advantages in Acquiring Funds (Liabilities) –π  i  then disintermediation because 1.Deposit rate ceilings and regulation Q in the U.S. 2.Money market mutual funds 3.Foreign banks have cheaper source of funds: Japanese banks can tap large savings pool

18. Copyright © 2004 Pearson Education Canada Inc. Slide 16–18 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