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Depository Institutions Chapter 1

Financial Institutions Management, 3/e

By Anthony Saunders

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Depository Institutions

• Commercial Banks» Largest depository institutions are commercial

banks.

» Differences in operating characteristics and profitability across size classes.

• Thrifts» S&Ls

» Savings Banks

» Credit Unions

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Functions and Structural Differences

• Functions of depository institutions» Regulatory sources of differences across types of

depository institutions.

• Structural changes generally resulted from changes in regulatory policy.

» Example: changes permitting interstate branching.

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Commercial Banks

Primary assets:• Real Estate Loans ~$1,197 billion• C&I loans ~$830 billion• Loans to individuals ~$521 billion

Primary liabilities:• Deposits ~$3,029 billion• Borrowings ~$750 billion

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Trends

U.S. Banking industry:

• Low concentration ratios and mostly smaller banks. Primary cause: Regulatory effect.

• Prominent recent trend is consolidation resulting from combined effects of deregulation, disintermediation, technological change & innovation. Merger activity results in excess supply of bank personnel. The emergence of many new (small) banks is noteworthy.

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Other Trends

Number of banks continues to decline. Increase in off-balance-sheet activities. Increase in income derived from fees-for-

service rather than spread income. Increased competition between banks and

across financial services sectors. Increased competition from foreign FIs.

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Some Terminology

• Transaction accounts• Negotiable Order of Withdrawal (NOW)

accounts• Money Market Mutual Fund• Negotiable CDs: Fixed-maturity interest

bearing deposits with face values over $100,000 that can be resold in the secondary market.

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More Terminology

• Federal Funds Market: An interbank market for short-term borrowing and lending of bank reserves.

• Money center bank: A bank that is heavily reliant on nondeposit or borrowed sources of funds.

• Dual Banking System: Coexistence of nationally and state-chartered banks.

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Key Regulatory Agencies

• FDIC• OCC: Primary function is to charter national

banks.• FRS: monetary policy, lender of last resort.

» National banks are automatically members of the FRS. State-chartered banks can elect to become members.

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Key Regulatory Legislation

• McFadden Act: Controls branching of national banks.

• Glass-Steagall: separates securities and banking activities.

• Regulation Q• Bank Holding Company Act and subsequent

amendments specifies permissible activities and regulation by FRS of BHCs.

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Legislation (continued)

• DIDMCA and DIA (Garn-St. Germain Depository Institutions Act)

» Mainly deregulation acts.

» Phased out Regulation Q.

• Competitive Equality in Banking Act (CEBA)» Redefined bank to limit growth of nonbank banks.

• Community Reinvestment Act (CRA)» Meant to address discrimination in lending.

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Legislation (continued)

• FIRREA» Imposed restrictions on investment activities

» Replaced FSLIC with FDIC-SAIF

» Replaced FHLB with Office of Thrift Supervision

» Created Resolution Trust Corporation

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Legislation (continued)

FDIC Improvement Act• Introduced Prompt Corrective Action• Risk-based deposit insurance premiums • Limited “too big to fail”

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Legislation (continued)

• Riegle-Neal Interstate Banking and Branching Efficiency Act

» Permits BHCs to acquire banks in other states.

» Invalidates some restrictive state laws.

» Permits BHCs to convert out-of-state subsidiary banks to branches of single interstate bank.

» Newly chartered branches permitted interstate if allowed by state law.

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Savings Institutions

• Comprised of:» Savings and Loans Associations

» Savings Banks

• Effects of changes in Federal Reserve’s policy of interest rate targeting combined with Regulation Q and disintermediation.

• Effects of regulator forbearance.• Qualified Thrift Lender (QTL) test.

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Primary Regulators

Office of Thrift Supervision (OTS).• Charters and examines all federal S&Ls.

FDIC-SAIF Fund.• Oversees and manages Savings Association

Insurance Fund (SAIF).

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Credit Unions

• Nonprofit depository institutions owned by member-depositors with a common bond.

• Exempt from taxes and Community Reinvestment Act (CRA).

• Expansion of services offered in order to compete with other FIs.

• Approximately 2/3 federally chartered and subject to NCUA regulation.