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8/13/2019 US Banking Structure
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Chapter 10. The Banking Industry:Structure and Competition
A Brief History
Structure
Thrifts
International Banking
The Decline of Traditional Banking
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I. A Brief History
A. dual banking systembanking at state level until Civil War
state charters, regulation banknotes as local currency
failures, fraud were common
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National Bank Act 1963
federal charters for banks
Comptroller of the Currency
federal banknotes
tax on state banknotes
state banks survived by acceptingdeposits
-- dual banking system
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B. A central bank
U.S. had two prior central banks
the Bank of the U.S. (1791-1811))
the Second Bank of the U.S.(1816-63)
U.S. central banks not popular w/
ranchers & farmers states rights
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1863-1907
no central bank regular financial crises
panic of 1907
--bankers demanded a centralbank
Federal Reserve System (1913)
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C. Branching Restrictions
McFadden Act 1927 restricted intra and interstate
branching of national banks
meant to protect small banks &increase competition
repealed 1994
(Riegle-Neal)
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D. Great Depression
1930-33, 1/3 of all U.S. banks failed
Congress responded w/ legislation
FDIC federal insurance for bank
deposits
banks pay premiums
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Glass-Steagall Act
separated permissible activities ofcommercial, investment banks
idea: limit risk for commercial
banks weakened over time
repealed 1999
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Regulation Q
ceiling on interest rates ondeposits
no interest on checking deposits
repealed 1980
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Regulators
Comptroller of the Currency
national banks
Federal Reserve bank holding companies
state member banks
national banks (secondary)
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FDIC
nonmember state banks
state regulators
state banks (secondary)
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II. Bank StructureA. Decentralization & Consolidation
McFadden Act resulted in many smallbanks
meant to protect small banks &increase competition
-- but protected inefficient banks
-- limited economies of scale
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loopholes
-- bank holding companies
-- owned several banks
-- limited service banks
-- deposits or loans, not both-- ATMs
repealed 1994
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Consolidation
bank failures in 1980s
loopholes in McFadden
repeal of McFadden Over 14,000 banks in 1985
less than 8,000 today
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A good thing?
economies of scale
diversification
But risks with expansion?
responsive to small customers?
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B. Commercial & InvestmentBanking
separated by Glass Steagall 1933
commercial banks banned from
-- corporate underwriting
-- securities brokerage
-- real estate sales-- insurance
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why?
many believed investmentactivities led to bank failures of1930s not really true
problems
less diversification
restricting economies of scale disadvantage w/ global
competition
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Glass Steagall weakened over time
bank holding companies Federal Reserve weakened
restrictions
repealed 1999
(Gramm-Leach-Bliley)
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III. Thrift Industry
S&Ls, credit unions
dual banking systems
Savings & Loans (1,049) FDIC insured
own regulators:
-- FHLBS
-- OTS
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credit unions (10,000)
< 10% of commercial bank assets $600 billion
commercial banks $7.6 trillion
regulator: NCUA
own federal deposit insurance
nonprofit
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IV. International Banking
global economy means globalbanking
often less regulation overseas
alternative structures
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Edge Act corporations
subsidiary of U.S. bank overseas
more favorable regulation
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IBFs
international banking facilities
in the U.S.
loans and deposits to foreigncustomers
favorable regulation, tax status
keep the business in the U.S.
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Foreign banks in the U.S.
Agency office not full service
but less regulated
Full service branch
U.S. regulations
U.S. subsidiary U.S. regulations
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V. Decline of Traditional Banking
traditional bank activities
decline in profitability
decline in importance
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declining share of loans
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rising profitability..
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but due to nontraditional activities
share of incomeNOT from
interest
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why the decline?
liability side:
cost of acquiring funds has risen
asset side: income generated has declined
causes:
financial innovation since 1970s
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Money market mutual funds
substitute for checking account frominvestment companies
pay interest not insured (but low risk)
banks had to offer own version
raised the cost of funds
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Junk bond market
no market for new, low-rated debtprior to 1980
only for ratings of Baa (BBB) orbetter
improvements in credit risk
screening created market for newrisky debt
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before 1980
low-rated firms relied on banks
after 1980
low-rated firms could borrow byissuing junk bonds
junk bond markets competing with
banks for lending business
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Commercial Paper
easier to issue with improvements incredit risk screening
demanded by money market mutualfunds
replaced corporate short-term
borrowing from banks
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Securitization
transform illiquid loans
into liquid debt securities
individual loans bundled together
debt securities issued, backed by
pool of loans
owners of security get a share ofthe loan payments
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most often down with mortgages
2/3 of all mortgages securitized
also down with auto loans, leases,credit cards
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the implication
other financial institutions take apart of the lending process
-- originate the loan
-- service the loan
-- issue and sell security
finance companies that justspecialize in originating loans
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in total
higher cost of obtaining funds due to competition from money
market
lower income from loans due to competition from
-- junk bond market
-- commercial paper market
-- financial companies
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Result of decline:
bank failures
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newer activities
fee income
credit cards commercial real estate