Banking in the U. S.

1. Banking in the U. S. ECO 473Dr. D. Foster I. StructuresII. Management

2. I. Banking Structure in the U. S.

3. Institutions . . . • Commercial Banks • “Money Center” banks • Regional (& Super-) banks • Community Banks • Savings Institutions • Lost 50% of deposits 1989 - 2001 • 1980s - Congress relaxes lending rules • Credit Unions • 1934-strict member rules; relaxed since. • no fed’l tax -  deposit rates &  loan rates

4. Dec.2014 Commercial Bank Assets ($ Billions), June 2008 1,784 11.9% 1,198 8.0% 3,629 24.2% 86 0.6% 1,1958.0% 7,89252.6% 2,045 13.6% 8845.9% 2,929* 19.5% 2,82118.8% 1,3639.1% 15,005 100.0% Commercial & industrial loans 1,507 13.5% Consumer loans 831 7.5% Real estate loans 3,645 32.7% Interbank loans 454 4.1% Other loans (net) 9188.2% Total loans7,35566.1% U.S. government securities 1,113 10.0% Other securities 1,35812.2% Total securities2,471 22.2% Cash assets300 2.7% Other assets1,0049.0% Total assets11,130 100.0% * $1,393 bill. is in mortgaged-backed securities (MBS)

5. Dec.2014 Commercial Bank Liabilitiesand Equity Capital ($ Billions), June 2008 Transactions deposits 603 Small time and savings deposits 4,180 Large time deposits 2,126 Total deposits6,909 Borrowings from banks 480 Other borrowings 1,829 Total borrowings2,309 Trading liabilities --- Other liabilities 674 Net due to foreign offices -18 Equity capital1,155 Total liabilities & equity11,029 5.5% 37.9% 19.3% 62.6% 4.4% 16.6% 20.9% --- 6.1% -0.2% 10.5% 100.0% --- --- 8,736 58.2% 1,70011.3% 10,43669.5% 118 0.8% 1,66311.1% 1,781 11.9% 226 1.5% 423 2.8% 505 3.4% 1,64210.9% 15,013 100.0%

6. Commercial Bank Asset Allocations Dec. 2014 60% 20%

7. Commercial Bank Liabilitiesand Equity Capital Dec. 2014 70% 19% 11%

8. Misc. Data on Banks & Savings Institutions (FDIC) 1990 to 2010: Bank offices: 63,200 to 94,300 --main offices: 12,300 to 6,700 --branches: 51,000 to 88,000

9. Misc. Data on Credit Unions (FDIC) 2010: Fed’l CU: 4,600 State CU: 2,750 Tot. Assets: $914 billion

10. The Top Twenty Banks* [based on assets] in the U. S. *As of March, 2016

11. Commercial Bank Expenses Sources of Commercial Bank Revenues

12. Equity as a Percentage of Bank Assets in the United States, 1840–Present

13. II. Banking Management in the U. S.

14. Evolution of theories of bank management & risk. • Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds • Gap management • Duration gap management

15. Real bills doctrine – managing liquidity risk • Shiftability theory • Anticipated income • Conversion of funds • Gap management • Duration gap management • Make low-risk loans with high liquidity… • Lend to finance shipment of goods:-- paid off quickly to known buyer.-- earns low return. • Lend for production…-- “self-liquidating” loans; repaid as sold.-- relatively low risk.

16. Real bills doctrine – managing liquidity risk • Shiftability theory • Anticipated income • Conversion of funds • Gap management • Duration gap management

17. Real bills doctrine • Shiftability theory – managing credit risk • Anticipated income • Conversion of funds • Gap management • Duration gap management •  Return with longer-term loans…-- adds to the default risk.-- offset with purchases of gov’t. securities. - “Secondary reserves” add liquidity. • Popular until the Crash of 1929:-- Margin calls & loan defaults  deposit withdrawals-- Liquidate UST  falling prices & capital loss-- Calling in loans exacerbates circumstances.

18. Real bills doctrine • Shiftability theory – managing credit risk • Anticipated income • Conversion of funds • Gap management • Duration gap management During a panic, depositors withdraw funds. Cash reserves are quickly depleted but US Treasuries can be liquidated to cover what is needed … up to a point. In the GD, failing loans encouraged withdrawals and flooding the market with UST depressed prices.

19. Real bills doctrine • Shiftability theory • Anticipated income -managing interest rate risk • Conversion of funds • Gap management • Duration gap management • Initiation of the “installment loan”…-- mitigates default risk through ongoing payments.-- gives the bank a highly predictable stream of income.-- has features that make it a “super-liquidating” loan.

20. Real bills doctrine • Shiftability theory • Anticipated income -managing interest rate risk • Conversion of funds • Gap management • Duration gap management A panic will have less of an impact in that the loans now generate predictable income and defaulting loans are less likely to burden the bank.

21. Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds - managing interest rate risk • Gap management • Duration gap management • Match asset & liability maturities…-- long-term loans with CDs.-- short-term loans with deposits. • Events that change interest rates will be neutralized.

22. Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds - managing interest rate risk • Gap management • Duration gap management As interest rates rise and fall both sides of the balance sheet are approximately equally affected.

23. Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds • Gap Management – managing profit • Relate assets & liabilities by interest…-- manage the “gap” to bank’s advantage.-- if interest rates are expected to rise ….-- if interest rates are expected to fall ….

24. Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds • Gap Management – managing profit • Duration gap management • Measure ave. time for payments (in or out)…-- if positive and interest rates fall, bank profits rise.-- if positive and interest rates rise, bank profits fall.

25. Does Bank Size Matter? Economies of scale-- Efficient structure theory. -- Cost savings seem minor; mgt. savings. Concentration will . . . -- raise costs? -- lower costs? Consolidation stats: Community bank % of all banks: 96% (ICBA, 2015) Community bank % of total bank assets: 14% (FDIC, 2011)

26. Universal Banking • Banks own firms -- Better informed about financial condition. -- Conflict of interest? • Firms own banks -- Does the FED regulate the firm as well? • Banks do . . . Whatever (economies of scope): -- Insurance. -- Real estate. -- Stock brokers.

27. Banking in the U. S. ECO 473Dr. D. Foster I. StructuresII. Management