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Depository Institutions Chapter 1

Depository Institutions Chapter 1. Financial Institutions Management, 3/e By Anthony Saunders. Depository Institutions. Commercial Banks Largest depository institutions are commercial banks. Differences in operating characteristics and profitability across size classes. Thrifts S&Ls

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Depository Institutions Chapter 1

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  1. Depository Institutions Chapter 1 Financial Institutions Management, 3/e By Anthony Saunders

  2. 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

  3. 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.

  4. 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

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. Legislation (continued) • FIRREA • Imposed restrictions on investment activities • Replaced FSLIC with FDIC-SAIF • Replaced FHLB with Office of Thrift Supervision • Created Resolution Trust Corporation

  13. Legislation (continued) • FDIC Improvement Act • Introduced Prompt Corrective Action • Risk-based deposit insurance premiums • Limited “too big to fail”

  14. 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.

  15. 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.

  16. 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).

  17. 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.

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