Chapter Three

1. Chapter Three The Organization and Structure of Banking and the Financial-Services Industry

2. Assets Held by U.S. FDIC-insured Commercial Banks, 2005

3. Number of U.S. FDIC-insured Commercial Banks, 2005

4. Community Banks • ‘Typical’ Size is $250 Million • Organizational Chart is Not Complicated • Significantly Affected by Health of Local Economy • Limited Opportunities for Advancement • Generally Know their Customers Well

5. Money Center or Wholesale Banks • Generally Multi-Billion Dollar Company • Organizational Chart is Much More Complex • Serve Many Different Markets with Many Different Services • Better Able to Withstand Risks of Fluctuating Economy • Able to Raise Large Amounts of Capital at Relatively Low Costs

6. Common Classifications of U.S. Banks, 2005

7. Deposits Held By Banks in 2005

8. Unit Banks • Offer All Services From One Office • One of the Oldest Kinds of Banks • New Banks are Generally Unit Banks

9. Branch Banks • Offer Full Range of Services from Several Locations • Senior Management at the Home Office • Each Branch has its Own Management Team with Limited Decision Making Ability • Some Functions are Highly Centralized, While Others are Decentralized

10. Reasons for Growth of Branching • Exodus of Population to Suburban Communities • Increased Bank Failures in Recent Years • Business Growth

11. Electronic Branches • Internet Banking Services • Automated Teller Machines (ATMs) • Point of Sale (POS) Terminals

12. Virtual Banks • Provides their services Exclusively Through the Web • Can Generate Cost Savings Over Traditional Brick and Mortar Banks • Have Not Yet Demonstrated They Can Be Consistently Profitable

13. Bank Holding Companies (BHC) • A Corporation Chartered for the Purpose of Holding the Stock of One or More Banks • Control of a bank is Assumed When 25% or More of the Stock is Owned • Must Get Approval from Federal Reserve Board to Control a Bank

14. Finance Companies Mortgage Companies Data Processing Companies Factoring Companies Security Brokerage Firms Financial Advising Credit Insurance Underwriters Merchant Banking Investment Banking Firms Trust Companies Credit Card Companies Leasing Companies Insurance Companies and Agencies Real Estate Services Savings Associations Nonbank Businesses of BHCs

15. Reasons for the Growth of BHCs • Geographic Diversification • Product Line Diversification • Tax Sheltering • Double Leveraging • Source of Strength • A Way Around Regulatory Restrictions

16. Reasons for Full-Service Interstate Banking • Need to Bring New Capital to Revive Struggling Local Economies • The Expansion by Non Bank Financial Institutions with Fewer Restrictions • A Strong Desire by Large Banks to Expand Geographically • Belief Among Regulators that Large Banks are More Efficient and Less Prone to Failure • Advances in Technology

17. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 • Allows BHCs to Acquire Banks Anywhere in the U.S. • Allows BHCs to Convert Banks to Branches – June 1997 • States Can ‘Opt Out’ and Not Allow BHCs to Convert to Branches • States Can ‘Opt In’ Early • Limits Deposits of One BHC to 10% Nationwide and 30% Within One State

18. Proponents Efficient Use of Scarce Resources Lower Prices for Services Geographic Diversification Efficient Flow of Credit in the System Opponents Increased Bank Concentration Less Competition Higher Prices for Services Drain Resources from Community Proponents and Opponents of Interstate Banking

19. Financial Holding Companies • Special Type of Holding Company • Offers the Broadest Range of Services • List of Activities Offered May Expand as Regulators Decide What Services are ‘Compatible’ with Banking • Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss

20. Bank Subsidiaries • Bank Controls One or More Subsidiaries • Subsidiaries Offer Other Services Such as Insurance and Security Brokerage Services • Profits and Losses of Each Subsidiary Impact Parent Bank

21. Structure and Organization of Banks in Europe • Germany – Largest European Banking Industry • Private Sector Banks • Public Sector Banks • France – Second in Number of Banks • Belgium – Dominated by Five Large Banks • Great Britain – Dominated by a Half Dozen Banking Firms • Switzerland – Credit Suisse and UBS and Many Smaller Firms • Italy Privatized Banking in the 1990’s

22. Structure and Organization of Banks in Asia • China – Large Dominating Government Sector, Although Private Banks are Expanding • Japan – Dominated by the Big Four Financial Group with More than One Hundred Smaller Domestic Banks and Seventy Foreign Banks

23. Efficiency • Economies of Scale • As Output Doubles Economies of Scale Mean Less Than the Doubling of Production Costs • Producing Multiple Units of the Same Package Costs Less Because of Efficiencies • Economies of Scope • A Financial Services Provider can Save Operating Costs When it Expands the Mix of Products it Offers • Resources are Used More Efficiently in Jointly Producing Multiple Services

24. Banking and Financial Firm Goals • Expense Preference Behavior • Managers Value Fringe Benefits Over Pursuit of Maximizing Return for Shareholders • Agency Theory • Explores Whether Mechanisms Exist to Compel Management to Act to Maximize the Return to Shareholders • Corporate Governance • Relationships Among Managers, the Board of Directors, the Stockholders and Other Stakeholders of a Corporation