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The Commercial Banking Industry

The Commercial Banking Industry. I. Commercial Banking History. A. State Banking, 1714 - 1863 Chartering by Legislation, 1714 Free Banking, 1837 B. Dual Banking, 1863 - 1914 C. Central Banking, 1914 - 1980 D. Deregulation, 1980 - . II. Industry Structure. A. Industry Composition

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The Commercial Banking Industry

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  1. The Commercial Banking Industry

  2. I. Commercial Banking History • A. State Banking, 1714 - 1863 • Chartering by Legislation, 1714 • Free Banking, 1837 • B. Dual Banking, 1863 - 1914 • C. Central Banking, 1914 - 1980 • D. Deregulation, 1980 -

  3. II. Industry Structure • A. Industry Composition • National Banks and State Banks • Member Banks and Non-Member Banks • Insured Banks and Uninsured Banks • Unit Banks and Branching Banks • Limited Branching • Statewide Branching • Interstate Branching

  4. II. Industry Structure (Cont.) • B. Market Concentration • Line of Commerce • Market Scope • Uniform Price Criterion • Political Boundary Criterion • Service Area Criterion • Measures • Concentration Ratio • Herfindahl-Hirschman Index

  5. Concentration Ratio InstitutionMarket Share Bank A 30% Bank B 25% Bank C 20% Bank D 15% Bank E 5% : : : : Concentration Ratio 90%

  6. Herfindahl-Hirschman Index InstitutionMarket Share (Market Share)2 Bank A 30% 900 Bank B 25% 625 Bank C 20% 400 Bank D 15% 225 Bank E 5% 25 Bank F 4% 16 Bank G 1% 1 HHI 2192

  7. II. Industry Structure (Cont.) • C. Correspondent Banking Correspondent Bank - Upstream Bank Respondent Bank - Downstream Bank • Payment System • Check Collection • Funds Transfers • Automated Clearing-House Services

  8. II. Industry Structure (Cont.) • C. Correspondent Banking (Cont.) • Payment System • Liquidity Maintenance • Overline and Liquidity Loans • Federal Funds Transactions • Supply of Currencies and Coins

  9. II. Industry Structure (Cont.) • C. Correspondent Banking (Cont.) • Asset Adjustments • Loan Participation • Collection of Non-Cash Items • Security Safekeeping • Trading Government Securities • Trading Money Market Instruments

  10. II. Industry Structure (Cont.) • C. Correspondent Banking (Cont.) • Management Services • Data Processing • Investment Advice • Capital Funding Advice • Operational Advice

  11. II. Industry Structure (Cont.) • D. Bank Holding Companies • Definitions • One-Bank Holding Company • Multi-Bank Holding Company • Reasons for the Growth • Economies of Scale • Economies of Scope

  12. II. Industry Structure (Cont.) • D. Bank Holding Companies (Cont.) • Activities • Permitted by Regulation • Extension of Credit • Trust Company and Fiduciary Activities • Data Processing Services • Investment or financial Advising • Securities Brokerage

  13. II. Industry Structure (Cont.) • D. Bank Holding Companies (Cont.) • Activities (Cont.) • Permitted by Regulation • Permitted by Order • Operating a Distressed Savings Institution • Trading Precious Metals • Employee Benefit • Underwriting Corporate Bonds • Denied

  14. II. Industry Structure (Cont.) • D. Bank Holding Companies (Cont.) • Activities (Cont.) • Permitted by Regulation • Permitted by Order • Denied • Underwriting Life Insurance • Land Investment/Development • Travel Agency Services • Management Consulting

  15. II. Industry Structure (Cont.) • E. Interstate Banking • Advantages • Safety through Diversification • Convenience and Accessibility • Efficiency • Competition • Models of Interstate Banking • Host-State Regulation • Home-State Regulation

  16. II. Industry Structure (Cont.) • A. Industry Composition • B. Market Concentration • C. Correspondent Banking • D. Bank Holding Companies • E. Interstate Banking • F. Non-Bank Banks

  17. F. Non-Bank Banks(Limited-Service Banks) • 1980 Gulf & Western Case • 1983 Federal Reserve Action Redefined commercial loans to include the purshase of commercial paper, CDs, and bankers acceptances. Redefined demand deposits to include interest- bearing checking accounts. Prevented the investment in corporate securities. • 1986 Court Decision • 1987 Competitive Equality in Banking Act.

  18. III. Financial Operations • A. Goals of Financial Operations • Safety • Liquidity • Profitability

  19. III. Financial Operations B. Banlance Sheet Analysis

  20. 1. Assets • Cash • Securities • Treasury Bills • Treasury Bonds • Federal Agency Securities • Municipal Bonds

  21. Loans • Commercial and Industrial Loans • Agricultural Loans • Consumer Loans • Real Estate Loans • Other Assets

  22. 2. Liabilities • Deposities • Non-Interest-Bearing Deposits • Interest-Bearing Deposits • Other Liabilities • 3. Capital and Capital Requirements

  23. C. Profitability • Loan Pricing • Asset-Liability Management

  24. The Commercial Banking Industry • I. Commercial Banking History • II. Industry Structure • III. Financial Operations

  25. The Commercial Banking Industry (cont.) • I. Commercial Banking History • II. Industry Structure • III. Financial Operations • IV. Bank Regulations

  26. IV. Bank Regulations • A. Regulators • Federal Regulators • FDIC • Federal Reserve System • Comptroller of the Currency • State Regulators

  27. A. Regulators • B. The Regulated • National Banks • State Banks • State Nonmember Noninsured Banks • State Nonmember Banks • State Member Banks

  28. A. Regulators • B. The Regulated • C. Regulations • Public Protection • Examination and Supervision • Deposit Insurance • Consumer Protection and Enforcement • Investor Protection

  29. C. Regulations (Cont.) • Public Protection • Banking Structure • Chartering • Branching • Merger and Acquisition • Bank Holding Company Activities • Insolvency

  30. C. Regulations (Cont.) • Public Protection • Banking Structure • Monetary Stability • Reserve Requirement • Discount Policy

  31. C. Regulations (Cont.) • Public Protection • Banking Structure • Monetary Stability • Major Federal Legislation

  32. Major Federal Legislation • The Federal Reserve Act (1913) • The Bank Holding Company Act (1956) • The Bank Merger Act (1966) • The Amendment to Bank Holding Company Act (1970) • The Depository Institutions Deregulation and Monetary Control Act (1980)

  33. The Depository Institutions Act (The Garn-St. Germain Act) (1982) • The Competitive Equality in Banking Act (CEBA) (1987) • The Financial Institutions Reform, Recovery, and Enforcement Act (1989) • The Federal Deposit Insurance Corporation Improvement Act (1991)

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