Chapter Three

1. Chapter Three The Organization and Structure of Banking Industry

2. 3-2 Key Topics • The Organization and Structure of the Commercial Banking Industry • The Array of Organizational Structures in Banking • Interstate Banking and the Riegle-Neal Act • The Financial Holding Company • Mergers and Acquisition • Banking Structure and Organization in Europe and Asia • The Changing Organization and Structure of Banking’s Principal Competitors • Economies of Scale and Scope

3. Assets Held by U.S. FDIC-Insured Commercial Banks, 2007

4. Number of U.S. FDIC-insured Commercial Banks, 2007

5. Community Banks or Retail Banks • ‘Typical’ Size is $300 Million • Organizational Chart is Not Complicated • Significantly Affected by Health of Local Economy • Generally Know their Customers Well – Relationship Lending

6. Money Center or Wholesale Banks • Generally Multi-Billion Dollar Company • Organizational Chart is Much More Complex • Serve Many Different Markets with Many Different Services so are Better Diversified Geographically and by Product • Able to Raise Large Amounts of Capital at Relatively Low Costs

7. Unit Banks • Offer All Services From One Office • One of the Oldest Kinds of Banks • New Banks are Generally Unit Banks Until Can Grow and Attract More Resources

8. 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

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

10. What Trend in Branch Banking Has Been Prominent in the U.S. in Recent Years? From Table 3-2; Source: FDIC

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

12. Virtual Banks • Provide 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 • One-Bank Holding Companies vs. Multibank Holding Companies

14. 3-14 Organizational Structure of a BHC

15. Nonbank Businesses of BHCs • 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

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

17. 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

18. 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

19. Proponents and Opponents of Interstate Banking 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

20. Financial Holding Companies: GLB Act of 1999 • 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

21. Financial HoldingCompany Securities Subsidiaries Bank Real Thrift Holding Company Insurance Subsidiary Holding Estate Company Subsidiary Subsidiaries and Service Companies Thrift Company Nonbank Subsidiaries Commercial Banking Company 3-21 Sample Organizational Structure of FHC

22. 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

23. The Changing Organization and Structure • Rise in Branching, BHCs, and FHCs • Consolidation among Banks and Nonbanks • Convergence • Other forces of change: • Deregulation/Reregulation • Financial Innovation • Securitization • Globalization • Advances in Technology

24. Do Bigger Firms Operate at Lower Cost? • Economies of Scale • Exhibit 3-10 • Economies of Scope • Banking and Financial Firm Goals and Motivations • Expense-Preference Behavior • Agency Theory • Corporate Governance