Sapienza Università di Roma

1. Sapienza Università di Roma International Banking Lecture Eleven Banking in the United States Prof. G. Vento

2. Agenda • Introduction to Banking in the United States • Structure of the Banking and Financial System in the US • Key issues of US Banking Industry • Banking Regulation in the US International Banking - Prof. G. Vento

3. Introduction to Banking in the United States: Recent Trends • Industry concentration • Important regulatory changes (i.e. Gramm-Leach-Bliley Act of 1999) • Disintermediation International Banking - Prof. G. Vento

4. Banking in the US: Structure of Banking and Financial System • Wide range of financial intermediaries: • Depository institutions: commercial banks, saving institutions and credit unions. They mostly collect deposits. • Contractual saving institutions. Insurance companies and pension funds whose main liabilities are long-term future benefits to be paid to policy holders and fund holders. These liabilities usually take form of reserves. • Investment intermediaries. Mutual funds, investment funds, securities firms whose liabilities are usually short-term money market or capital market securities. International Banking - Prof. G. Vento

5. Banking in the US: Depository Institutions • Commercial banks are the major financial intermediaries in the US economy. • A list of many commercial banks in the United States can be found at the website of the Federal Deposit Insurance Corporation (FDIC).According to the FDIC, there were 8,430 FDIC-insured commercial banks in the United States as of August 22, 2008. They used to be over 14,000 in 1984. International Banking - Prof. G. Vento

6. Gramm-Leach-Bliley Act • The Glass-Steagal Act (1932) separated commercial banking and investment banking. • The Gramm-Leach-Bliley Act (1999) allows to create financial holding companies where banks can engage in securities underwriting, insurance sales and a broad range of investment banking and other financial services business • All the major banks are part of FHCs. • For an overview on the Gramm-Leach-Bliley Act see: http://www.frbsf.org/publications/banking/gramm/grammpg1.html#criteria International Banking - Prof. G. Vento

7. Banking industry in US: Foreign Banks • Foreign banks play a significant role: in 2004 about 18% of assets and 22% of business lending belonged to foreign banks. • Top US banks (Citibank, JPMorganChase, Bank of America, etc.) have significant businesses in Europe, Asia and Latin America. International Banking - Prof. G. Vento

8. Banking industry in US: Savings Institutions • Savings institutions are similar to commercial banks, although their main difference relates to their ownership features • Savings institutions traditionally have mutual ownership. They are owned by ‘members’ or ‘shareholders’ who are the depositors or borrowers. • The main type of saving institutions in the US are the so-called Savings and Loan Associations (or thrifts) International Banking - Prof. G. Vento

9. Banking industry in US: Credit Unions • Credit Unions are another type of mutual depository institutions which have grown in importance over the last decade or so • These are non-profit institutions and are owned by their members • Members deposits are used to offer loans to the members. • They are almost totally focused on retail financial services. International Banking - Prof. G. Vento

10. Banking industry in US: Credit Unions • Credit unions originated in Europe in the mid 19th century. The first credit union in the United States was established in 1908 in New Hampshire. At the time, banks were unwilling to lend to many poor laborers, who then turned to corrupt moneylenders and loan sharks. • Businessman and philanthropist Edward Filene spearheaded an effort to secure legislation for credit unions first in Massachusetts and later throughout the United States. With the help of the Credit Union National Extension Bureau and an army of volunteers, states began passing credit union legislation in the 1920s. Credit unions were formed based on a bond of association, often beginning with a small group of employees. Despite opposition from the banking industry, the Federal Credit Union Act was signed into law in 1934 as part of the New Deal, allowing the creation of federally chartered credit unions in the United States. The Credit Union National Association (CUNA) was formed and by 1937, 6400 credit unions with 1.5 million members were active in 45 states. • Today there are over 9500 credit unions in the United States and they are regulated by the National Credit Union Administration (NCUA). International Banking - Prof. G. Vento

11. Contractual Savings Institutions: Insurance Companies and pension funds • Insurance products are an integral feature of the financial services sector and many US banks nowadays cross-sell insurance services to their banking clients. • Private pension funds. They are pension funds that are administered by a bank, a life insurance firm or pension fund manager. • Public pension funds are the pension provision of the government. In the United States the most important public pension plans are the Social Security old Age and Survivors Insurance Fund. International Banking - Prof. G. Vento

12. Investment Intermediaries • A mutual fund is a company that pools the money of many investors in order to invest in a range of investment securities. • Investment banks. Important changes after the great financial crisis. International Banking - Prof. G. Vento

13. Regulation of US Banking System • Different regulatory agencies • Office of the Comptroller of the Currency (OCC). It’s an independent bureau of the Treasury in charge to supervise all national banks • Federal Reserve System. In addition to its monetary policy rules, the Fed is also responsible for regulating various type of banks: • Bank holding companies • State-chartered banks • Foreign branches of member Banks.

14. Federal Reserve System • The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the Federal Reserve (a quasi-governmental entity), creating the twelve regional Federal Reserve Banks which are supervised by the Federal Reserve Board. • Notwithstanding the Glass-Steagall Act of 1932 and the Banking Act of 1933 and the Banking Act of 1935, which were attempts to reform various banking abuses, the Federal Reserve System has remained more or less unchanged through to the present day. • The Glass-Steagall Act was repealed in 1999, whereas the Banking Act of 1933 simply strengthened the supervisory powers of federal authorities and created the Federal Deposit Insurance Corporation. International Banking - Prof. G. Vento

15. Federal Reserve System: goals • Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates. • Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers. • Maintaining stability of the financial system and containing systemic risk that may arise in financial markets. • Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system. International Banking - Prof. G. Vento

16. Federal Reserve Parts • According to the Federal Reserve, the Federal Reserve System is presently composed of five parts: • The presidentially appointed Board of Governors, an independent federal government agency located in Washington, D.C. • The Federal Open Market Committee (FOMC), which oversees Open Market Operations, the principal tool of national monetary policy. • Twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation, which divide the nation into 12 districts, acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors. • Numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks. • Various advisory councils. International Banking - Prof. G. Vento

17. Federal Deposit Insurance Corporation • The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. The FDIC insures deposits at 8,195 institutions. • The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks). • Insured institutions are required to place signs at their place of business stating that "deposits are backed by the full faith and credit of the United States Government.“ • Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. International Banking - Prof. G. Vento

18. Performance of US Commercial Banks • US commercial banks have been among the most profitable banks in the developed world over the last decade averaging ROE of 15%. • Before the crisis total assets increased (11%), capital increased, growth in corporate lending as well as in commercial real estate lending, residential mortgage lending, securities. International Banking - Prof. G. Vento

19. Next Lecture : BANKING IN JAPAN International Banking - Prof. G. Vento