Overview of Depository Institutions



Overview of Depository Institutions

Size, Structure and Composition of Depository FIs

Definition of Commercial Bank

✓ Accept demand deposits and make commercial loans.

Consolidation has created some very large depository FIs

Depository institutions

Commercial Banks

Specialize in short-term business credit

Largest depository institutions are commercial banks

← Shrinking number of banks: 14,416 commercial banks in 1985, 12,744 in 1989, 8,315 in 2000 and 5,328 in 2015. Mostly the result of mergers and acquisitions

← Commercial banks are also classified as

• Community banks

• Regional and Super-regional: Access to federal funds market to finance their lending activities

• Money Center banks: Bank of New York, Citigroup, J.P. Morgan/Chase, HSBC Bank USA

← Financial Services Modernization Act 1999: Allowed full authority to enter investment banking (and insurance)

✓ Thrifts

← Savings & loan associations (S&Ls):

• Founded in mid-1800s

Specialize in real estate loans

• Members pooled funds to loan to members to buy houses

• Originally all were mutual associations, the board elected by members; now some are stock-issuing corporations

← Savings Banks:

• Founded in early 1800s

• Provided savings accounts for individuals

• Existed then and now only in New England

✓ Credit Unions

← Fields of membership requirements: employee groups, associations, religious affiliations and residential areas

← Not- for-profit organization

← Offers lower average fees and more competitive rates than banks do

Understanding Commercial Bank’s Balance Sheets

Balance Sheet

Assets = Liabilities + Equity

Bank assets

← Cash and due from banks: vault cash, deposits held at the Fed and other financial institutions, and cash items in the process of collection

← Investment Securities: assets held to earn interest and help meet liquidity needs

← Loans: the major asset, generate the greatest amount of income, exhibit the highest default risk and are relatively illiquid

← Other assets: bank premises and equipment, interest receivable, prepaid expenses, other real estate owned, and customers' liability to the bank

✓ Commercial banks primary assets:

2000 2015

Real Estate Loans: $1,670.3 billion $3,921.4 billion

C&I loans: $1,048.2 billion $1,779.3 billion

Loans to individuals: $609.7 billion $1,362.6 billion

Other loans: $367.5 billion $669.4 billion

Investment security portfolio: $1,662.0 billion $3,052.1 billion

Of which, Treasury bonds: $710.0 billion $406.6 billion

8 Bank liabilities and equity

Assets = Liabilities + Equity

✓ Bank liabilities

← Demand deposits: transactions accounts that pay no interest

← Negotiable orders of withdrawal (NOWs) and automatic transfers from savings (ATS) accounts: pay interest set by each bank without federal restrictions

← Money market deposit accounts (MMDAs): pay market rates, but a customer is limited to no more than six checks or automatic transfers each month

← Savings and time deposits represent the bulk of interest-bearing liabilities at banks:

← Deposits held in foreign offices: balances issued by a bank subsidiary located outside the U.S.

← Rate-sensitive borrowings: Federal Funds purchased and Repos

Core vs. volatile funds

← Core deposits include: demand deposits, NOW accounts, MMDAs, and small time deposits

← Core deposits are stable deposits that are not highly interest rate-sensitive

← Core deposits are more sensitive to the fees charged, services rendered, and location of the bank

← Volatile liabilities or net non-core liabilities include: large CDs (over 100,000), deposits in foreign offices, federal funds purchased, repurchase agreements, and other borrowings with maturities less than one year

← Large, or volatile, borrowings are liabilities that are highly rate-sensitive

✓ Commercial banks’ primary liabilities:

2000 2015

Deposits: $4,176.6 billion $11,349.5 billion

Borrowings: $1,532.5 billion $1,297.5 billion

Other liabilities: $401.0 billion $563.8 billion

Stockholders equity

← Subordinated notes and debentures: notes and bonds with maturities in excess of one year

← Ownership interest in the bank: common and preferred stock and retained earnings

11 The income statement

✓ Interest income (II): the sum of interest and fees earned on all of a bank's assets, interest income includes interest from:

← Loans

← Deposits held at other institutions

← Municipal and taxable securities, and

← Investment and trading account securities

Interest expense (IE) is the sum of interest paid on all interest-bearing liabilities

Interest income less interest expense is net interest income (NII)

Loan-loss provisions (PLL): represent management's estimate of potential lost revenue from bad loans

Noninterest income (OI)

Noninterest expense (OE)

← Personnel expense: salaries and fringe benefits paid to bank employees

← Occupancy expense : rent and depreciation on equipment and premises, and

← Other operating expenses: utilities and deposit insurance premiums

Evaluating bank performance

13 Return on equity (ROE)

Return on assets (ROA)

15 Trends of bank’ balance sheets

✓ Business loans have declined in importance

✓ Offsetting increase in securities and mortgages

✓ Increased importance of funding via commercial paper market

✓ Securitization of mortgage loans

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download