Why Are Financial
Overview of Banking
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 7769 in 2003. 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, Bankers Trust, 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
Regulation of Depository Institutions
← Goals and Functions of Bank Regulation
✓ Ensure the Safety and Soundness of Banks
✓ Provide an Efficient and Competitive Financial System
✓ Provide Monetary Stability
✓ Maintain the Integrity of the Payments System
✓ Protect Consumers from Abuses
← Dual Banking System: Coexistence of nationally and state-chartered banks.
✓ Office of the Comptroller of the Currency (OCC)
← Charters national banks
✓ Office of Thrift Supervision (OTS)
← Charters federal savings banks and savings associations
✓ National Credit Union Administration
← Charters federal credit unions
✓ State Banking Authorities
← Charter state banks
✓ State Savings Authorities
← Charter state savings banks
✓ State Credit Union Authorities
← Charter state credit unions
Federal Deposit Insurance
✓ Depositors are currently insured up to $100,000 per qualify account per insured bank
✓ FDIC maintains the deposit insurance fund at 1.25% of insured deposits.
✓ Currently, the fund is “well-funded” and over 90% of banks pay no insurance premium
National versus State Charter
✓ All banks obtain FDIC deposit insurance as part of the chartering process
✓ National banks must join the Fed
← Primary regulator is the OCC
✓ State banks may join the Fed
State banks are regulated by their state banking authority.
State banks also have a primary federal regulator
The primary federal regulator of state banks that are members of the Fed is the Federal Reserve
The primary federal regulator of Non-Fed member state banks is the FDIC
← What is Regulated?
✓ Initial creation of depository institutions
← Initial licensing and chartering
← Location and number of physical branches, offices
← Initial board of directors and officers
← Minimum cash and capital requirements to open
✓ On-going operations
← Mergers and acquisitions
← Opening or closing of offices, branches
← Many operations procedures
← What financial services/products may be offered
✓ Assets
← Diversification of assets
← Quality of assets
← Liquidity of assets
← Level of cash reserves
✓ Liabilities & equity
Types of liabilities created
Distribution of financing of assets
Quality of liability and equity accounts
Minimum capital requirements
✓ Others
← Community involvement
← Degree of market share in each market area
← Non-discriminatory operating policies
← Degree of risk created through the use of derivatives and other financial instruments
← Regulatory Process
✓ Examinations
← Federal Financial Institutions Examination Council (FFIEC)
← Securities & Exchange Commission
← State Regulatory Departments
✓ Reports
← Multiple agencies
← Multiple areas
✓ CAMELS Rating: C apital adequacy; A sset Quality; M anagement Quality; E arnings – amount & stability; L iquidity; S ensitivity to market risk
← One versus Multiple Regulators
✓ Multiple regulators
← Provide more ability to detect problems
← Provide cross-checks
← Are inefficient and costly to maintain
✓ One regulator
← More efficient and lower cost
← Too much power concentrated in one place
Fundamental Forces of Change in Banking
← Deregulation
← Financial Innovation
← Securitization
← Globalization
← Advances in Technology
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