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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