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US BANKING INDUSTRY

Prepared By:• Ankit Gupta (11DM-020)

• Kanishka Rao (11FN-049)
• Rohit Iyer (11FN-082) • Simran Preet (11FN-105) • Sahil Gupta (11IB-069)

• Sahil Singhal (11FN-087)
• Sri Lasya Gade (11FN-037)

US Banking Industry Risk
Strengths:
• Highly

Weaknesses:
• Even though losses on loans have

diversified and marketoriented economy, with an adaptable and resilient economic structure. large share of system wide funding needs.

abated in recent quarters, continued weakness in the real estate segment poses latent credit risks.
• Large and active nonbank

• Core retail deposits constitute a

competitors should continue to undermine the "competitive dynamics" of U.S. banks.
• The supervisory challenges of

• The U.S. benefits from the dollar's

standing as a key reserve currency, which helps compensate for the country's external debt and leads to minimal foreign-currency funding of the banking system.

monitoring the U.S.' innovative, complex, and dynamic financial system remain formidable, despite the regulatory overhaul underway.

Time Line of the Early History of US Banking

Steagall .A timeline of Banking Regulation Banking Act Restrictions on Competition McFadden Act Holding Company Act Monetary Control Act Great Depression Riegle-Neal 1956 1999 1933 1863 Restrictions on activities 1927 1980 1994 Graham .Bliley Holding Company Act Glass .Leach .

fraud were common • National Bank Act 1963 • federal charters for banks • Comptroller of the Currency • federal banknotes • tax on state banknotes • state banks survived by accepting deposits -.dual banking system .A Brief History DUAL BANKING SYSTEM • Banking at state level until Civil War • state charters. regulation • banknotes as local currency • failures.

S.S.CENTRAL BANK • U.S. (1791-1811)) • the Second Bank of the U. (1816-63) • U. had two prior central banks • the Bank of the U.S. central banks not popular • ranchers & farmers • states rights • 1863-1907 • no central bank • regular financial crises • panic of 1907 --bankers demanded a central bank • Federal Reserve System (1913) .

Branching Restrictions • McFadden Act 1927 • restricted intra and interstate branching of national banks • meant to protect small banks & increase competition • repealed 1994 (Riegle-Neal) • Glass-Steagall Act • separated permissible activities of commercial. investment banks • idea: limit risk for commercial banks • weakened over time • repealed 1999 .

1/3 of all U.Great Depression • 1930-33.S. banks failed • Congress responded to legislation • FDIC • federal insurance for bank deposits • banks pay premiums .

Regulators • Comptroller of the Currency • national banks • Federal Reserve • bank holding companies • state member banks • national banks (secondary) • FDIC • nonmember state banks • state regulators • state banks (secondary) .

.

Standard & Poor's Financial Institutions Ratings . Citigroup Inc. Bank of America Corp. Systemic Importance A/ Negative A-/ Negative A-/ Negative A+/ Negative 2290 2161 1916 1336 High High High High A-/ Negative 951 High Source:. The Goldman Sachs Group Inc. $) rating/ outlook JP Morgan Chase & Co. Wells Fargo & Co.Five Largest Financial Institutions By Assets Long-term counterparty credit Assets (bil.

small businesses rely entirely on banks for financing Stocks 2% Other 6% Bonds 30% Loans 62% . In particular.A majority of external funds raised by non-financial businesses come from bank loans.

There is a moral hazard problem/adverse selection problem between both the bank and its depositors as well as between the bank and its potential loan customers Depositors Bank Loans This problem must be dealt with through regulation A bank can deal with this problem with: •Credit Scoring •Collateral •Optimal Debt Contracts .

Depository Institutions are broadly defined as businesses that accept deposits and make loans Depository Institutions Commercial Banks Savings & Loans Savings Banks Credit Unions Non-Bank Thrifts •Deal almost exclusively in short term deposits and mortgages •Are generally mutual companies (depositors are the owners) •Are allowed to hold corporate equities/bonds .

All Depository Institutions in the US are chartered Depository Institutions Commercial Banks Savings & Loans Savings Banks Credit Unions National Banks Comptroller of the Currency State Banks State Authority Federal Associations Office of Thrift Supervision State Associations State Authority Federal Unions National Credit Union Administration State Unions State Authority .

• Federal Reserve members provide input to the election of Federal Reserve Board Members • The Federal Reserve provides check clearing services .Federal Reserve Membership (1913) • National Banks are Required to be members of the Federal Reserve System (Membership is optional for state banks) • Federal Reserve members are required to purchase stock in the federal reserve system.

National Banks 2001 Of the 7.769 banks in 2003. a vast majority are nonmember state banks State Banks (Non-Member) 4833 State Banks (Non-Member) 935 .

.Federal Deposit Insurance (1934) • Federal reserve members are required to purchase deposit insurance.000 are insured by the FDIC. Insurance is optional for state banks (98% of all banks have deposit insurance) • FDIC insured banks are charged up to 27 cents per $100 of eligible deposits • All deposits up to $100.

ATMs • Repealed 1994 .owned several banks -.but protected inefficient banks -. not both -.bank holding companies -.deposits or loans.limited economies of scale • Loopholes -.Decentralization & Consolidation McFadden Act resulted in many small banks • Meant to protect small banks & increase competition -.limited service banks -.

000 banks in 1985 • less than 8.000 today .Consolidation • Bank failures in 1980s • Loopholes in McFadden • Repeal of McFadden • Over 14.

Source:.Federal Financial Institutions Examination Council .Commercial Banks in the US Shaded areas indicate US recessions.

Until the mid 1900’s.000 68.000 National Banks Prohibited from interstate branching Must comply with state branching rules State Banks Unit Banking Limited Branching Main Office Statewide Branching Branch Offices . US was a nation of unit banks Year Number of Banks Total Branches 1900 2000 12.500 7800 McFadden Act (1927) 13.

A good thing? • Economies of scale • Diversification • But • risks with expansion? • responsive to small customers? .

the activities of commercial banks were severely restricted The Glass-Steagall Act of 1934 was designed to put a wall between commercial banking and investment banking Glass-Steagall (1934) Commercial Banks are restricted from participating in equities markets Interest rates on non.25% No interest allowed on transaction deposits Regulation Q .transaction deposits is restricted to be below 5.Following the great depression.

Branching Restrictions could be avoided by forming holding companies Main Office Holding Company Branch Offices Subsidiaries Illegal under the McFadden Act Legal under the McFadden Act .

Bank Offices Financial Services Makes loans.The Bank Holding Company act allowed holding companies with only one bank to provide limited non-bank financial services on an interstate basis. but doesn’t make loans Non. This created a loophole around Glass-Steagall!! Prior to Bank Holding Company Act After Bank Holding Company Act Holding Company Holding Company Bank Bank Bank Non-Bank Branches Collects deposits. but doesn’t collect deposits .

The Monetary Control Act (1980) Began the phase out of interest rate ceilings at depository institutions Imposed uniform reserve requirements on Banks and Thrifts Riegle-Neal Interstate Banking and Branching Efficiency Act (1994) Allowed holding companies to acquire banks in any state Allowed banks to branch across state lines Financial Services Modernization Act (Graham Leach-Bliley) (1996) Permitted financial holding companies offering banking. securities and other services under one controlling corporation (allowed Citicorp to buy Traveler’s Insurance) .Deregulation of the Financial Services sector began in the 1980’s. insurance.

Barings Bank went bankrupt due to losses in the Derivatives market. At the time. However.Problems with Monitoring The CAMELS System Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Interest Rate Risk Banks are monitored using the camels system. it was holding $60B worth of derivative contracts – a staggering number when compared to Baring’s reported equity of $615M!! . It’s not always easy to accurately assess the risk a bank is taking on Off Balance Sheet Activities Derivatives Financial Guarantees (SLC) Asset Securitization In 1995.

Problems with Restricting Activities Banks compete with other financial services companies as well as other banks!! During the late 1970’s. mortgage and small business lending was seriously curtailed! . but banks were restricted by regulation Q to pay only 5.25% in savings accounts and 0% on checking accounts Banks Checking Accounts (0%) Financial Companies Money Markey Mutual Funds (10%) As households pulled their money out of banks. market interest rates rose well above 10%.

they are forced to operate at an inefficiently small scale! By forcing banks to remain in a confined geographical location. but small marginal costs).e. they can use this to increase profits at the customers expense! Banking is a decreasing cost industry (i. you are forcing them to take on idiosyncratic (area specific) risk! . large startup costs.Problems with Restricting Competition (Branching) Restricting entry gives banks limited monopoly power. By forcing banks to remain small and local.

Decline of Traditional Banking • Traditional bank activities • decline in profitability • decline in importance .

Declining share of loans .

Rising profitability .

But due to nontraditional activities
share of income NOT from interest

Why the decline?
• Liability side: • cost of acquiring funds has risen • Asset side: • income generated has declined • Causes: • financial innovation since 1970s

Money market mutual funds
• Substitute for checking account from investment

companies
• pay interest • not insured (but low risk)

• Banks had to offer own version • raised the cost of funds

low-rated debt prior to 1980 • only for ratings of Baa (BBB) or better • Improvements in credit risk screening created market for new risky debt • Before 1980 • low-rated firms relied on banks • After 1980 • low-rated firms could borrow by issuing junk bonds • Junk bond markets competing with banks for lending business .Junk bond market • No market for new.

Commercial Paper • Easier to issue with improvements in credit risk screening • Demanded by money market mutual funds • Replaced corporate short-term borrowing from banks .

backed by pool of loans • owners of security get a share of the loan payments .Securitization • Transform illiquid loans into liquid debt securities • Individual loans bundled together • Debt securities issued.

. • other financial institutions take a part of the lending process -.The implications.service the loan -.originate the loan -.issue and sell security • finance companies that just specialize in originating loans .

commercial paper market -.junk bond market -.In total • Higher cost of obtaining funds • due to competition from money market • Lower income from loans • due to competition from -.financial companies .

Result of decline •Bank failures •Newer activities •fee income •credit cards •commercial real estate .

Globalization. there has been tremendous growth in international trade 6 5 4 3 2 1 0 1979 1986 1989 1992 1995 1998 World Trade (in Trillions of $s) .The Final Frontier Since the 1970’s.

The Final Frontier 400 Even more impressive is the growth in foreign exchange 350 300 250 200 150 100 50 0 1979 1986 1989 1992 1995 1998 Currency Transactions (in Trillions of $s) .Globalization.

but may not do business in the US. International Banking Facilities: Accepts time deposits and makes loans to foreign households & firms. but is limited to international trade transactions Branches: Offer a full line of banking services. but are subject to foreign laws . Can deal with both US and foreign citizens . Edge Act Corporations: Makes loans/accepts deposits.US Banks locate facilities abroad to aid in international trade as well as to avoid regulation and taxes US Banks Operating Abroad Subsidiaries: Governed by Federal Reserve Regulation K – must be involved in business “closely related to banking. Exempt from reserve requirements.

Subject to all US regulations.Likewise for Foreign Banks… Foreign Banks Operating in the US Agency Office: Can’t accept deposits from US citizens. Subsidiaries may also set up edge act corporations and international lending facilities . but can transfer funds from abroad and make loans in the US Branches: Offers a full range of banking services for US citizens Subsidiaries: Treated as a US bank.

Important Dates in International Banking Bank for International (BIS) Settlements Created International Banking Act Basle Accords I Foreign Bank Supervision Act BCCI Scandal 1930 1978 1988 1991 .

United States United Kingdom Federal Reserve Bank of England Under whose jurisdiction do international banks fall? (it’s a gray area) .

Regulating International Banking International Banking Act (1978) Brought foreign banks operating in the US under federal regulation for the first time Foreign banks. were not monitored as closely as US banks Foreign Bank Supervision Act (1991) Passed shortly after the BCCI scandal Gave the Federal Reserve and the Comptroller of the Currency greater control over foreign banks operating in the US . however.

Bank For International Settlements (1930) • Established to handle German WWI reparations. the BIS has become a center for international cooperation. • Played a central role in the Bretton Woods Exchange Rate System • Integral in the Establishment of the Euro • The BIS is like a central bank for central banks. .

0 1. Equity capital was required to equal at least 4% of a bank’s risk weighted assets.The Basle Accords established uniform capital requirements for banks around the world.5 1.0 . Risk weighted assets Asset Cash and equivalents Risk Weight 0 Government securities Interbank loans Mortgage loans Ordinary loans Standby letters of credit 0 0.2 0.

5)($2.500B (Saving) $ 2.5B) = $174.000B) = $0 (.2B .04)($4350.US Banking Sector Assets Liabilities Risk Weighted Assets $ 54B (Cash) $ 800B (Checking) $ 46B (Reserves) $ 4.701B) = $1.5B + (1)($3.000B (Equity) $4. Req.5B Required Equity = (.350.701 (Mortgage) $ 3.000 (T-Bills) Loans Loans $ 1B (Discount) $ 2.000 (Other) (0)( $54B) = $0 (0)($46B) = $0 (0)($2.000B Res.350. = 5% $1.000B) = $3.

Problems with International Regulation • The key issue is that the banking industry in Japan and Europe is Fundamentally different from the US. .

517.083.000 SAN FRANCISCO.000 MINNEAPOLIS. CA $1. NY $846.146.381 NEW YORK.000 $330.000 $353.490. NC $2.284..188.000 $317. WELLS FARGO & COMPANY GOLDMAN SACHS GROUP.336.000 $2. NY $2.168. MORGAN STANLEY U.Why BOFA? Rank 1 2 3 4 5 6 7 8 9 10 Institution Name Location Total Assets 09/30/2012 Total Assets 06/30/2012 JPMORGAN CHASE & CO.451 HSBC NORTH AMERICA HOLDINGS INC. THE METLIFE. NY $340.162.105 $2.931.023. NY $1.136.204.102. NY $949.gov/nicpubweb/nicweb . INC.000 BANK OF AMERICA CORPORATION CITIGROUP INC.000 $1.321. NY $320.916. THE CHARLOTTE.285.374.000 MN NEW YORK.290.482.985.475. Source:http://www.485 NEW YORK.981.000 NEW YORK.ffiec. NEW YORK.000 NEW YORK.346. INC.S.715.000 $1.490 $748.451.396 NEW YORK. BANCORP BANK OF NEW YORK MELLON CORPORATION.000 $948. $352. NY $764.253.000 $825.833.

Asset Size:US vs World Asset size 3.500.00 Total Assets.500.00 2.000.00 500.relbanks.00 2.00 1.000.00 0. US$b as on 30/09/12 Source:www.00 1.000.com .

Market Capitalization:US vs World Market Cap 180 160 140 120 100 80 60 40 20 0 Source:www.com .relbanks.

•Largest bank holding company in the United States by assets. Bank of America is the fifth-largest company in the United States by total revenue. •The bank's 2008 acquisition of Merrill Lynch made Bank of America the world's largest wealth management corporation and a major player in the investment banking market. . North Carolina.INTRODUCTION •American multinational banking and financial services corporation headquartered in Charlotte. as well as the thirdlargest non-oil company in the U.S. •As of 2010.

S. • It has a retail banking footprint that covers approximately 80 percent of the U.• One of the Big Four banks in the United States. JPMorgan Chase and Wells Fargo—its main competitors.600 banking centers and 16.S. population and serves approximately 57 million consumer and small business relationships at 5.200 ATMs. . along with Citigroup. the District of Columbia and more than 40 other countries. • Bank of America operates in all 50 states of the U..

He renamed the Bank of Italy on November 3. the latter established in 1918. when Amadeo Giannini founded the Bank of Italy in San Francisco in an effort to cater to immigrants denied service by other banks. calling it Bank of America. • On March 7. • In 1922. Giannini merged with Bank of America. . A. Giannini established Bank of America and Italy in Italy by buying Banca dell'Italia Meridionale. Giannini consolidated his Bank of Italy (101 branches) with the newly formed Liberty Bank of America (175 branches). Los Angeles. 1930. 1927. P. • In 1928.HISTORY Bank of Italy • The history of Bank of America dates back to 1904.

Growth in California • Federal banking regulators prohibited Bank of America's interstate banking activity. • In 1958. . and Bank of America's domestic banks outside California were forced into a separate company. the bank introduced the BankAmericard. • It was not until the 1980s with a change in federal banking legislation and regulation that Bank of America was again able to expand its domestic consumer banking activity outside California. which changed its name to Visa in 1975. • A consortium of other California banks introduced Master Charge (now MasterCard) to compete with BankAmericard.

• In 1992. Later that year. Washington. • In 1994. of Chicago. BankAmerica expanded into Nevada by acquiring Valley Bank of Nevada. • BankAmerica experienced huge losses in 1986 and 1987 by the placement of a series of bad loans in the Third World. as well as its wholly owned banking subsidiary. Robertson Stephens was integrated into BancAmerica Securities and the combined subsidiary was renamed BancAmerica Robertson Stephens .Expansion outside California • In 1983. Security Pacific Corporation and its subsidiary Security Pacific National Bank in California. a San Francisco-based investment bank specializing in high technology for $540 million. particularly in Latin America. acquired Seafirst Corporation of Seattle. BankAmerica acquired the Continental Illinois National Bank and Trust Co. acquired its California rival. • In 1997. Seattle-First National Bank. BankAmerica acquired Robertson Stephens.

• BankAmerica was acquired by Nations Bank of Charlotte in October 1998.4 billion in order to run various businesses for the bank. • The merged bank took the name Bank of America Corporation.. $1.Merger of NationsBank and BankAmerica • In 1997. • the integration of BancAmerica Robertson Stephens and NationsBanc Montgomery Securities. Shaw & Co. a large hedge fund. was renamed Banc of America Securities in 1998. E. BankAmerica lent D. .

SWOT Large market share Cleaning up Robust growth in core banking Product and service innovation Convenience Legal expenses Weak wholesale banking operations Declining net interest margins Failing in social media presence Fails at handling public relations Weak trend in U.S. mortgage put-back costs. consumer behaviors Litigation threats Threat from defaults in residential lending and credit cards Additional foreclosure. and regulatory costs Expansion in international markets Holds the largest market share in the U.S Merrill Lynch Acquisition Owns a massively large customer base .

Product Developments • CashPro Online :The bank introduced three new applications to boost its global treasury management and online banking platform • CashPro Payments • CashPro Information Reporting • CashPro Mobile • Bank of America to change fees for checking accounts. cites increased regulation • Bank of America Introduces New eBanking Checking Account for Customers Who Prefer to Bank On-The-Go 2011 2010 .

Bank of America and Banco Itaú entered into an acquisition agreement through which Itaú agreed to acquire BankBoston's operations in Brazil and was granted an exclusive right to purchase Bank of America's operations in Chile and Uruguay. 2005. Bank of America announced it would purchase credit card giant MBNA for $35 billion in cash and stock. Bank of America announced it would purchase Boston-based bank FleetBoston Financial for $47 billion in cash and stock. • In May 2006. • On November 20.3 billion. 2006.KEY HAPPENINGS • In 2004. • On June 30. Bank of America announced the purchase of The United States Trust Company for $3. .

surpassing JPMorgan Chase. With this purchase. • Bank of America became the largest bank in the Chicago market with 197 offices and 14% of the deposit share.7 trillion in assets. Bank of America possessed 1. 2007.500 ATMs. • LaSalle Bank and LaSalle Bank Midwest branches adopted the Bank of America name on May 5.• On September 14. • The deal increased Bank of America's presence in Illinois. Bank of America won approval from the Federal Reserve to acquire LaSalle Bank Corporation from Netherlands's ABN AMRO for $21 billion. and 1.4 million retail customers. 17. . 2008.000 commercial bank clients. and Indiana by 411 branches. Michigan. 1.

2007.25% per annum and provided the option to purchase common stock at a price of $18 per share. • This purchase of preferred stock was arranged to provide a return on investment of 7. • On January 11. controlling 20– 25% of the home loan market.1 billion.Acquisition of Countrywide Financial • On August 23. . the company announced a $2 billion repurchase agreement for Countrywide Financial. • This purchase made Bank of America Corporation the leading mortgage originator and servicer in the U. 2008. • Countrywide Financial has changed its name to Bank of America Home Loans. Bank of America announced they would buy Countrywide Financial for $4.S..

• At the same time Bank of America was reportedly also in talks to purchase Lehman Brothers.Acquisition of Merrill Lynch • On September 14. was then $45 billion. including Merrill Lynch. and down $108 billion from the merger announcement. Inc. the third largest underwriter of global equity and the ninth largest adviser on global mergers and acquisitions. less than the $50 billion it offered for Merrill just four months earlier. . in an all-stock deal worth approximately $50 billion. 2008. • The market capitalization of Bank of America.. Bank of America announced its intentions to purchase Merrill Lynch & Co. • The acquisition made Bank of America the number one underwriter of global high-yield debt.

2009. 2009. using $26. along with a guarantee of $118 billion in potential losses at the company. government through the Troubled Asset Relief Program (TARP) on January 16.Federal Troubled Asset Relief Program (TARP) • Bank of America received $20 billion in the federal bailout from the U. • On December 2.S.6 billion to be gained in "common equivalent securities" . • The additional payment was part of a deal with the U. Bank of America announced it would repay the entire $45 billion it received in TARP and exit the program. government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.S.2 billion of excess liquidity along with $18.

• Bank of America will cut around 16. Bank of America began conducting personnel reductions of an estimated 36. • This will put a plan one year ahead of a time to eliminate 30.Downsizing (2011 to 2014) • During 2011. contributing to intended savings of $5 billion per year by 2014.000 people.000 jobs under a cost-cutting program called Project New BAC. .000 jobs in a quicker fashion by the end of 2012 as revenue continues to decline because of new regulations and a slow economy.

800 retail branches and over 18. • Competes with the retail banking arms of America's three other megabanks: Citigroup. Consumer • The Consumer Banking organization includes over 5. • member of the Global ATM Alliance . JPMorgan Chase.S. and Wells Fargo.000 ATMs across the United States.Operations • Bank of America generates 90% of its revenues in its domestic market and continues to buy businesses in the U.

• Its strongest groups include Leveraged Finance.S. It is among the 10 largest U. and 79% of the Global Fortune 500. as well as sales & trading in fixed income and equities markets.S. .Corporate • The bank's investment banking activities operate under the Merrill Lynch subsidiary and provides mergers and acquisitions advisory. capital markets. investment banking business • looking to become one of the top five investment banks worldwide. wealth managers. Investment management • Global Wealth and Investment Management manages assets of institutions and individuals. underwriting. • Bank of America has recently spent $675 million building its U.S. and mortgage-backed securities. • Its clients include 98% of the Fortune 500 companies in the U. Syndicated Loans.

In 2006. Bank of America sold BankBoston's operations to Brazilian bank Banco Itaú. • Bank of America currently has offices in Hong Kong. including Brazil. • Bank of America's Global Corporate and Investment Banking spans the Globe with divisions in United States. Europe. Shanghai. . Bank of America acquired a 9% stake in China Construction Bank. Bank of America was awarded Project Finance Deal of the Year at the 2008 ALB Hong Kong Law Awards. in exchange for Itaú shares.International operations • In 2005. • Bank of America operated under the name BankBoston in many other Latin American countries. and Guangzhou and was looking to greatly expand its Chinese business as a result of this deal. one of the Big Four banks in China. and Asia. for $3 billion. • In 2008. Bank of America announced plans to divest most of its stake in the China Construction Bank. • In November 2011.

01 0.30 2.37 .01 89.78 0.07 17 Net interest yield (%) Earnings (loss) per common share ($) Diluted earnings (loss) per common share ($) 2.08 2.37 -0.24 74.60 1.06 85.41 2.66 11 2010 8.61 93.86 0.Financials Parameters Tier 1 Capital Adequacy Ratio(%) Debt Service Coverage ratio(%) Current ratio Assets to deposits ratio Efficiency ratio (%) Loans to deposits (%) Cash Deposit ratio(%) 2011 9.50 2.01 1.96 -0.