Professional Documents
Culture Documents
Structure, Regulation
and Performance
Chapter 15
Slide 4
Banking Regulatory Structure
Chartered
Given permission to engage in business of
commercial banking
Banks must obtain charter before opening
Commercial banks in U.S. are chartered
National Bank
Bank that has received charter from
Comptroller of Currency (federal government)
Dual Banking System
System whereby a bank may have either a
national or state charter
Slide 5
Regulatory Responsibilities
FDIC regulates:
State-chartered, insured non-Fed
members
Insured branches of foreign banks
Comptroller of Currency regulates:
National banks that are not bank
holding companies
Federally chartered branches of foreign
banks
Slide 6
Regulatory Responsibilities
Fed regulates:
State-chartered, insured members of the
Fed
All bank holding companies
All financial holding companies
Branches of foreign banking
organizations operating in U.S. and their
parent bank
States regulate:
State-chartered, non-FDIC-insured
Slide 7
banks that are not Fed members
Structure of Commercial
Banking System
Regulators
Interested in monitoring, influencing,
controlling structure of market for
banking services
Control entry into market
Control mergers among existing firms
Control branching in effort to maintain
many small firms
Slide 8
Structure of Commercial
Banking System
McFadden Act - 1927
Outlawed interstate branching
Made national banks conform to the intrastate
branching laws of states in which they were
located
Interstate Banking and Branching
Efficiency Act (IBBEA)
Signed into law in September 1994 by
Congress
Allows unimpeded, nationwide branching
Slide 9
Bank Holding Companies
Bank Holding Company
Corporation that owns several firms - at least
one is a bank
Owns one - one-bank holding company
Owns more than one – multi-bank holding company
Many banks organize into holding companies to:
Circumvent restrictions on branching, thus seek out
sources and uses of funds in other geographical
markets
Diversify into other product areas, thus providing
public with a wider array of financial services, while
reducing risk associated with limiting operations to
traditional banking services
Slide 10
Exhibit 15–5
Allowable
Activities for
Bank Holding
Companies
(Federal
Reserve
Regulation Y,
Revised
January 1,
2001)
Slide 11
Bank Holding Companies
Organizing into holding company allows
banks to:
Circumvent prohibitions on intrastate and
interstate branching (which now have been
virtually eliminated)
Participate in activities that otherwise would
be barred such as:
Data processing
Leasing
Investment counseling
Servicing out-of-state loans
Almost all large banks are owned by
holding companies
Slide 12
Financial Holding Companies
Financial Holding Companies
Engage in broader array of financial-
related activities than bank holding
companies
Securities underwriting & dealing
Insurance agency and underwriting activities
Merchant banking activities
Other activities that Fed determines to be
financial or incidental to financial activities
Any non-financial activity that Fed determines
is complementary to financial activity and
Slide 13
doesn’t pose a substantial risk
Bank Holding Companies and
Financial Holding Companies
Merchant Banking
Direct equity investment (purchasing of
stock) by a bank in a start-up or growing
company
Slide 14
Ongoing Changes in Structure
of Banking Industry
Increased competition in financial services
industry
Considerable erosion in domain and
effectiveness of many long-standing
financial regulations
Significant increase in share of total bank
assets controlled by largest banks
Pace and dollar volume of mergers
increased significantly
Slide 15
Slide 16
Evolution of International
Banking
Increase in international borrowing and
lending by domestic banks
Many foreign banks made significant
inroads into U.S. markets by the 1980s.
Agency of a Foreign Bank
U.S. Banking office of foreign bank
Can borrow funds only in wholesale and
money markets
Not allowed to accept retail deposits
Slide 17
Bank Management: Managing
Risk and Profits
Slide 18
Managing Risk and Profits
Asymmetric Information
Potential borrower knows more about
the risks and returns of an investment
project than bank loan officer
Adverse Selection Problem
When least desirable borrowers pursue
a loan most diligently
Slide 19
Managing Risk and Profits
Moral Hazard Problem
When borrower has incentive to use
proceeds of loan for more risky venture
after loan is funded
Bank manager must manage interest rate
risk
Adjustable-(Variable-) Rate Loan
When interest rate on loan is adjusted up
or down as cost of funds rises or falls
Banks can use financial futures, options
and swaps to manage interest rate risk
Slide 20
Bank Performance
Banks are facing increasing competition
from other FIs and nonfinancial
corporations in a global environment.
Nonbanks
Other intermediaries and nonfinancial
companies that have taken increasing
share of intermediation
Slide 21