Chapter Three

The Organization and

Structure of Banking
and the Financial-
Services Industry

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 3-2

Key Topics

• The Organization and Structure of the

Commercial Banking Industry
• The Array of Organizational Structures in
Banking
• Interstate Banking and the Riegle-Neal Act
• The Financial Holding Company
• Mergers and Acquisition
• Banking Structure and Organization in Europe
and Asia
• The Changing Organization and Structure of
Banking’s Principal Competitors
• Economies of Scale and Scope
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Assets Held by U.S. FDIC-Insured

Commercial Banks, 2007
2%

11%
Assets Held By Large
Banks
Assets Held By Medium
Banks
Assets Held By Small Banks
87%

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Number of U.S. FDIC-insured

Commercial Banks, 2007

7%

43% Small ≤ $100 Million

50% Medium $100 Million -

$1 Billion
Large > $1 Billion

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Community Banks or Retail Banks

• ‘Typical’ Size is $300 Million
• Organizational Chart is Not Complicated
• Significantly Affected by Health of Local
Economy
• Generally Know their Customers Well –
Relationship Lending

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Money Center or Wholesale Banks

• Generally Multi-Billion Dollar Company

• Organizational Chart is Much More Complex
• Serve Many Different Markets with Many
Different Services so are Better Diversified
Geographically and by Product
• Able to Raise Large Amounts of Capital at
Relatively Low Costs

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Quick Quiz
• What are the general trends in the size
distribution and asset concentration of
American banking industry?
• Describe differences between a typical
organizational structure of smaller
community bank and a larger money-center
bank.
• What trends are affecting the way banks and
their competitors are organized today?

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Common Classifications of U.S. Banks

FDIC Ins ur ed Banks 98%

Not FDIC Ins ur ed 2%

0% 20% 40% 60% 80% 100% 120%

National Banks 25%

State Banks 75%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Member Banks 36%

Non Member Banks 64%

0% 10% 20% 30% 40% 50% 60% 70%

Source: FRB and FDIC, 2005

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Deposits Held By Banks

Deposits of National Banks 55%

Deposits of State Banks 45%

0% 10% 20% 30% 40% 50% 60%

Depos its of Member Banks 77%

Depos its of Non Member Banks 23%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Source: FRB and FDIC, 2005

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Unit Banks

• Offer All Services From One Office

• One of the Oldest Kinds of Banks
• New Banks are Generally Unit Banks Until
Can Grow and Attract More Resources

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Branch Banks
• Offer Full Range of Services from Several
Locations
• Senior Management at the Home Office
• Each Branch has its Own Management Team
with Limited Decision Making Ability
• Some Functions are Highly Centralized,
While Others are Decentralized

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Reasons for Growth of Branching

• Exodus of Population to Suburban

Communities
• Increased Bank Failures in Recent Years
• Business Growth

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What Trend in Branch Banking Has Been

Prominent in the U.S. in Recent Years?
Year # of Bank # of Total of Ave # of
Main Branch U.S. Bank Branches/
Offices Offices Offices U.S. Bank

1934 14,146 2,985 17,131 0.21

1970 13,511 21,810 35,321 1.61

1982 14,451 39,784 54,235 1.75

2007 7,241 77,947 85,188 10.76

From Table 3-2; Source: FDIC

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Electronic Branches
• Internet Banking Services
• Automated Teller Machines (ATMs)
• Point of Sale (POS) Terminals

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Virtual Banks

• Provide their Services Exclusively Through

the Web
• Can Generate Cost Savings Over Traditional
Brick-and-Mortar Banks
• Have Not Yet Demonstrated They Can Be
Consistently Profitable

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Bank Holding Companies (BHC)

• A Corporation Chartered for the Purpose of

Holding the Stock of One or More Banks
• Control of a bank is Assumed When 25% or
More of the Stock is Owned
• Must Get Approval from Federal Reserve
Board to Control a Bank
• One-Bank Holding Companies vs. Multibank
Holding Companies

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Organizational Structure of a BHC

Single Ba nk Holding Com pa ny

Boa rd of Dire c t ors

Pa re nt Com pa ny

E a c h s ubs idia ry ha s a
Ba nk S ubs idia ry Nonba nk Subsidia rie s
pre s ide nt a nd line offic e rs

Ba nk Bra nc he s

The bottom four le ve ls ha ve the sa m e orga niza tiona l form a s the inde pe nde nt ba nk.

Mult iba nk Holding Com pa ny

Boa rd of Dire c t ors

Pa re nt Com pa ny

Ba nk S ubs idia ry Nonba nk Subsidia rie s Ba nk S ubs idia ry

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Nonbank Businesses of BHCs

• Finance Companies • Investment Banking
• Mortgage Companies Firms
• Data Processing • Trust Companies
Companies • Credit Card
• Factoring Companies Companies
• Security Brokerage • Leasing Companies
Firms • Insurance Companies
• Financial Advising and Agencies
• Credit Insurance • Real Estate Services
Underwriters • Savings Associations
• Merchant Banking
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Reasons for the Growth of BHCs

• Geographic Diversification
• Product Line Diversification
• Tax Sheltering
• Double Leveraging
• Source of Strength
• A Way Around Regulatory Restrictions

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Reasons for Full-Service Interstate

Banking
• Need to Bring New Capital to Revive
Struggling Local Economies
• The Expansion by Non Bank Financial
Institutions with Fewer Restrictions
• A Strong Desire by Large Banks to Expand
Geographically
• Belief Among Regulators that Large Banks
are More Efficient and Less Prone to Failure
• Advances in Technology

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Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994
• Allows BHCs to Acquire Banks Anywhere in
the U.S.
• Allows BHCs to Convert Banks to Branches –
June 1997
• States Can ‘Opt Out’ and Not Allow BHCs to
Convert to Branches
• States Can ‘Opt In’ Early
• Limits Deposits of One BHC to 10%
Nationwide and 30% Within One State

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Proponents and Opponents of

Interstate Banking

Proponents Opponents
• Efficient Use of Scarce • Increased Bank
Resources Concentration
• Lower Prices for Services • Less Competition
• Geographic Diversification • Higher Prices for Services
• Efficient Flow of Credit in • Drain Resources from
the System Community

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Financial Holding Companies: GLB

Act of 1999
• Special Type of Holding Company
• Offers the Broadest Range of Services
• List of Activities Offered May Expand as
Regulators Decide What Services are
‘Compatible’ with Banking
• Each Affiliated Financial Firm has its Own
Capital and Management and its Own Profit
or Loss

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Sample Organizational Structure of FHC

Financial Holding
Company

Bank Securities Real

Insurance Thrift Holding
Subsidiaries
Holding Subsidiary Company Estate
Company Subsidiary

Subsidiaries
Commercial Nonbank Thrift Company and Service
Banking Subsidiaries Companies
Company

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Bank Subsidiaries

• Bank Controls One or More Subsidiaries

• Subsidiaries Offer Other Services Such as
Insurance and Security Brokerage Services
• Profits and Losses of Each Subsidiary Impact
Parent Bank

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The Changing Organization and

Structure
• Rise in Branching, BHCs, and FHCs
• Consolidation among Banks and Nonbanks
• Convergence
• Other forces of change:
▫ Deregulation/Reregulation
▫ Financial Innovation
▫ Securitization
▫ Globalization
▫ Advances in Technology
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Do Bigger Firms Operate at Lower

Cost?
• Economies of Scale
• Exhibit 3-10
• Economies of Scope
• Banking and Financial Firm Goals and
Motivations
• Expense-Preference Behavior
• Agency Theory
• Corporate Governance

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Structure and Organization of Banks

in Europe
• Germany – Largest European Banking
Industry
▫ Private Sector Banks
▫ Public Sector Banks
• France – Second in Number of Banks
• Belgium – Dominated by Five Large Banks
• Great Britain – Dominated by a Half Dozen
Banking Firms
• Switzerland – Credit Suisse and UBS and
Many Smaller Firms
• Italy Privatized Banking in the 1990’s
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Structure and Organization of Banks

in Asia
• China – Large Dominating Government
Sector, Although Private Banks are
Expanding
• Japan – Dominated by the Big Four Financial
Group with More than One Hundred Smaller
Domestic Banks and Seventy Foreign Banks

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Quick Quiz
• Which type of corporations chartered for the
simple purpose of holding the stock of at least
one bank?
• What were the reasons for the Riegle Neal Act
of1994?
• When the banking industry moves toward
larger but fewer organizations, what is it
known as?
• What relationship appears to exist between
bank size, efficiency, and operating costs per
unit of service produced and delivered?
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