Transcript Saunders Chapter 1 - National Cheng Kung University

Depository Institutions
Chapter 1
Financial Institutions Management, 3/e
By Anthony Saunders
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Depository Institutions
• Commercial Banks
» Largest depository institutions are commercial
banks.
» Differences in operating characteristics and
profitability across size classes.
• Thrifts
» S&Ls
» Savings Banks
» Credit Unions
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Functions and Structural
Differences
• Functions of depository institutions
» Regulatory sources of differences across types of
depository institutions.
• Structural changes generally resulted from
changes in regulatory policy.
» Example: changes permitting interstate branching.
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Commercial Banks

Primary assets:
• Real Estate Loans ~$1,197 billion
• C&I loans ~$830 billion
• Loans to individuals ~$521 billion

Primary liabilities:
• Deposits ~$3,029 billion
• Borrowings ~$750 billion
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Trends

U.S. Banking industry:
• Low concentration ratios and mostly smaller
banks. Primary cause: Regulatory effect.
• Prominent recent trend is consolidation resulting
from combined effects of deregulation,
disintermediation, technological change &
innovation. Merger activity results in excess
supply of bank personnel. The emergence of
many new (small) banks is noteworthy.
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Other Trends
Number of banks continues to decline.
 Increase in off-balance-sheet activities.
 Increase in income derived from fees-forservice rather than spread income.
 Increased competition between banks and
across financial services sectors.
 Increased competition from foreign FIs.

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Some Terminology
• Transaction accounts
• Negotiable Order of Withdrawal (NOW)
accounts
• Money Market Mutual Fund
• Negotiable CDs: Fixed-maturity interest
bearing deposits with face values over
$100,000 that can be resold in the secondary
market.
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More Terminology
• Federal Funds Market: An interbank market for
short-term borrowing and lending of bank
reserves.
• Money center bank: A bank that is heavily
reliant on nondeposit or borrowed sources of
funds.
• Dual Banking System: Coexistence of
nationally and state-chartered banks.
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Key Regulatory Agencies
• FDIC
• OCC: Primary function is to charter national
banks.
• FRS: monetary policy, lender of last resort.
» National banks are automatically members
of the FRS. State-chartered banks can elect
to become members.
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Key Regulatory Legislation
• McFadden Act: Controls branching of national
banks.
• Glass-Steagall: separates securities and banking
activities.
• Regulation Q
• Bank Holding Company Act and subsequent
amendments specifies permissible activities and
regulation by FRS of BHCs.
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Legislation (continued)
• DIDMCA and DIA (Garn-St. Germain
Depository Institutions Act)
» Mainly deregulation acts.
» Phased out Regulation Q.
• Competitive Equality in Banking Act (CEBA)
» Redefined bank to limit growth of nonbank banks.
• Community Reinvestment Act (CRA)
» Meant to address discrimination in lending.
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Legislation (continued)
• FIRREA
» Imposed restrictions on investment activities
» Replaced FSLIC with FDIC-SAIF
» Replaced FHLB with Office of Thrift Supervision
» Created Resolution Trust Corporation
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Legislation (continued)

FDIC Improvement Act
• Introduced Prompt Corrective Action
• Risk-based deposit insurance premiums
• Limited “too big to fail”
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Legislation (continued)
• Riegle-Neal Interstate Banking and Branching
Efficiency Act
» Permits BHCs to acquire banks in other states.
» Invalidates some restrictive state laws.
» Permits BHCs to convert out-of-state subsidiary
banks to branches of single interstate bank.
» Newly chartered branches permitted interstate if
allowed by state law.
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Savings Institutions
• Comprised of:
» Savings and Loans Associations
» Savings Banks
• Effects of changes in Federal Reserve’s policy
of interest rate targeting combined with
Regulation Q and disintermediation.
• Effects of regulator forbearance.
• Qualified Thrift Lender (QTL) test.
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Primary Regulators

Office of Thrift Supervision (OTS).
• Charters and examines all federal S&Ls.

FDIC-SAIF Fund.
• Oversees and manages Savings Association
Insurance Fund (SAIF).
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Credit Unions
• Nonprofit depository institutions owned by
member-depositors with a common bond.
• Exempt from taxes and Community
Reinvestment Act (CRA).
• Expansion of services offered in order to
compete with other FIs.
• Approximately 2/3 federally chartered and
subject to NCUA regulation.
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