Notes on Chapter 18“The Commercial Banking Industry”Notes on Chapter 18“The Commercial Banking Industry”A. Role of Commercial Banks- Distribution of funds from source to usageB. Other Services: Investment advise Security underwriting Financial Planning such as creation of trustC. Policy Impact Money supply impact Main purchaser of U.S. government debtD. The Structure of U.S. Commercial Banks Size—As of March 2001, due to consolidation the number of U.S. commercial banks droppedfrom 10,000 in mid 90s to 8,237. The consolidation has not stopped and Mega Banks continues to replace smaller commercial banks. Of the 8,237 commercial banks, 6030 were state chartered banks and only 980 were members of Federal Reserve System. However the member banks hold more than 75% of all deposits in U.S. The five largest U.S. commercial banks based on assets are Citigroup, JP Morgan Chase, Bank of America, Wachovia, and Wells Fargo. Branch Banking—The Mc Fadden Act of 1927 allowed each state the right to set its own rules on intrastate branch banking. In 1994 Congress passed the Riegle-Neal Intrastate Banking and Branching Efficiency Act permitting adequately capitalized and managed bank holding companies to acquire banks in any state subject to certain limitation and approval by Fed. Starting June 1997, this single legislation allowed all the mergers which took place in the last few years.  Bank holding company is a corporation that holds the stocks of one or more banks. There arearound 6000 holding companies currently in U.S. that hold more than 90 percent of all U.S. banks assets.  International Banking1. Office representation-no services locally provided2. Brach office- all services locally provided3. Full subsidiary with its own charter and capital stock4. Joint ventureForeign banks with branches in U.S. have a competitive edge because they can under-write corporate equity where as American charter branch cannot engage in such activity. This is the reason International Banking Act of 1978 and Improvement Act of 1991 was created, to watch the irregular behavior of international banks in U.S. However the Gramm-Leach-Bliely Legislative Act of 1999 broke these barriers for U.S. banks. It permitted holding companies affiliation between banks and insurance underwriting. It also created a new financial holding company authorized to engage in underwriting and selling securities. E. Universal or Merchant Banks- In addition to regular services they offer other services such as consulting, insurance, real estate sale and under-writing of securities (many of these actions are porhabited for American charter banks), examples include; Barclay Bank of England, Deutsche Bank of Germany, Royal Bank of Canada.F. Technology and Bankinga. ATMs Automated Teller Machinesb. POS Point-of-Sale…instant purchase debit or credit card in terminals located in retail storesc. ACH Automated Clearing House…Transfers financial information from one institution to another, images are transferred so the paper does not have to move.d. ALM Automated Loan MachinesG. Portfolio Characteristics of Commercial Banks Cash and dues from banks-primary reserve1. Cash in temporary investment 2. Short-term loans to other banks Security holdings-secondary reserve1. Municipal securities2. Federal Agencies securities 3. Treasury Bills4. Corporate bonds (in small amount) Loans1. Direct loan2. Term loans-direct loans with maturity of more than a year3. Lease financing…the equipment belongs to the bank , under lease to customer4. Real-estate loans5. Loans for consumer products such as automobile Deposits1. Demand deposits-checking accounts2. Saving accounts3. Time deposits-Certificate of Deposit (CD)4. Transaction accounts a. Negotiable Orders of Withdrawal (NOW)b. Automatic Transfer Services (ATS)-Zero Balance Accountc. Money Market Deposit Accounts (MMDA) Non-deposit source of funds 1. Purchase of reserve including Federal Fund2. Security purchase agreement such as American Depository Receipt (ADR)3. Stand by credit letters4. Sales of block of loans5. Floating-rate or variable CD’s and notes6. Securitization (auto, home mortgage loans…)H. Other Issues in Banking Industry Deregulation of banking industry Globalization of banking and sever competition Technical evolution in banking industry Future need for uniformity of regulation and supervision in banking industryI. Reserve Requirement Total Required Legal Reserve = Reserve Requirement on deposit x Daily average of net deposit hold over a fixed period + Reserve requirement of long-term deposits such as saving accounts x Daily average amount of saving hold for a period of