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Economics 370 Money and Banking


Bank of America and Banc One. Bank Consolidation. Information Technology ... NationsBank and Bank of America merged creating the first bank with branches on ... – PowerPoint PPT presentation

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Title: Economics 370 Money and Banking

Economics 370Money and Banking
  • Instructor
  • Ryan Herzog

  • Go over homework 3
  • Finish Chapter 10
  • Evaluations

Decline of Traditional Banking
  • Traditional Banking Make loan term loans and to
    fund them by issuing short-term deposits
  • As a source of funds for borrowers, market share
    has fallen
  • Banks making loans funded with deposits is no
    longer as important in our financial system
  • Share of total financial intermediary assets has
  • No decline in overall profitability
  • Increase in income from off-balance-sheet

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Decline of Traditional Banking
  • Decline in cost advantages acquiring funds
  • Rising inflation led to rise in interest rates
    and disintermediation
  • Until 1960, checkable deposits were low-cost
    source of funds, since have declined in
  • Decline in income advantages on uses of funds
  • Information technology
  • Decreased need for banks to finance short-term
    credit needs or to issue loans
  • Lower transaction costs for other financial
    institutions, increasing competition

Banks Responses
  • Expand into new and riskier areas of lending
  • Commercial real estate loans
  • Leveraged buyouts
  • Corporate takeovers
  • Pursue off-balance-sheet activities
  • Non-interest income
  • Credit line, selling loan packages,
  • Concerns about risk

Bank Consolidation
  • The number of banks has declined over the last 25
  • From 1985-1992 100 bank failures
  • From 1985-1992 3,000 less banks
  • From 1992-2005 3,500 less banks
  • Most of the bank failures were from smaller banks

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Bank Consolidation
  • Consolidation
  • Mid 1970s states started to allow interstate
  • Bank holding companies could purchase bank shares
    in other states
  • Diversification
  • Banks can make loans in other states, protects
    banks from state level recessions
  • Superregional Banks
  • Bank of America and Banc One

Bank Consolidation
  • Information Technology
  • Economies of scale decreasing average costs
  • Economies of scope the use of one resource
    provides many services
  • Credit Ratings Loan worthiness and stock
  • Results may be not only a smaller number of banks
    but a shift in assets to much larger banks

Bank Consolidation
  • Deregulation
  • Riegle Neal Interstate Banking and Branching
    Efficiency Act of 1994
  • Overturns the McFadden Act which prohibited
    interstate banking
  • Texas is the only state that has opted out of
    interstate branching
  • In 1998 NationsBank and Bank of America merged
    creating the first bank with branches on both
  • U.S. still has 7,500 banks far more than many
    industrialized countries

Benefits and Costs of Bank Consolidation
  • Benefits
  • Increased competition, driving inefficient banks
    out of business
  • Increased efficiency also from economies of scale
    and scope
  • Lower probability of bank failure from more
    diversified portfolios
  • Costs
  • Elimination of community banks may lead to less
    lending to small business
  • Banks expanding into new areas may take increased
    risks and fail
  • Financial intermediaries are encroaching on
    others territory

Thrift Industry Regulation and Structure
  • Savings and Loan Associations
  • Chartered by the federal government or by states
  • Most are members of Federal Home Loan Bank System
  • Deposit insurance provided by Savings Association
    Insurance Fund (SAIF), part of FDIC
  • Regulated by the Office of Thrift Supervision
  • Most states allowed branching and in 1980
    federally chartered SL were permitted interstate
  • Mutual Banks
  • Approximately half are chartered by states
  • Regulated by state in which they are located
  • Deposit insurance provided by FDIC or state

Thrift Industry Regulation and Structure
  • Credit Unions
  • Tax-exempt
  • Chartered by federal government or by states
  • Regulated by the National Credit Union
    Administration (NCUA)
  • Deposit insurance provided by National Credit
    Union Share Insurance Fund (NCUSIF)
  • Owned by members and are generally not for profit
  • Centered around a particular group, union,
    occupation, or location

International Banking
  • 1960 8 US banks operated in foreign countries
  • 2005 100 US banks operate in foreign countries
    with over 1.5 trillion in assets
  • Rapid growth
  • Growth in international trade and multinational
  • Global investment banking is very profitable
  • Ability to tap into the Eurodollar market

Eurodollar Market
  • Dollar-denominated deposits held in banks outside
    of the U.S.
  • Foreign firms often prefer the dollar
  • Most widely used currency in international trade
  • Eurodollars are not subject to reserve
  • Offshore deposits not subject to regulations
  • Important source of funds for U.S. banks

Structure of U.S. Banking Overseas
  • U.S. bank locations
  • Latin America, Far East, Caribbean, and London
  • Shell operation
  • Banks in the Caribbean (Bahamas and Cayman
    Islands) function as bookkeepers not banks Tax
  • Edge Act corporation
  • U.S. banks that operate overseas (owning foreign
    banks and financial companies)
  • International banking facilities (IBFs)
  • Not subject to regulation and taxes
  • May not make loans to domestic residents

Foreign Banks in the U.S.
  • Foreign Banks hold 10 of U.S. bank assets
  • 16 of the market share for lending to U.S.
  • Agency office of the foreign bank
  • Can lend and transfer funds in the U.S.
  • Cannot accept deposits from domestic residents
  • Not subject to regulations
  • Subsidiary U.S. bank
  • Subject to U.S. regulations
  • Owned by a foreign bank

Foreign Banks in the U.S. (contd)
  • Branch of a foreign bank
  • May open branches only in state designated as
    home state or in state that allow entry of
    out-of-state banks
  • Limited-service may be allowed in any other state
  • Subject to the International Banking Act of 1978
  • Basel Accord (1988)
  • Example of international coordination of bank
  • Sets minimum capital requirements for banks