Banking in the U S Structure Management ECO

Banking in the U. S. Structure & Management ECO 473 Dr. D. Foster

Institutions. . . • Commercial Banks Ø “Money Center” banks Ø Regional (& Super-) banks Ø Community Banks • Savings Institutions v Lost 50% of deposits 1989 - 2001 v 1980 s - Congress relaxes lending rules • Credit Unions v 1934 -strict member rules; relaxed since. v no fed’l tax - deposit rates & loan rates

Commercial Bank Assets ($ Billions), June 2008 Commercial & industrial loans Consumer loans 831 7. 5% Real estate loans 3, 645 Interbank loans 454 4. 1% Other loans (net) 918 8. 2% Total loans 7, 355 66. 1% U. S. government securities Other securities 1, 358 12. 2% Total securities 2, 471 22. 2% 1, 507 13. 5% 32. 7% 1, 113 Cash assets 300 2. 7% Other assets Total assets 1, 004 11, 130 9. 0% 100. 0% 10. 0% Dec. 2014 1, 784 11. 9% 1, 198 8. 0% 3, 629 24. 2% 86 0. 6% 1, 195 8. 0% 7, 892 52. 6% 2, 045 13. 6% 884 5. 9% * $1, 393 bill. is in mortgagedbacked securities 2, 929* (MBS) 19. 5%

Commercial Bank Liabilities and Equity Capital ($ Billions), June 2008 Transactions deposits 603 Small time and savings deposits Large time deposits 2, 126 Total deposits 6, 909 Borrowings from banks Other borrowings 1, 829 Total borrowings 480 Trading liabilities Other liabilities 674 --- 2, 309 4, 180 5. 5% 37. 9% 19. 3% 62. 6% 4. 4% 16. 6% 20. 9% --6. 1% Net due to foreign offices -18 -0. 2% Equity capital 1, 155 Total liabilities & equity 11, 029 10. 5% 100. 0% Dec. 2014 --- --8, 736 58. 2% 1, 700 11. 3% 10, 436 69. 5% 118 0. 8% 1, 663 11. 1% 1, 781 11. 9% 226

Misc. Data on Banks & Savings Institutions (FDIC) 1990 Bank offices: --main offices: --branches: to 2010: 63, 200 to 94, 300 12, 300 to 6, 700 51, 000 to 88, 000

Misc. Data on Credit Unions (FDIC) 2010: Fed’l CU: State CU: Tot. Assets: 4, 600 2, 750 $914 billion

Equity as a Percentage of Bank Assets in the U. S. 1840–Present From a depositor’s point of view, were banks in the mid-1800 s especially at risk to collapse?

Evolution of theories of bank management & risk. • Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds • Gap management • Duration gap management

• Real bills doctrine – managing liquidity risk v Make low-risk loans with high liquidity… v Lend to finance shipment of goods: -- paid off quickly to known buyer. -- earns low return. v Lend for production… -- “self-liquidating” loans; repaid as sold. -- relatively low risk. • • • Shiftability theory Anticipated income Conversion of funds Gap management Duration gap management

• Real bills doctrine • Shiftability theory – managing credit risk v Return with longer-term loans… -- adds to the default risk. -- offset with purchases of gov’t. securities. - “Secondary reserves” add liquidity. v Popular until the Crash of 1929: -- falling prices means converting to cash involves a capital loss. -- exacerbated circumstances, as loans were going into default as well. • • Anticipated income Conversion of funds Gap management Duration gap management

• • Real bills doctrine Shiftability theory • Anticipated income - managing interest rate risk v Initiation of the “installment loan”… -- mitigates default risk through ongoing payments. -- gives the bank a highly predictable stream of income. -- has features that make it a “superliquidating” loan. • • • Conversion of funds Gap management Duration gap management Does this also help a bank to avoid a bank run/panic?

• • • Real bills doctrine Shiftability theory Anticipated income • Conversion of funds - managing interest rate risk v Match asset & liability maturities… -- long-term loans with CDs. -- short-term loans with deposits. v Events that change interest rates will be neutralized. • • Gap management Duration gap management

• • Real bills doctrine Shiftability theory Anticipated income Conversion of funds • Gap Management – managing profit v Relate assets & liabilities by interest… -- manage the “gap” to bank’s advantage. -- if interest rates are expected to rise …. -- if interest rates are expected to fall …. Assets Liabilities Cash Reserves $50, 000 Demand Deposits $300, 000 US Treasuries $150, 000 Credit Card loans $400, 000 Savings Deposits $575, 000 Short Term Consumer Loans $200, 000 Long Term Business Loans $250, 000 Certificates of Dep. Mortgage Loans $825, 000 Equity $1, 875, 000 $950, 000 $1, 875, 000

• Real bills doctrine • Shiftability theory • Anticipated income • Conversion of funds • Gap Management – managing profit • Duration gap management v Measure ave. time for payments (in or out)… -- if positive and interest rates fall, bank profits rise. -- if positive and interest rates fall, bank profits fall. Assets Liabilities … Auto Loans (5 yr. ) … $400, 000 Portfolio average payoff = 36 months 3 -5 yr. CDs $575, 000 Portfolio average payout = 32 mo.

Banking in the U. S. Structure & Management ECO 473 Dr. D. Foster