The Organization and Structure Chapter of Three Banking

The Organization and Structure Chapter of Three Banking Industry

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Assets Held by U. S. FDIC-Insured Commercial Banks, 2007 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Number of U. S. FDIC-insured Commercial Banks, 2007 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Reasons for Growth of Branching • Exodus of Population to Suburban Communities • Increased Bank Failures in Recent Years • Business Growth Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

What Trend in Branch Banking Has Been Prominent in the U. S. in Recent Years? Year # of Bank Main Offices # of Branch Offices Total of U. S. Bank Offices Ave # of Branches/ 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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Electronic Branches • Internet Banking Services • Automated Teller Machines (ATMs) • Point of Sale (POS) Terminals Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

3 -14 Organizational Structure of a BHC Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Nonbank Businesses of BHCs • Finance Companies • Mortgage Companies • Data Processing Companies • Factoring Companies • Security Brokerage Firms • Financial Advising • Credit Insurance Underwriters • Merchant Banking Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e • Investment Banking Firms • Trust Companies • Credit Card Companies • Leasing Companies • Insurance Companies and Agencies • Real Estate Services • Savings Associations © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Reasons for the Growth of BHCs • Geographic Diversification • Product Line Diversification • Tax Sheltering • Double Leveraging • Source of Strength • A Way Around Regulatory Restrictions Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Proponents and Opponents of Interstate Banking Proponents • Efficient Use of Scarce Resources • Lower Prices for Services • Geographic Diversification • Efficient Flow of Credit in the System Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e Opponents • Increased Bank Concentration • Less Competition • Higher Prices for Services • Drain Resources from Community © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

3 -21 Sample Organizational Structure of FHC Financial Holding Company Bank Securities Subsidiaries Holding Insurance Subsidiary Company Commercial Banking Company Real Thrift Holding Company Estate Subsidiary Nonbank Subsidiaries Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e Thrift Company Subsidiaries and Service Companies © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.