What Do Banks Do • Intermediation – Transforming savings received primarily from households into credit for business firms and others in order to make investments – Are there

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What Do Banks Do • Intermediation – Transforming savings received primarily from households into credit for business firms and others in order to make investments – Are there Powered By Docstoc
					        What Do Banks Do?
• Intermediation
  – Transforming savings received primarily from
    households into credit for business firms and
    others in order to make investments
  – Are there others who perform intermediation
    roles in the financial markets?
 Why Is Intermediation Important?
• Liquidity
  – Intermediaries provide liquid financial
    instruments
  – One of the oldest reasons for the existence of
    financial institutions
     • Knights Templar
• Delegated Monitoring
  – Individuals do not have the ability to make
    informed investment decisions
  – Intermediaries act as agents
 Why Is Intermediation Important?
• Information asymmetries
  – Financial intermediaries have unique abilities
    to select investment opportunities
  – Work with clients one on one
• Transaction costs
  – Intermediaries reduce transaction costs in
    markets
    • Access to markets for individuals
    • Allow for smaller transaction sizes for individuals
     Are Banks Unique In Their
        Intermediation Role
• Yes…
 – Bank loans contain information
    • Markets respond positively to bank loan renewals
 – Banks create relationships
    • Relationship lending
    • Able to exploit profitable opportunities that others
      would avoid
 – Banks are in a unique position to provide
   liquidity and serve as the best alternative
    • Deposit insurance
    Are Banks Unique In Their
       Intermediation Role
• No…
 – Any intermediary can provide liquidity
 – Many non-bank firms create relationships that
   create unique opportunities
   • Venture capital
 – Banking system is a product of regulation and
   is not efficient
   • Un-regulated markets would have developed an
     efficient system
   The Other Roles of Commercial
           Banks Today
• Payment Role
  – Checkable deposits, clear checks, transfer funds
     • Again, not unique
• Guarantor Role
  – Provide standby letters of credit and other forms of
    guarantees
• Risk Management Role
  – Essentially providing insurance services both
    traditional and non-traditional
   The Other Roles of Commercial
           Banks Today
• The Investment Banking Role
  – Financial service diversification has allowed banks to
    take a more active role
  – Underwriting Securities
     • Big issuer of ABS
  – Offering Mutual Funds and Annuities
  – Offering Merchant Banking Services
     • Venture capital role
  – Offering Risk Management and Hedging Services
     • Exchange rate risk
     • Interest rate risk
  – Essentially banks have become market makers for
    many financial products
    The Roles of Commercial Banks
                Today
• Savings/Investment Advisor Role
  – One stop shop concept
  – Again, financial service diversification has allowed this
    to happen
• Safekeeping/Certification of Value Role
  – Safe deposit boxes, savings accounts, CD‟s
• Agency Role
  – Trust services
• Policy Role
  – Banks are used by government to control the economy
     • Federal Reserve Bank
    Traditional Services Offered By
                 Banks
• Carrying Out Currency Exchange
• Discounting Commercial Notes and Making
  Business Loans
• Offering Savings Deposits
• Safekeeping of Valuables
• Supporting Government Activities with Credit
• Offering Checking Accounts
• Offering Trust Services
    More Recent Services Offered by
                Banks
•   Granting Consumer Loans
•   Providing Financial Advice
•   Managing Cash
•   Offering Equipment Leasing
•   Making Venture Capital Loans
•   Selling Insurance Policies
•   Selling Retirement Plans
The Financial Service Competitors of Banks
•   Savings Associations
•   Savings Banks
•   Credit Unions
•   Money Market Funds
•   Mutual Funds (Investment Companies)
•   Hedge Funds
•   Security Brokers and Dealers
•   Investment Banks
•   Finance Companies
•   Financial Holding Companies
•   Life and Property-Casualty Insurance Companies
      Some Leading Non-Bank
           Competitors
• Merrill-Lynch
  – Traditionally think of them as a stock broker
  – One of the first non-bank companies to form a
    holding company
  – Deals in gov‟t securities, asset management,
    and mutual funds (especially money market
    funds)
  – Controls an industrial bank
       Some Leading Non-Bank
            Competitors
• American Express
  – Credit cards
  – Owns FDIC-insured industrial bank
     • Provides mortgage, home equity, and consumer loans
     • Offers savings and deposits, on-line bill paying
• Household International
  – Largest finance company in the world
     • Credit cards, auto loans, home loans, consumer loans
  – Purchased HSCB of London in 2002
       Some Leading Non-Bank
            Competitors
• Countrywide
  – Mortgages
     • Set up branch-like offices
  – Broker/dealer subsidiary and insurance subsidiary
  – Bought Treasury Bank, NA
• GE Capital
  – Originally set up as a “captive” finance company to
    provide financing to customers
  – Today does a bunch of leasing, credit cards,
    insurance, etc.
  – Would be 10th largest bank in the US
           Common Thread
• What do all of these competitors have in
  common with banks?
  – They all own banks or have industrial banks
  – Is this a potential problem?
1    CITIGROUP INC. (1951350)                            NEW YORK, NY           $1,746,248,000

2    BANK OF AMERICA CORPORATION (1073757)               CHARLOTTE, NC          $1,451,603,528

3    JPMORGAN CHASE & CO. (1039502)                      NEW YORK, NY           $1,338,029,000

4    WACHOVIA CORPORATION (1073551)                      CHARLOTTE, NC           $559,922,000

5    WELLS FARGO & COMPANY (1120754)                     SAN FRANCISCO, CA       $483,441,000


6    HSBC NORTH AMERICA HOLDINGS INC. (3232316)          PROSPECT HEIGHTS, IL    $473,711,105

7    TAUNUS CORPORATION (2816906)                        NEW YORK, NY            $430,384,000

8    U.S. BANCORP (1119794)                              MINNEAPOLIS, MN         $216,855,000


9    COUNTRYWIDE FINANCIAL CORPORATION (2549857)         CALABASAS, CA           $193,194,572

10   SUNTRUST BANKS, INC. (1131787)                      ATLANTA, GA             $183,104,553

11   CITIZENS FINANCIAL GROUP, INC. (1132449)            PROVIDENCE, RI          $163,084,111


12   ABN AMRO NORTH AMERICA HOLDING COMPANY (1379552)    CHICAGO, IL             $155,199,559

13   NATIONAL CITY CORPORATION (1069125)                 CLEVELAND, OH           $138,134,005


14   BB&T CORPORATION (1074156)                          WINSTON-SALEM, NC       $118,523,897

15   STATE STREET CORPORATION (1111435)                  BOSTON, MA              $112,341,939


16   BANK OF NEW YORK COMPANY, INC., THE (1033470)       NEW YORK, NY            $106,730,000

17   FIFTH THIRD BANCORP (1070345)                       CINCINNATI, OH          $105,828,398


18   PNC FINANCIAL SERVICES GROUP, INC., THE (1069778)   PITTSBURGH, PA           $98,464,925

19   KEYCORP (1068025)                                   CLEVELAND, OH            $95,682,192


20   CAPITAL ONE FINANCIAL CORPORATION (2277860)         MCLEAN, VA               $94,906,746
              Bank Structure
• Unit Bank
  – Offer All Services From One Office
  – One of the Oldest Kinds of Banks
  – New Banks are Generally Unit Banks
            Bank Structure
• Branch banking
  – 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
            Bank Structure

• Bank Holding Company
  – 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
      Reasons for the Growth of
               BHCs
•   A Way Around Regulatory Restrictions
•   Geographic Diversification
•   Product Line Diversification
•   Tax Sheltering
•   Double Leveraging
 Nonbank Businesses of BHCs
• Finance Companies          • Investment Banking
• Mortgage Companies           Firms
• Data Processing            • Trust Companies
  Companies                  • Credit Card Companies
• Factoring Companies        • Leasing Companies
• Security Brokerage Firms   • Insurance Companies
• Financial Advising           and Agencies
• Credit Insurance           • Real Estate Services
  Underwriters               • Savings Associations
• Merchant Banking
            Bank Structure
• Financial Holding Company
  – 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
            Bank Structure
• 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
  Structure and Organization of
        Banks in Europe
• Germany – Largest European Banking Industry
  – Private Sector Banks
  – Public Sector Banks
• France – Second in Number of Banks
• Belgium – Dominated by Five Large Banks
• Great Britain – Dominated by a Half Dozen
  Banking Firms
• Switzerland – Credit Suisse and UBS and Many
  Smaller Firms
• Italy Privatized Banking in the 1990‟s
 Structure and Organization of
         Banks in Asia
• China – Large Dominating Government
  Sector, Although Private Banks are
  Expanding
• Japan – Dominated by the Big Four
  Financial Group with More than One
  Hundred Smaller Domestic Banks and
  Seventy Foreign Banks
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                                                                                 Number of Banks in US




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                                   Series1
                                                      Change In Number of Banks by Asset Size


             3,500



             3,000



             2,500



             2,000
# of Banks




                                                                                                                                                         1994
                                                                                                                                                         1996
             1,500



             1,000



              500



                0
                     < $25   $25 - $50   $50 - $100    $100 - $300      $300 - $500       $500 - $1,000   $1,000 - $3,000   $1,000-$10,000   > $10,000
                                                                     Size in $ Millions
     Consolidation in Banking
• Decreased # of banks
  – Primarily smaller banks that have gone away
• Increased importance on asset size
  – Larger banks have greater share of the
    market
• Will this trend continue?
              Bank Efficiency
• Economies of Scale
  – As Output Doubles Economies of Scale Mean Less
    Than the Doubling of Production Costs
  – Producing Multiple Units of the Same Package Costs
    Less Because of Efficiencies
• Economies of Scope
  – A Financial Services Provider can Save Operating
    Costs When it Expands the Mix of Products it Offers
  – Resources are Used More Efficiently in Jointly
    Producing Multiple Services
            Bank Efficiency
• Are the largest banks the most cost
  efficient?
  – Probably so
• Are the largest banks the most profit
  efficient?
  – Not necessarily, not all bank operations
    shown to be particularly profitable
  – Asset specialization may play a role in overall
    profitability
         Community Banks

• „Typical‟ Size is $250 Million
• Organizational Chart is Not Complicated
• Significantly Affected by Health of Local
  Economy
• Generally Know their Customers Well
   Money Center or Wholesale
           Banks
• Generally Multi-Billion Dollar Company
• Organizational Chart is Much More Complex
• Serve Many Different Markets with Many
  Different Services
• Better Able to Withstand Risks of Fluctuating
  Economy
• Able to Raise Large Amounts of Capital at
  Relatively Low Costs

				
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