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Banking in the U. S.
I. Structures
II. Management
ECO 473
Dr. D. Foster
I. Banking Structure in the U. S.
Institutions . . .
• Commercial Banks
 “Money Center” banks
 Regional (& Super-) banks
 Community Banks
• Savings Institutions

Lost 50% of deposits 1989 - 2001

1980s - Congress relaxes lending rules
• Credit Unions

1934-strict member rules; relaxed since.

no fed’l tax -  deposit rates &  loan rates
Commercial Bank Assets
($ Billions), June 2008
Dec.
2014
Commercial & industrial loans
Consumer loans
Real estate loans
Interbank loans
Other loans (net)
Total loans
1,507
831
3,645
454
918
7,355
13.5%
7.5%
32.7%
4.1%
8.2%
66.1%
1,784
1,198
3,629
86
1,195
7,892
11.9%
8.0%
24.2%
0.6%
8.0%
52.6%
U.S. government securities
Other securities
Total securities
1,113
1,358
2,471
10.0%
12.2%
22.2%
2,045
884
2,929*
13.6%
5.9%
19.5%
Cash assets
300
2.7%
2,821
18.8%
Other assets
Total assets
1,004
11,130
9.0%
100.0%
1,363
15,005
9.1%
100.0%
* $1,393 bill. is in mortgagedbacked securities (MBS)
Commercial Bank Liabilities
and Equity Capital
($ Billions), June 2008
Dec.
2014
Transactions deposits
Small time and savings deposits
Large time deposits
Total deposits
603
4,180
2,126
6,909
5.5%
37.9%
19.3%
62.6%
--8,736
1,700
10,436
--58.2%
11.3%
69.5%
Borrowings from banks
Other borrowings
Total borrowings
480
1,829
2,309
4.4%
16.6%
20.9%
118
1,663
1,781
0.8%
11.1%
11.9%
Trading liabilities
Other liabilities
--674
--6.1%
226
423
1.5%
2.8%
Net due to foreign offices
-18
-0.2%
505
3.4%
Equity capital
Total liabilities & equity
1,155
11,029
1,642
15,013
10.9%
100.0%
10.5%
100.0%
Commercial Bank Asset Allocations
Dec.
2014
60%
20%
Commercial Bank Liabilities
and Equity Capital
Dec.
2014
70%
19%
11%
Misc. Data on Banks & Savings Institutions (FDIC)
Misc. Data on Credit Unions (FDIC)
The Top Twenty Banks* [based on assets] in the U. S.
*As of June, 2015
Sources of Commercial Bank Revenues
Commercial Bank Expenses
Equity as a Percentage of Bank
Assets in the United States,
1840–Present
II. Banking Management in the U. S.
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
 Make low-risk loans with high liquidity…
 Lend to finance shipment of goods:
-- paid off quickly to known buyer.
-- earns low return.
 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
  Return with longer-term loans…
-- adds to the default risk.
-- offset with purchases of gov’t. securities.
- “Secondary reserves” add liquidity.
 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
 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
•
•
•
Real bills doctrine
Shiftability theory
Anticipated income
• Conversion of funds - managing interest rate risk
 Match asset & liability maturities…
-- long-term loans with CDs.
-- short-term loans with deposits.
 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
 Relate assets & liabilities by interest…
-- manage the “gap” to bank’s advantage.
-- if re is rising, then make gap positive.
-- if re is falling, then make gap negative.
Duration gap management
 Measure ave. time for payments (in or out)…
-- if positive and interest rates fall, bank profits rise.
-- if negative and interest rates rise, profits rise.
Does Bank Size Matter?
Economies of scale
-- Efficient structure theory.
-- Cost savings seem minor;
mgt. savings.
Concentration will . . .
-- raise costs?
-- lower costs?
Consolidation stats:
Community bank % of all banks:
96%
Community bank % of total bank assets: 14%
(ICBA, 2015)
(FDIC, 2011)
Universal Banking
• Banks own firms
-- Better informed about financial condition.
-- Conflict of interest?
• Firms own banks
-- Does the FED regulate the firm as well?
• Banks do . . . Whatever (economies of scope):
-- Insurance.
-- Real estate.
-- Stock brokers.
Banking in the U. S.
I. Structures
II. Management
ECO 473
Dr. D. Foster