Chapter 14Commercial Banking Structure, Regulation,

and Performance

©2000 South-Western College Publishing

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Comptroller of the Currency

The federal agency that charters national banks

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Federal Deposit Insurance Corporation (FDIC)

The federal agency that insures the deposits of banks and savings associations

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Charter...

•Permission to engage in the business of commercial banking•Banks must obtain a charter before opening

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National Bank

A bank that has received a charter from the Comptroller of the Currency

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Dual Banking System

The system whereby banks may have either a national or a state charter

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FDIC Insured Banks as of June 30, 1998

Number Number Deposits of Banks of Offices (billions)

Domestic Banks 8,983 68,977 $2,963.62National Charter 2,546 36,171 1,712.27 Fed Member 988 10,622 567.16 Fed Non-member 5,449 22,184 684.18

Exhibit 14-1

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Regulatory Responsibilities

FDIC:

Exhibit 14-2

Regulates state chartered insured non-Fed members and insured branches of foreign banks

Regulates national banks which are not bank holding companies and federally chartered branches of foreign banks

Regulates state chartered insured members of the Fed, all bank holding companies, and branches of foreign banking organizations operating in the U.S. and the parent bank

Regulate state chartered, non-Fed members, non-FDIC insured banksThe States:

The Comptrollerof the Currency:

The Fed:

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Bank Failures Since the Inception ofthe FDIC 1934 - 1998

Nu

mb

er o

f F

ailu

res

1935 1998Figure 14-3

50

150

200

100

250

Year

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McFadden Act

The 1927 act by Congress that outlawed interstate branching and made national banks conform to the intrastate branching laws of the state in which they are located

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Interstate Banking and Branching Efficiency Act

(BBEA)

Signed into law in September 1994, an act by Congress that effectively allows unimpeded

nationwide branching

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Asset Size Asset Size # # % of Cum Total % of Cum % of Cum Total % of Cum Instit. total % Assets total %Instit. total % Assets total %

< $25 Million 1,338 15% 15% $ 21,812 .4% .4%$25 - $49.99 M. 1,990 22.3 37.3 73,822 1.4 1.8$50 - $99.99 M. 2,252 25.3 62.6 161,789 3.1 4.9$100 - $299.99 M. 2,242 25.2 87.8 371,097 7 11.9$300 - $499.99 M. 408 4.6 92.4 156,295 3 14.9$500 - $999.99 M. 297 3.3 95.7 203,553 3.9 18.8$1 - $2.99 Billion 212 2.4 98.1 345,184 6.6 25.4$3 - $9.99 Billion 107 1.2 99.3 611,612 11.6 37>$10 Billion 64 .7 100 3,324,055 63.1 100Total 8,910 100% 100% $5,269,220 100%100%

Exhibit 14.4

Size Distribution of FDIC Insured Banks 9/30/98

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Bank Holding Company•A corporation that owns several firms, at least one of which is a bank•A one-bank holding company owns only one bank•A multi-bank holding company owns more than one bank

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The Declining Number of Banks

Year Number of FDIC Insured Banks 1980 14,500 1990 12,343 1991 11,921 1993 10,957 1994 10,451 1995 9,940 1996 9,528 1997 9,144 1998 9,024

Exhibit 14.7

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Asymmetric Information

When a potential borrower knows more about the risks and returns of an investment project than the bank loan officer

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Adverse selection problem...

When the least desirable borrowers pursue a loan most diligently

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Moral Hazard Problem

When the borrower has an incentive to use the proceeds of a loan for a more risky venture after the loan is funded

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Adjustable (Variable) Rate Loans

When the interest rate on a loan is adjusted up or down as the cost of funds rises or falls

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Asset-Liability Committee

The committee that is responsible for shaping a bank’s basic borrowing and lending strategy

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Movement in Bank Stock Prices Relative to Stock Prices in General

.35

.30

.25

.20

.40

199719951985

Exhibit 14-8

1983 1987 1989 1991 1993

.45

.50

.55

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Nonbanks

Other intermediaries and nonfinancial companies that have taken an increasing share of intermediation

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The Declining Share of Commercial Banks in Intermediation

100%

20%

60%

40%

80%

Exhibit 14-9

1950 1970 1991 1995 1998

Commercial BanksSavings & Loans

Life Insurance Companies

All others

0