Finance 4000

Money and Capital Markets

Tenth class

• The Banking Industry

  
  
  
  
  

• What Do Banks Do?

  
  
  

  • What is a bank?

    
    
    

    • Accepts deposits of funds

      
      
      

    • Promises to pay depositor back the amount deposited

      
      
      

    • Makes loans

      
      
      

  • Different types of banks

    
    
    

    • Mutual savings banks

      
      
      

    • Savings and loans

      
      
      

    • Credit unions

      
      
      

    • Commercial banks

      
      
      

      • Accept deposits

        
        
        

      • Make commercial loans

• • Activities are fairly well represented by

    
    
    

    • Balance sheets

      
      
      

    • Income statements

      
      
      

• Commercial banks' balance sheets

  
  
  

• Commercial banks' balance sheets

TABLE RC-1 ASSETS AND LIABILITIES OF FDIC-INSURED COMMERCIAL BANKS

Institutions Grouped by Asset Size and Insurance Fund Membership

(Amounts in Millions of Dollars)

All Commercial Banks

SEPTEMBER 30, 1998

Number of institutions 8,910

Total assets......................................... 5,269,220

Cash and due from depository institutions......... 307,025

Noninterest-bearing............................ 216,815

Interest-bearing............................... 90,211

Securities........................................ 923,072

Federal funds sold and securities purchased under

agreements to resell........................ 288,418

Loans and leases, net............................. 3,088,525

Plus: allowance for losses and allocated

transfer risk reserve....................... 57,263

Loans and leases, total..................... 3,145,788

Assets held in trading accounts................... 306,194

Bank premises and fixed assets.................... 69,877

Other real estate owned........................... 3,944

Intangible assets................................. 77,110

All other assets.................................. 205,055

Total liabilities, limited-life preferred stock,

and equity capital........................... 5,269,220

Total liabilities................................. 4,811,790

Deposits, total................................ 3,506,900

Noninterest-bearing..................... 653,789

Interest-bearing........................ 2,853,111

Federal funds purchased and securities sold under

agreements to repurchase.................. 419,327

Demand notes issued to the U.S. Treasury....... 28,485

Trading liabilities............................ 235,172

Other borrowed money........................... 391,278

With remaining maturity of less than one year.. 229,381

Subordinated notes and debentures.............. 68,823

All other liabilities.......................... 161,804

Total equity capital.............................. 457,430

Perpetual preferred stock...................... 2,840

Common stock................................... 35,107

Surplus........................................ 210,700

Undivided profits.............................. 210,202

Cumulative foreign currency

translation adjustments................. (1,419)

TABLE RI-1 INCOME AND EXPENSE OF FDIC-INSURED COMMERCIAL BANKS
(Amounts in Millions of Dollars)
SEPTEMBER 30, 1998 YEAR-TO-DATE
Number of institutions......................	8,910
Total interest and fee income..............	271,261
Loans...........................	198,034
Lease financing receivables.....	6,382
Balances due from depository institutions	4,935
Investment securities..................	42,277
Assets held in trading accounts.......	8,341
Federal funds sold and securities purchased under
agreements to resell..................	11,291
Total interest expense.....................	135,027
Deposits...........................	94,200
Federal funds purchased and securities sold under
agreements to repurchase.........	16,889
Demand notes issued to the U.S. Treasury and
other borrowed money.............	20,367
Subordinated notes and debentures..	3,571
Net interest income........................	136,234
Provisions for loan and lease losses and allocated transfer risk.....................	16,720
Total noninterest income....................	89,448
Fiduciary activities..................	13,603
Service charges on deposit accounts...	14,679
Trading account gains and fees........	5,731
All other noninterest income..........	55,436
Total noninterest expense..................	139,616
Salaries and employee benefits...........	57,932
Premises and equipment..................	17,560
All other noninterest expense...........	64,125

• What do bankers do to maximize shareholder value?

  
  
  
  
  

  • Maximize value of bank to owners

    
    
    
    
    

  • Liquidity management

    
    
    
    
    

  • Asset management

    
    
    
    
    

  • Liability management

    
    
    
    
    

  • Capital management

    
    
    

• Measures of performance

  
  
  

  • Return on equity

    
    
    

• • Return on assets

    
    
    

• • Net interest margin

    
    
    

• Recent developments

  
  
  

  • ATM and debit cards

    
    
    

  • New forms of deposits

    
    
    

    • NOW (negotiable order of withdrawal) accounts

      
      
      

    • ATS (automatic transfer from savings) accounts

      
      
      

    • Sweep accounts

      
      
      

• Possible future developments

  
  
  

  • Electronic banking

    
    
    

  • Smart cards

    
    
    

  • Digital currency

    
    
    

  • Results of digital revolution

    
    
    
• Characteristics of United States Banking

  
  
  

  • Many banks

    
    
    

    • Over 8,000

      
      
      

    • Far more than most other countries

      
      
      

      • Unit banking back to early U.S. history

        
        
        

      • Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

        
        
        

    • Implications for the future

      
      
      

  • Separation of commercial banking from investment banking

    
    
    

    • Separation of commercial banking from commerce

      
      
      

    • Glass-Steagell Act

      
      
      

    • Effects of repeal

      
      
      

      • Competition in securities business

        
        
        

      • Universal banking

• Financial innovations associated with the decline of traditional banking

  
  
  

  • Money market mutual funds

    
    
    

  • Junk bonds

    
    
    

  • Commercial paper

    
    
    

  • Securitization

    
    
    

• Banks' responses

  
  
  

  • Focus more on noninterest income

    
    
    

  • Securitize assets