Chapter 4 Depository Institutions

BA 543 Financial Markets and Institutions

Chapter 4 Depository Institutions

Types

Commercial Banks (Check-writing Institutions) Savings and Loans (NOW accounts) Savings Banks (NOW accounts) Credit Units (Share Draft accounts)
Credit (Default) Risk Regulatory Risk Interest Rate Risk - Examples

Asset/Liability Problem

Chapter 4 Depository Institutions

Commercial Banks

Today less than 8,000

National Banks Federal Charter and must be insured Bank Insurance Fund (administered by FDIC) State Banks State Chartered (approximately 75% or 6,000) State Banks may elect to join Federal System and if they do must insure with BIF (about 15% elect to join)

http://www.fdic.gov/bank/statistical

Chapter 4 Depository Institutions

Income Generation Individual Banking charges for services

Fees for checking, mortgage origination, credit cards, trusts, etc. Spread on consumer loans Commercial and Real Estate Financing, Leasing, Factoring Accounts Receivable, etc. Bond Dealers, Currency Dealers, Bankers Acceptance, Letters of Credit, etc. Financial Products such as SWAPS

Institutional Banking charges for services

Global Banking

Chapter 4 Depository Institutions

Bank Funding

Demand Deposits Checking and Savings

Regional Banks rely primarily on demand deposits

Time Deposits Certificates of Deposit Borrowed Funds Fed Window Selling of Securities

Short Term Notes, Bonds, Repos, etc. Money Center Banks rely on this form of funding

Reserve Requirement More Later

Chapter 4 Depository Institutions

Regulations

McFadden Act 1927 States Right to Set Rules for Banking Unit Banking States, Branches Allowed or Not Allowed Banking Act 1932 - Glass-Steagall (Sections 16, 20, 21, and 32) Separate Investment Banking and Commercial Banking - WHY? Garn-St. Germain Act 1982 NOW Accounts Interstate Banking and Branching Act 1994 Gramm-Leach Bliley Act 1999

Chapter 4 Depository Institutions

Capital Requirements

Very Low Equity Stake

Equity Stake is the risk position of owners

Tier One and Tier Two

Different types of Equity Holdings

TABLE 4-3 Page 55 Arrived at on no particular scientific basis

Risk Weights of Assets

Basle Committee on Banking Regulations and Supervisory Practices 1988 (G-10 Countries)

Chapter 4 Depository Institutions

Savings and Loan Association

Assets Traditionally Mortgages and Mortgage Backed Securities Liabilities (Funding) Passbook Savings

Today NOW accounts

Originally - Home Owners Loan Act of 1933 Now Federal S&Ls by Office of Thrift Supervisor

Regulation

S&L Crisis of the 1980s - Disintermediation

Chapter 4 Depository Institutions

Savings Banks Similar to S&Ls Broader Assets and so they weathered the interest changes of the 80s Credit Unions Common Bond among members Cooperative or Mutual No Corporate Stock Numbers bigger than commercial banks but total assets very small compared to commercial banks Typically strong local player in banking