Financial Markets and Institutions Ninth Edition Chapter 19

Financial Markets and Institutions

Ninth Edition, Global Edition

Chapter 19

Banking Industry: Structure

and Competition

Chapter Preview (1 of 3)

In the U.S., about 6,000 commercial banks serving the

businesses and consumer’s needs. This puts the U.S. in a

class by itself. In most other developed nations, only a

handful of banks dominate the landscape.

But is this better?

Chapter Preview (2 of 3)

Indeed there are many questions we can ask. Why did the

U.S. banking system develop this way? Does this mean

there is more competition? We try to answer these questions

in this chapter.

Chapter Preview (3 of 3)

Topics include:

–Historical Development of the Banking System

–Financial Innovation and the Growth of the Shadow

Banking System

–Structure of the U.S. Banking Industry

–Bank Consolidation and Nationwide Banking

–Separation of Banking and Other Financial Service

Industries

–Thrift Industry

–International Banking

Historical Development of the Banking

Industry (1 of 4)

•The modern commercial banking industry began when the

Bank of North America was chartered in Philadelphia in

1782.

•The next slide provides a timeline of important dates in the

history of U.S. banking prior to WWII.

Figure 19.1 Time Line of the Early History of Commercial

Banking in the United States

Historical Development of the Banking

Industry (2 of 4)

•There are also some major events post–1933

–In 1999, Glass-Steagall was repealed. Commercial

banks now engaged again in securities activities.

Historical Development of the Banking

Industry (3 of 4)

•The history had one other significant outcome: Multiple

Regulatory Agencies

1. Federal Reserve

2. FDIC

3. Office of the Comptroller of the Currency

4. State Banking Authorities

Historical Development of the Banking

Industry (4 of 4)

•The U.S. Treasury has proposed legislation to centralize

the regulation of depository institutions under one

independent agency, but it hasn’t survived the scrutiny of

Congress.

Financial Innovation and the Growth of the

Shadow Banking System

•In recent years the traditional banking business of making

loans that are funded by deposits has been in decline.

•Some of this business has been replaced by the shadow

banking system, in which bank lending has been

replaced by lending via the securities market.

Financial Innovation (1 of 3)

•Innovation is result of search for profits. A change in the

financial environment will stimulate a search for new

products and ideas that are likely to increase the bottom

line.

•There are generally three types of changes we can

examine:

–Response to Changes in Demand Conditions

–Response to Changes in Supply Conditions

–Avoidance of Existing Regulation

Financial Innovation (2 of 3)

•Response to Changes in Demand Conditions

–Major change is huge increase in interest-rate risk

starting in 1960s

–Adjustable-Rate Mortgages are an example of the reply