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CHAPTER 3
THE ORGANIZATION AND STRUCTURE OF BANKING AND THE
FINANCIAL-SERVICES INDUSTRY
Goal of This Chapter: The goal of this chapter is to explore the different types of organizations
used in the banking and financial services industry, to see how changing public mobility and
changing demand for financial services, the rise of potent competition, and changing government
roles have changed the structure, size, and the types of organizations in this industry.
Key Topics in This Chapter
• The Organization and Structure of Banks and the Banking Industry
• The Array of Organizational Structures in Banking: Unit, Branch, Holding
Company, and Electronic Services
• Interstate Banking and the Riegle-Neal Act
• The Financial Holding Company (FHC)
• Mergers and Acquisitions
• Banking Structure and Organization in Europe and Asia
• The Changing Organization and Structure of Banking’s Principal Competitors
• Economies of Scale and Scope and Expense Preference Behavior
Chapter Outline
I. Introduction
II. The Organization and Structure of the Commercial Banking Industry
A. Advancing Size and Concentration of Assets
B. A Possible Countertrend
III. Internal Organization of the Banking Firm
A. Community Banks and Other Community-Oriented Financial Firms
B. Larger Banks—Money Center, Wholesale and Retail
C. Trends in Organization
IV. The Array of Organizational Structures and Types in the Banking Industry
A. Unit Banking Organizations
B. Branching Organizations
1. Branching’s Expansion
2. Reasons behind Branching’s Growth
3. Advantages and Disadvantages of Branch Banking
C. Electronic Branching—Web Sites and Electronic Networks: An Alternative or a
Supplement to Traditional Bank Branch Offices?
D. Holding Company Organizations
1. Why Holding Companies Have Grown
2. One-Bank Holding Companies
3. Multibank Holding Companies
4. Advantages and Disadvantages of Holding Companies
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V. Interstate Banking Organizations and the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994
A. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
B. Research on Interstate Banking
VI. An Alternative Type of Banking Organization Available as the 21st Century Opened:
Financial Holding Companies (FHCs)
A. Gramm-Leach-Bliley Act of 1999
B. Financial Holding Companies
VII. Mergers and Acquisitions Reshaping the Structure and Organization of the Financial-
Services Sector
VIII. The Changing Organization and Structure of Banking’s Principal Competitors
A. Consolidation
B. Convergence
IX. Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost?
A. Efficiency in Producing Financial Services
1. Economies of Scale
2. Economies of Scope
3. X-Efficiency
X. Financial Firm Goals: Their Impact on Operating Cost, Efficiency, and Performance
A. Expense-Preference Behavior
B. Agency Theory
C. Corporate Governance
XI. Summary of the Chapter
Concept Checks
3-1. How would you describe the size distribution of American banks and the concentration
of industry assets inside the United States? What is happening in general to the size distribution
and concentration of banks in the United States and in other industrialized nations and why?
3-2. Describe the typical organization of a smaller community bank and a larger money-center
bank. What does each major division or administrative unit within the organization do?
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and/or auditor and by the vice presidents in charge of each department and division. Overall, the
3-3. What trends are affecting the way banks and their competitors are organized today?
In general, banks are becoming larger and more complex organizations with more departments
3-4. What are unit banks?
3-5. What advantages might a unit bank have over banks of other organizational types? What
disadvantages?
3-6. What is a branch banking organization?
A branch banking organization sells its full menu of services through several locations, including
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Branch banking has become increasingly important with the great majority of states now
allowing statewide branching. Today, more states permit statewide branching and only a
3-8. Do branch banks seem to perform differently than unit banks? In what ways? Can you
explain any differences?
Branch banking has a number of important advantages. With offices spread over different areas
3-9. What is a bank holding company?
3-10. When must a holding company register with the Federal Reserve Board?
Under the terms of Bank Holding Company Act, if the company owns at least 25 percent of the
3-11. What nonbank businesses are bank holding companies permitted to acquire under the
law?
The Bank Holding Company Act (as amended) requires a registered bank holding company to
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companies, insurance agencies, data processing firms, and several other businesses as well.
Increasingly as the 1990s began, bank holding companies sought approval to acquire failing
3-12. Are there any significant advantages or disadvantages for holding companies or the
public if these companies acquire banks or nonbank business ventures?
The ability of holding companies to acquire nonbank businesses has given them the capacity to
3-13. What did the Riegle-Neal Interstate Banking Act do? Why was it passed into law?
In 1994 the U.S. Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency
Act which allows bank holding companies to acquire banks throughout the United States without
3-14. Can you see any advantages to allowing interstate banking? What about potential
disadvantages?
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3-15. How is the structure of the nonbank financial-services industry changing? How do the
organizational and structural changes occurring today among nonbank financial-service firms
parallel those experienced by the banking industry?
3-16. What relationship appears to exist between bank size, efficiency, and operating costs per
unit of service produced and delivered? How about among nonbank financial-service providers?
For banks and nonbank financial service providers alike, economies of scale and economies of
3-17. Why is it so difficult to measure output and economies of scale and scope in the
financial-services industry? How could this measurement problem affect any conclusions
reached about firm size, efficiency, and expense behavior?
This is not an easy question to answer. A financial-service firm, regardless of its size, operating
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3-18. What is expense-preference behavior? How could it affect the performance of a financial
firm?
Expense-preference behavior describes an approach where managers use the financial resources
3-19. Of what benefit is agency theory in helping us understand the consequences of changing
control of a financial-services firm? How can control by management as opposed to control by
stockholders affect the behavior and performance of a financial-services provider?
3-20. What is corporate governance, and how might it be improved for the benefit of the
owners and customers of financial firms?
3-1. As a financial journalist, you are writing an article explaining how the U.S. market shares
of small, medium, and large banks have changed over the last 25 years. Utilize Exhibit 3–2 to
approximate the market shares for the years 1985, 1990, 1995, 2000, 2005, and 2010 for small,
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only about half of all U.S. domestic banking assets in 1980, but by 2010 their proportion of the
nation’s domestic banking assets had climbed to more than 90 percent.
Large banks have moved toward the profit-center approach, in which each major department
strives to maximize its contribution to profitability. Also large banks serve many different
3-2. Of the business activities listed here, which activities can be conducted through U.S.-
regulated holding companies today?
a. Data processing companies
b. Office furniture sales
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and businesses in the market area served by the bank and the challenges posed to your share of
this market by several aggressive competitors, you want to become a branch bank by establishing
satellite offices. Please answer the following questions:
a. What laws and regulations have a bearing on where you might be able to locate the new
from the FDIC. All other banks would have to have approval of the state banking commission.
However, depending on the services offered, the Gramm-Leach-Bliley Act may apply. The
Gramm-Leach-Bliley Act allows banks to offer many different services either as subsidiaries of
the parent bank or under the financial holding company structure. In this case, the Federal
Reserve must approve of the services and the structure of the bank.
3-4. Suppose you are managing a medium-size branch banking organization (holding about
$25 billion in assets) with all of its branch offices located within the same state. The board of
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see as the principal benefits from and the principal stumbling blocks to successful pursuit of such
a project?
3-5. First Security Trust National Bank of Boston is considering making aggressive entry into
the People’s Republic of China, possibly filing the necessary documents with the government in
Beijing to establish future physical and electronic service facilities. What advantages might such
a move bring to the management and shareholders of First Security? What potential drawbacks