Chapter 19
Banking Industry: Structure and Competition
Historical Development of the Banking System
Multiple Regulatory Agencies
Financial Innovation and the Growth of the Shadow Banking System
Responses to Changes in Demand Conditions: Interest Rate Volatility
Responses to Changes in Supply Conditions: Information Technology
E-Finance Box: Will “Clicks” Dominate “Bricks” in the Banking Industry?
E-Finance Box: Why are Scandinavians So Far Ahead of Americans in Using Electronic
Payments and Online Banking?
E-Finance Box: Are We Headed for a Cashless Society?
Avoidance of Existing Regulations
Mini-Case Box: Bruce Bent and the Money Market Mutual Fund Panic of 2008
The Practicing Manager: Profiting from a New Financial Product: A Case Study of Treasury
Strips
Financial Innovation and the Decline of Traditional Banking
Structure of the U.S. Commercial Banking Industry
Restrictions on Branching
Response to Branching Restrictions
Bank Consolidation and Nationwide Banking
E-Finance Box: Information Technology and Bank Consolidation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
What Will the Structure of the U.S. Banking Industry Look Like in the Future?
Are Bank Consolidation and Nationwide Banking Good Things?
Separation of the Banking and Other Financial Service Industries
Erosion of Glass-Steagall
The Gramm-Leach-Bliley Financial Services Modernizaton Act of 1999: Repeal of Glass-Steagall
Implications for Financial Consolidation
Separation of the Banking and Other Financial Services Industries Throughout the World
Mini-Case Box: The Global Financial Crisis and the Demise of Large, Free-Standing
Investment Banks
Chapter 19: Banking Industry: Structure and Competition 115
Thrift Industry: Regulation and Structure
Savings and Loan Associations
Mutual Savings Banks
Credit Unions
International Banking
Eurodollar Market
Structure of U.S. Banking Overseas
Foreign Banks in the United States
◼ Overview and Teaching Tips
Chapter 19 supplements Chapter 2 by going into much greater detail about the structure, operation, and
regulation of the banking system. This chapter differs from conventional chapters on the banking industry
in other financial markets and institutions textbooks by stressing a more dynamic, analytical framework. It
uses this framework to explain how regulation has led to the peculiar structure of the American banking
industry and how financial innovation and changes in the ability to process information have led to a
decline in the traditional banking business and the growth of the shadow banking system.
◼ Answers to End-of-Chapter Questions
1. Agricultural and other interests in the U.S. were quite suspicious of centralized power and thus
opposed the creation of a central bank.
2. a. Office of the Controller of the Currency;
3. False. Although there are many more banks in the United States than in Canada, this does not mean
4. New technologies such as electronic banking facilities are frequently shared by several banks, so
5. Because becoming a bank holding company allows a bank to:
6. International banking has been encouraged by giving special tax treatment and relaxed branching
regulations to Edge Act corporations and to international banking facilities (IBFs); this was done to
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8. No, because the Saudi-owned bank is subject to the same regulations as the American-owned bank.
9. The elimination of reserve requirements would decrease the size of money market mutual funds
10. The rise of inflation and the resulting higher interest rates on alternatives to checkable deposits meant
that banks had a big shrinkage in this low-cost way of raising funds. The innovation of money
11. True. Higher inflation helped raise interest rates which caused the disintermediation process to occur
and which helped create money market mutual funds. As a result banks lost cost advantages on the
12. The growth of the commercial paper market and the development of the junk bond market meant
13. Uncertain. The invention of the computer did help lower transaction costs and the costs of collecting
information, both of which have made other financial institutions more competitive with banks and
14. Brokerage firms began to engage in the traditional banking business of issuing deposit instruments,
while foreign bank activities in the United States further eroded the competitive position of U.S. banks.
15. The Gramm-Leach-Bliley Act now opens the door to consolidation, not only in terms of the number