Transcript European Business School London Regents College

Sapienza Università di Roma
International Banking
Lecture Eleven
Banking in the United States
Prof. G. Vento
Agenda
• Introduction to Banking in the United States
• Structure of the Banking and Financial System in the
US
• Key issues of US Banking Industry
• Banking Regulation in the US
April 2013
International Banking - Prof. G. Vento
Introduction to Banking in the United States: Recent
Trends
• Industry concentration
• Important regulatory changes (i.e. Gramm-LeachBliley Act of 1999)
• Disintermediation
April 2013
International Banking - Prof. G. Vento
Banking in the US: Structure of Banking and Financial
System
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Wide range of financial intermediaries:
Depository institutions: commercial banks, saving
institutions and credit unions. They mostly collect deposits.
Contractual saving institutions. Insurance companies and
pension funds whose main liabilities are long-term future
benefits to be paid to policy holders and fund holders.
These liabilities usually take form of reserves.
Investment intermediaries. Mutual funds, investment
funds, securities firms whose liabilities are usually shortterm money market or capital market securities.
April 2013
International Banking - Prof. G. Vento
Banking in the US: Depository Institutions
• Commercial banks are the major financial
intermediaries in the US economy.
• A list of many commercial banks in the United States
can be found at the website of the Federal Deposit
Insurance Corporation (FDIC). According to the FDIC,
there were 8,430 FDIC-insured commercial banks in
the United States as of August 22, 2008. They used to
be over 14,000 in 1984.
April 2013
International Banking - Prof. G. Vento
Gramm-Leach-Bliley Act
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The Glass-Steagal Act (1932) separated commercial banking
and investment banking.
The Gramm-Leach-Bliley Act (1999) allows to create financial
holding companies where banks can engage in securities
underwriting, insurance sales and a broad range of investment
banking and other financial services business
All the major banks are part of FHCs.
For an overview on the Gramm-Leach-Bliley Act see:
http://www.frbsf.org/publications/banking/gramm/grammpg1.
html#criteria
April 2013
International Banking - Prof. G. Vento
Banking industry in US: Foreign Banks
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Foreign banks play a significant role: in 2004 about 18% of
assets and 22% of business lending belonged to foreign
banks.
Top US banks (Citibank, JPMorganChase, Bank of America,
etc.) have significant businesses in Europe, Asia and Latin
America.
April 2013
International Banking - Prof. G. Vento
Banking industry in US: Savings Institutions
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Savings institutions are similar to commercial banks,
although their main difference relates to their ownership
features
Savings institutions traditionally have mutual ownership.
They are owned by ‘members’ or ‘shareholders’ who are
the depositors or borrowers.
The main type of saving institutions in the US are the socalled Savings and Loan Associations (or thrifts)
April 2013
International Banking - Prof. G. Vento
Banking industry in US: Credit Unions
• Credit Unions are another type of mutual
depository institutions which have grown in
importance over the last decade or so
• These are non-profit institutions and are owned by
their members
• Members deposits are used to offer loans to the
members.
• They are almost totally focused on retail financial
services.
April 2013
International Banking - Prof. G. Vento
Banking industry in US: Credit Unions
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Credit unions originated in Europe in the mid 19th century. The first credit union in
the United States was established in 1908 in New Hampshire. At the time, banks were
unwilling to lend to many poor laborers, who then turned to corrupt moneylenders
and loan sharks.
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Businessman and philanthropist Edward Filene spearheaded an effort to secure
legislation for credit unions first in Massachusetts and later throughout the United
States. With the help of the Credit Union National Extension Bureau and an army of
volunteers, states began passing credit union legislation in the 1920s. Credit unions
were formed based on a bond of association, often beginning with a small group of
employees. Despite opposition from the banking industry, the Federal Credit Union
Act was signed into law in 1934 as part of the New Deal, allowing the creation of
federally chartered credit unions in the United States. The Credit Union National
Association (CUNA) was formed and by 1937, 6400 credit unions with 1.5 million
members were active in 45 states.
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Today there are over 9500 credit unions in the United States and they are regulated by
the National Credit Union Administration (NCUA).
April 2013
International Banking - Prof. G. Vento
Contractual Savings Institutions: Insurance Companies
and pension funds
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Insurance products are an integral feature of the financial
services sector and many US banks nowadays cross-sell
insurance services to their banking clients.
Private pension funds. They are pension funds that are
administered by a bank, a life insurance firm or pension fund
manager.
Public pension funds are the pension provision of the
government. In the United States the most important public
pension plans are the Social Security old Age and Survivors
Insurance Fund.
April 2013
International Banking - Prof. G. Vento
Investment Intermediaries
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A mutual fund is a company that pools the money of many
investors in order to invest in a range of investment
securities.
Investment banks. Important changes after the great
financial crisis.
April 2013
International Banking - Prof. G. Vento
Regulation of US Banking System
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Different regulatory agencies
Office of the Comptroller of the Currency (OCC). It’s an
independent bureau of the Treasury in charge to supervise all
national banks
• Federal Reserve System. In addition to its monetary policy
rules, the Fed is also responsible for regulating various type of
banks:
• Bank holding companies
• State-chartered banks
• Foreign branches of member
Banks.
April 2013
Federal Reserve System
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The Federal Reserve Act of 1913 established the present day Federal
Reserve System and brought all banks in the United States under the
authority of the Federal Reserve (a quasi-governmental entity),
creating the twelve regional Federal Reserve Banks which are
supervised by the Federal Reserve Board.
Notwithstanding the Glass-Steagall Act of 1932 and the Banking Act of
1933 and the Banking Act of 1935, which were attempts to reform
various banking abuses, the Federal Reserve System has remained
more or less unchanged through to the present day.
The Glass-Steagall Act was repealed in 1999, whereas the Banking Act
of 1933 simply strengthened the supervisory powers of federal
authorities and created the Federal Deposit Insurance Corporation.
April 2013
International Banking - Prof. G. Vento
Federal Reserve System: goals
• Conducting the nation's monetary policy by influencing monetary
and credit conditions in the economy in pursuit of maximum
employment, stable prices, and moderate long-term interest
rates.
• Supervising and regulating banking institutions to ensure the
safety and soundness of the nation's banking and financial
system, and protect the credit rights of consumers.
• Maintaining stability of the financial system and containing
systemic risk that may arise in financial markets.
• Providing financial services to depository institutions, the U.S.
government, and foreign official institutions, including playing a
major role in operating the nation's payments system.
April 2013
International Banking - Prof. G. Vento
Federal Reserve Parts
• According to the Federal Reserve, the Federal Reserve System is presently
composed of five parts:
• The presidentially appointed Board of Governors, an independent federal
government agency located in Washington, D.C.
• The Federal Open Market Committee (FOMC), which oversees Open Market
Operations, the principal tool of national monetary policy.
• Twelve regional privately-owned Federal Reserve Banks located in major cities
throughout the nation, which divide the nation into 12 districts, acting as fiscal
agents for the U.S. Treasury, each with its own nine-member board of
directors.
• Numerous other private U.S. member banks, which subscribe to required
amounts of non-transferable stock in their regional Federal Reserve Banks.
• Various advisory councils.
April 2013
International Banking - Prof. G. Vento
Federal Deposit Insurance Corporation
• The Federal Deposit Insurance Corporation (FDIC) is a United States
government corporation created by the Glass-Steagall Act of 1933. It
provides deposit insurance, which guarantees the safety of deposits in
member banks, currently up to $250,000 per depositor per bank. The FDIC
insures deposits at 8,195 institutions.
• The FDIC also examines and supervises certain financial institutions for
safety and soundness, performs certain consumer-protection functions,
and manages banks in receiverships (failed banks).
• Insured institutions are required to place signs at their place of business
stating that "deposits are backed by the full faith and credit of the United
States Government.“
• Since the start of FDIC insurance on January 1, 1934, no depositor has lost
a single cent of insured funds as a result of a failure.
April 2013
International Banking - Prof. G. Vento
Performance of US Commercial Banks
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US commercial banks have been among the most profitable
banks in the developed world over the last decade averaging
ROE of 15%.
Before the crisis total assets increased (11%), capital increased,
growth in corporate lending as well as in commercial real
estate lending, residential mortgage lending, securities.
April 2013
International Banking - Prof. G. Vento
Next Lecture :
BANKING IN JAPAN
April 2013
International Banking - Prof. G. Vento