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Chapter ThreeThe Organization and

Structure of Bankingand the Financial-Services Industry

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Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

Key Topics

The Organization and Structure of theCommercial Banking Industry The Array of Organizational Structures in

Banking Interstate Banking and the Riegle-Neal Act The Financial Holding Company Mergers and Acquisition

Banking Structure and Organization in Europeand Asia The Changing Organization and Structure ofBankings Principal Competitors

Economies of Scale and Scope

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Assets Held by U.S. FDIC-Insured

Commercial Banks, 2007

87%

11%

2%

Assets Held By LargeBanks

Assets Held By MediumBanks

Assets Held By Small Banks

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Number of U.S. FDIC-insured

Commercial Banks, 2007

43%

50%

7%

Small $100 Million

Medium $100 Million -$1 Billion

Large > $1 Billion

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Community Banks or Retail Banks

Typical Size is $300 Million

Organizational Chart is Not Complicated

Significantly Affected by Health of LocalEconomy

Generally Know their Customers Well

Relationship Lending

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Money Center or Wholesale Banks

Generally Multi-Billion Dollar Company

Organizational Chart is Much More Complex

Serve Many Different Markets with ManyDifferent Services so are Better DiversifiedGeographically and by Product

Able to Raise Large Amounts of Capital at

Relatively Low Costs

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Quick Quiz

What are the general trends in the sizedistribution and asset concentration ofAmerican banking industry?

Describe differences between a typicalorganizational structure of smallercommunity bank and a larger money-center

bank. What trends are affecting the way banks

and their competitors are organized today?

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Common Classifications of U.S. Banks

2%

98%

0% 20% 40% 60% 80% 100% 120%

Not FDIC Insured

FDIC Insured Banks

75%

25%

0% 10% 20% 30% 40% 50% 60% 70% 80%

State Banks

National Banks

64%

36%

0% 10% 20% 30% 40% 50% 60% 70%

Non Member B anks

Member Banks

Source: FRB and FDIC, 2005

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Deposits Held By Banks

23%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Deposits of Non Member Banks

Deposits of Member Banks

45%

55%

0% 10% 20% 30% 40% 50% 60%

Deposits of State Banks

Deposits of National Banks

Source: FRB and FDIC, 2005

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Unit Banks

Offer All Services From One Office

One of the Oldest Kinds of Banks New Banks are Generally Unit Banks Until

Can Grow and Attract More Resources

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Branch Banks

Offer Full Range of Services from SeveralLocations

Senior Management at the Home Office

Each Branch has its Own Management Teamwith Limited Decision Making Ability

Some Functions are Highly Centralized,While Others are Decentralized

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Reasons for Growth of Branching

Exodus of Population to SuburbanCommunities

Increased Bank Failures in Recent Years

Business Growth

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What Trend in Branch Banking Has BeenProminent in the U.S. in Recent Years?

1934 14,146 2,985 17,131 0.21

1970 13,511 21,810 35,321 1.61

1982 14,451 39,784 54,235 1.75

2007 7,241 77,947 85,188 10.76

From Table 3-2; Source: FDIC

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Electronic Branches Internet Banking Services

Automated Teller Machines (ATMs)

Point of Sale (POS) Terminals

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Virtual Banks

Provide their Services Exclusively Throughthe Web

Can Generate Cost Savings Over TraditionalBrick-and-Mortar Banks

Have Not Yet Demonstrated They Can Be

Consistently Profitable

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Bank Holding Companies (BHC)

A Corporation Chartered for the Purpose ofHolding the Stock of One or More Banks

Control of a bank is Assumed When 25% orMore of the Stock is Owned

Must Get Approval from Federal ReserveBoard to Control a Bank

One-Bank Holding Companies vs. MultibankHolding Companies

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Board of Direct ors

Parent Company

Bank Subsidiary Nonbank Subsidiaries

Bank Branches

Each subsidiary has a

president and line officers

The bottom four levels have the same organizational form as the independent bank.

Single Bank Holding Company

Mult ibank Holding Company

Board of Direct ors

Parent Company

Bank Subsidiary Nonbank Subsidiaries Bank Subsidiary

Bank Branches Bank Branches

Organizational Structure of a BHC

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Nonbank Businesses of BHCs

Finance Companies

Mortgage Companies

Data ProcessingCompanies

Factoring Companies

Security BrokerageFirms

Financial Advising

Credit InsuranceUnderwriters

Merchant Banking

Investment BankingFirms

Trust Companies

Credit CardCompanies

Leasing Companies

Insurance Companiesand Agencies

Real Estate Services

Savings Associations

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Reasons for the Growth of BHCs

Geographic Diversification

Product Line Diversification

Tax Sheltering

Double Leveraging

Source of Strength

A Way Around Regulatory Restrictions

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Reasons for Full-Service InterstateBanking

Need to Bring New Capital to ReviveStruggling Local Economies

The Expansion by Non Bank Financial

Institutions with Fewer Restrictions A Strong Desire by Large Banks to Expand

Geographically

Belief Among Regulators that Large Banksare More Efficient and Less Prone to Failure

Advances in Technology

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Riegle-Neal Interstate Banking andBranching Efficiency Act of 1994

Allows BHCs to Acquire Banks Anywhere inthe U.S.

Allows BHCs to Convert Banks to Branches

June 1997 States Can Opt Out and Not Allow BHCs to

Convert to Branches

States Can Opt In Early

Limits Deposits of One BHC to 10%Nationwide and 30% Within One State

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Proponents and Opponents of

Interstate Banking

Proponents Efficient Use of Scarce

Resources Lower Prices for Services

Geographic Diversification

Efficient Flow of Credit inthe System

Opponents Increased Bank

Concentration Less Competition

Higher Prices for Services

Drain Resources fromCommunity

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Financial Holding Companies: GLB

Act of 1999

Special Type of Holding Company

Offers the Broadest Range of Services

List of Activities Offered May Expand asRegulators Decide What Services areCompatible with Banking

Each Affiliated Financial Firm has its OwnCapital and Management and its Own Profitor Loss

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Bank

Holding

Company

Securities

Subsidiaries InsuranceSubsidiary

Thrift Holding

Company

Real

Estate

Subsidiary

Financial Holding

Company

Subsidiaries

and Service

Companies

Thrift CompanyNonbank

SubsidiariesCommercial

Banking

Company

Sample Organizational Structure of FHC

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Bank Subsidiaries

Bank Controls One or More Subsidiaries

Subsidiaries Offer Other Services Such as

Insurance and Security Brokerage Services Profits and Losses of Each Subsidiary Impact

Parent Bank

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The Changing Organization and

Structure

Rise in Branching, BHCs, and FHCs

Consolidation among Banks and Nonbanks

Convergence

Other forces of change:

Deregulation/Reregulation

Financial Innovation Securitization

Globalization

Advances in Technology

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Do Bigger Firms Operate at Lower

Cost? Economies of Scale

Exhibit 3-10

Economies of Scope

Banking and Financial Firm Goals andMotivations

Expense-Preference Behavior

Agency Theory Corporate Governance

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Structure and Organization ofBanks in Europe Germany Largest European Banking

Industry Private Sector Banks

Public Sector Banks France Second in Number of Banks Belgium Dominated by Five Large Banks Great Britain Dominated by a Half Dozen

Banking Firms Switzerland Credit Suisse and UBS and

Many Smaller Firms Italy Privatized Banking in the 1990s

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Structure and Organization of

Banks in Asia China Large Dominating Government

Sector, Although Private Banks areExpanding

Japan Dominated by the Big Four FinancialGroup with More than One Hundred SmallerDomestic Banks and Seventy Foreign Banks

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Quick Quiz

Which type of corporations chartered for thesimple purpose of holding the stock of at leastone bank?

What were the reasons for the Riegle Neal Act

of1994? When the banking industry moves toward

larger but fewer organizations, what is itknown as?

What relationship appears to exist betweenbank size, efficiency, and operating costs perunit of service produced and delivered?

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