1、Chapter ThreeThe Organization and Structure of Banking and the Financial-Services IndustryKey Topics 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 Riegl
2、e-Neal Act The Financial Holding Company(FHC)Mergers and Acquisitions Banking Structure and Organization in Europe and Asia The Changing Organization and Structure of Bankings Principal Competitors Economies of Scale and Scope and Expense Preference BehaviorIntroduction Chapter 1 explored many of th
3、e roles and services of the modern bank and competitors of banks Over the years,bankers and the managers of competing financial institutions have evolved into different organizational forms A financial institutions role and size are not the only determinants of how it is organized or how well it per
4、forms In this chapter,we will discuss the causes that have dramatically changed the structure,size,and types of organizations dominating the financial-services industry todayThe Organization and Structure of the Commercial Banking Industry Advancing Size and Concentration of Assets Commercial bankin
5、g is the dominant supplier of credit and payments services to businesses and households Many banks in the United States are small by global standards These smallest financial institutions,numerous as they are,held little more than one percent of total industry assets In contrast,the American banking
6、 industry also contains some of the largest financial service organizations on the planet Citigroup,JP Morgan Chase,and the Bank of America hold about 6 trillion dollars combined Thus,banking continues to be increasingly concentrated not only in the smallest,but also in the very largest of all finan
7、cial firmsEXHIBIT 31 The Structure of the U.S.Commercial Banking Industry,December 31,2009EXHIBIT 31 The Structure of the U.S.Commercial Banking Industry,December 31,2009Internal Organization of the Banking Firm The great differences in size across the industry that have appeared in recent years hav
8、e led to marked differences in the way banks and other service providers are organized internally and in the variety of financial services each institution sells in the markets it chooses to serveEXHIBIT 32 Small and Medium-Size U.S.Banks Lose Market Share to the Largest Banking InstitutionsInternal
9、 Organization of the Banking Firm(continued)Community Banks and Other Community-Oriented Financial Firms Devoted principally to the markets for smaller,locally based deposits and loans and are often referred to as a retail bank Financial firms of this type stand in sharp contrast to wholesale banks
10、Close contact between top management and management and staff of each division is common Community banks are usually significantly impacted by changes in the health of the local economy and keeping up with new regulations These institutions have been losing ground,both in numbers of institutions and
11、 in industry shares Around 14,000 community banks in 1985 and about 6,000 in 2010EXHIBIT 33 Organization Chart for a Smaller Community BankInternal Organization of the Banking Firm(continued)Larger Banks Money Center,Wholesale and Retail A large money center bank is usually located in a large city a
12、nd has a focus towards wholesale or wholesale plus retail Some of the largest banks have moved toward the profit-centered or performance approach Each major department strives to maximize its contribution to profitability or to some other performance indicator The largest money-center banks possess
13、some important advantages over community oriented institutions Better diversified both geographically and by product line Can better withstand the risks of a fluctuating economy Able to raise huge amounts of financial capital at relatively low cost Can attract top managerial talentEXHIBIT 34 Organiz
14、ation Chart for a Money Center or Wholesale Bank Serving Domestic and International MarketsInternal Organization of the Banking Firm(continued)Trends in Organization The tendency in recent years has been for most financial institutions to become more complex organizations over time When a financial
15、firm begins to grow,it usually adds new services and new facilities Another significant factor influencing financial organizations today is the changing makeup of the skills financial-service providers need to function effectively Financial firms have needed growing numbers of people with computer s
16、kills Call centers have grown in the industry to sell profitable services and respond to customer problems Automated bookkeeping has reduced the time managers spend in routine operationsThe Array of Organizational Structures and Types in the Banking Industry There are so many different types of fina
17、ncial institutions today that the distinctions between these different types of organizations often get very confusing Insured banks State chartered banks National banks Member banksEXHIBIT 35 U.S.Commercial Banks with Federal versus State Charters,Membership in the Federal Reserve System,and Deposi
18、t Insurance from the Federal Government(as of December 31,2009)The Array of Organizational Structures and Types in the Banking Industry(continued)Unit Banking Organizations Unit banks,one of the oldest kinds,offer all of their services from one office Some services(such as taking deposits,cashing ch
19、ecks,or paying bills)may be offered from limited-service facilities,such as drive-up windows and automated teller machines(ATMs)These organizations are still common today One reason for the large numbers of unit banks is the continuing formation of new banks Many customers still seem to prefer small
20、er banks,which often seem to know their customers better than larger banks Many new banks start out as unit organizationsTABLE 31 Entry and Exit in U.S.BankingThe Array of Organizational Structures and Types in the Banking Industry(continued)Branching Organizations As a unit financial firm grows lar
21、ger in size it usually decides at some point to establish a branching organization They offer the full range of services from several locations,including a head office and one or more full-service branch offices Likely to offer limited services through a supporting network of drive-in windows,ATMs,c
22、omputers networked with the banks computers,point-of-sale terminals in stores and shopping centers,the Internet,and other advanced communications systems Senior management of a branching organization is usually located at the home office,though each full-service branch has its own management team wi
23、th limited authority to make decisionsEXHIBIT 36 The Branch Banking OrganizationThe Array of Organizational Structures and Types in the Banking Industry(continued)Branchings Expansion During the Great Depression of the 1930s,only one in five American banks operated a full-service branch office By th
24、e beginning of the 21st century,the average U.S.bank operated close to 12 full-service branch offices One contributing factor has been the exodus of population from cities to suburban communities The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994 provided the basi
25、s for expansion However,in recent years new bank branch office expansion appears to have slowed somewhatTABLE 32 Growth of Commercial Bank Branch Offices in the United StatesThe Array of Organizational Structures and Types in the Banking Industry(continued)Electronic Branching Websites and Electroni
26、c Networks:An Alternative or a Supplement to Traditional Bank Branch Offices?Electronic branches Internet banking services Automated teller machines(ATMs)Point-of-sale(POS)terminals Personal computers Call-center systems Virtual banksEXHIBIT 37 Electronic Banking Systems,Computer Networks,and Web Ba
27、nking:An Effective Alternative to Full-Service Branches?The Array of Organizational Structures and Types in the Banking Industry(continued)Holding Company Organizations A bank holding company is simply a corporation chartered for the purpose of holding the stock of at least one bank,often along with
28、 other businesses The growth of holding companies has been rapid in recent decades The principal reasons for this rapid upsurge:Access to capital markets in raising funds Ability to use higher leverage Tax advantages Ability to expand into businesses outside bankingTABLE 33 The 10 Largest Bank Holdi
29、ng Companies Operating in the United States(Total Assets as Reported on June 30,2010)The Array of Organizational Structures and Types in the Banking Industry(continued)Most registered bank holding companies in the United States are one-bank companies However,these one-bank companies frequently contr
30、ol one or more nonbank businesses as well The principal advantage for holding companies entering nonbank lines of business is the prospect of diversifying sources of revenue and profits and reducing risk exposure A minority of bank holding company organizations are multibank holding companies Multib
31、ank companies control more than 70 percent of the total assets of all U.S.banking organizations One dramatic effect of holding company expansion has been a sharp decline in the number of independently owned banking organizations Banks acquired by holding companies are referred to as affiliated banks
32、 Banks not owned by holding companies are known as independent banksTABLE 34 The Most Important Nonbank Financially Related Businesses That Registered Holding Companies Can Acquire under U.S.Banking RegulationsEXHIBIT 38 The Multibank Holding CompanyThe Array of Organizational Structures and Types i
33、n the Banking Industry(continued)Holding company banking has been blamed for reducing competition by critics Supporters of the holding company movement claim greater efficiency,more services,lower probability of organizational failure,and higher and more stable profits The holding company as a whole
34、 tends to be more profitable than banking organizations that do not form holding companies Moreover,the failure rate for holding company banks appears to be below that of comparable-size independent banks However,there is anecdotal evidence that multibank holding companies may drain scarce capital f
35、rom some communities and weaken smaller towns and rural areasInterstate Banking Organizations and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Riegle-Neal allows holding companies to acquire banks throughout the United States without needing any states permission to do so
36、and to establish branch offices across state lines Why did the federal government eventually enact and the states support interstate banking laws?The need to bring in new capital to revive struggling local economies The expansion of financial-service offerings by nonbank financial institutions that
37、faced few restrictions on their ability to expand nationwide A strong desire on the part of the largest financial firms to geographically diversify their operations and open up new marketing opportunities The belief among regulators that larger financial firms may be more efficient and less prone to
38、 failure Advances in the technology of financial-services delivery,permitting service to customers over broader geographic areas An Alternative Type of Banking Organization Available as the 21st Century Opened:Financial Holding Companies(FHCs)Under the terms of the Gramm-Leach-Bliley(GLB)Act,financi
39、al holding companies(FHCs)are defined as a special type of holding company that may offer the broadest range of financial services,including dealing in and underwriting securities and selling and underwriting insurance With the FHCs,each affiliated financial firm has its own Capital Management Profi
40、ts or losses separate from the profits or losses of other affiliates of the FHC Some protection against companywide losses Led to consolidation and convergence within the industryEXHIBIT 39 The Financial Holding Company(FHC)TABLE 35 Leading Financial Holding Companies(FHCs)Registered with the Federa
41、l Reserve BoardMergers and Acquisitions Reshaping the Structure and Organization of the Financial-Services Sector The rise of branching,bank holding companies,and financial holding companies has been fueled by multiple factors Another powerful factor spurring these organizational types forward is th
42、eir ability to carry out mergers and acquisitions Bigger companies have pursued smaller financial-service providers and purchased their assets in great numbers Since 1980 more than 12,000 bank mergers have occurred in the United StatesThe Changing Organization and Structure of Bankings Principal Com
43、petitors Bankings principal competitors credit unions,savings associations,finance companies,insurance firms,security dealers,hedge funds,and other financial firms All are affected by powerful forces such as rising operating costs and rapidly changing technology A notable exception until very recent
44、ly has been hedge funds All financial firms are starting to look alike,especially in the menu of services offered Convergence Great structural and organizational changes have“spilled over”into one financial-service industry after anotherEfficiency and Size:Do Bigger Financial Firms Operate at Lower
45、Cost?If not,then why have some financial institutions become some of the largest businesses on the planet?Two possible sources of cost savings Economies of scale Economies of scope For financial firms,there is evidence for at least moderate economies of scale in banking,though most studies find only
46、 weak evidence or none at all for economies of scope Studies of selected nonbank financial firms often reach conclusions that roughly parallel the results for banking firmsEXHIBIT 310 The Most Efficient Sizes for Banks and Selected Other Financial FirmsFinancial Firm Goals:Their Impact on Operating
47、Cost,Efficiency,and Performance Expense-Preference Behavior When the management of a financial firm decides that benefits for managers(and not the stockholders or the public)should be the primary objective of the company Opposite of cost control and efficiency Agency Theory Analyzes relationships be
48、tween a firms owners(stockholders)and its managers,who legally are agents for the owners Explores whether mechanisms exist in a given situation to compel managers to maximize the welfare of their firms owners Lower agency costs and better company performance depend upon the effectiveness of corporat
49、e governanceQuick Quiz What trends are affecting the way banks and their competitors are organized today?What trend in branch banking has been prominent in the United States in recent years?What is a bank holding company?Are there any significant advantages or disadvantages for holding companies or the public if these companies acquire banks or nonbank business ventures?Can you see any advantages to allowing interstate banking?What about potential disadvantages?What relationship appears to exist between bank size,efficiency,and operating costs per unit of service produced and delivered?
