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BUFN722-ch02.ppt
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BUFN722-ch02.ppt
BUFN722-ch02.ppt
BUFN722-ch02.ppt
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BUFN722-ch02.ppt
BUFN722-ch02.ppt
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  • 1. BUFN 722 ch-02 Depository Institutions
  • 2. Overview of Depository Institutions <ul><li>In this segment, we explore the depository FIs: </li></ul><ul><ul><li>Size, structure and composition </li></ul></ul><ul><ul><li>Balance sheets and recent trends </li></ul></ul><ul><ul><li>Regulation of depository institutions </li></ul></ul><ul><ul><li>Depository institutions performance </li></ul></ul>
  • 3. Products of U.S. FIs <ul><li>Comparing the products of FIs in 1950, to products of FIs in 2000: </li></ul><ul><ul><li>Much greater distinction between types of FIs in terms of products in 1950 than in 2000 </li></ul></ul><ul><ul><li>Blurring of product lines and services over time </li></ul></ul><ul><ul><li>Wider array of services offered by all FI types </li></ul></ul><ul><ul><li>Refer to Tables 2-1A and 2-1B in the text </li></ul></ul>
  • 4. Size of Depository FIs <ul><li>Consolidation has created some very large FIs </li></ul><ul><li>Combined effects of disintermediation, global competition, regulatory changes, technological developments, competition across different types of FIs </li></ul>
  • 5. Largest Depository Institutions, 2000 by total assets (billions) <ul><ul><li>Citigroup $804.3 </li></ul></ul><ul><ul><li>J.P. Morgan Chase 707.5 </li></ul></ul><ul><ul><li>BankAmerica 671.7 </li></ul></ul><ul><ul><li>Banc One 283.4 </li></ul></ul><ul><ul><li>First Union 246.6 </li></ul></ul><ul><ul><li>Wells Fargo 241.1 </li></ul></ul><ul><ul><li>Washington Mutual 190.8 </li></ul></ul><ul><ul><li>Fleet Boston 179.1 </li></ul></ul><ul><ul><li>SunTrust Banks 100.6 </li></ul></ul><ul><ul><li>HSBC 87.1 </li></ul></ul>
  • 6. Depository Institutions <ul><ul><li>Commercial Banks </li></ul></ul><ul><ul><ul><li>Largest depository institutions are commercial banks. </li></ul></ul></ul><ul><ul><ul><li>Differences in operating characteristics and profitability across size classes. </li></ul></ul></ul><ul><ul><ul><ul><li>Notable differences in ROE and ROA as well as the spread </li></ul></ul></ul></ul><ul><ul><li>Thrifts </li></ul></ul><ul><ul><ul><li>S&Ls </li></ul></ul></ul><ul><ul><ul><li>Savings Banks </li></ul></ul></ul><ul><ul><ul><li>Credit Unions </li></ul></ul></ul>
  • 7. Functions and Structural Differences <ul><li>Functions of depository institutions </li></ul><ul><ul><li>Regulatory sources of differences across types of depository institutions. </li></ul></ul><ul><li>Structural changes generally resulted from changes in regulatory policy. </li></ul><ul><ul><li>Example: changes permitting interstate branching </li></ul></ul><ul><ul><ul><li>Reigle-Neal Act </li></ul></ul></ul>
  • 8. Definition of a Commercial Bank <ul><li>Represent the largest group of depository institutions measured by asset size. </li></ul><ul><li>Perform functions similar to those of savings institutions and credit unions - they accept deposits (liabilities) and make loans (assets) </li></ul><ul><li>Liabilities include nondeposit sources of funds such as subordinated notes and debentures </li></ul><ul><li>Loans are broader in range, including consumer, commercial, international, and real estate </li></ul><ul><li>Regulated separately from savings institutions and credit unions </li></ul>
  • 9. Differences in Balance Sheets Depository Institutions Nonfinancial Firms Assets Liabilities Assets Liabilities Loans Deposits Deposits Loans Other Other financial financial assets assets Other Other Other Other non- liabilities non- liabilities financial and financial and assets equity assets equity
  • 10. All US Commercial Banks Balance Sheet* ($ Bil.) Federal Reserve Bulletin, May 26, 1999 Assets Total cash assets………………. $ 253.8 4.8% U.S. gov securities…………… $ 801.4 Other…………………………. 391.6 Investment securities………….. 1,193.0 22.6% Interbank loans………………. 223.0 Loans exc. Interbank………… 3,314.3 Comm. and Indust…………..$ 948.5 Real estate…………………… 1,343.0 Individual……………………. 496.4 All other……………………… 526.4 Less: Reserve for losses……… 58.7 Total loans……………………… $3,478.6 66.0% Other assets…………………….. 347.6 6.6% Total assets…………………….. $5,273.0
  • 11. Commercial Bank Balance Statement* Liabilities and Equity Transaction accounts…………… $ 667.4 12.8% Nontransaction accounts………... 2,688.5 54.4% Total deposits…………………… $3,355.9 Borrowings……………………… 1,006.0 21.3% Other liabilities………………….. 462.3 2.8% Total liabilities………………….. $4,824.2 Equity…………………………… 448.8 8.7% *Aggregate balance sheet and percentage distributions for all U.S. commercial banks as of May 26, 1999 in billions of dollars
  • 12. Balance Sheet <ul><li>Assets </li></ul><ul><ul><li>loans and investment securities </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>transaction accounts - the sum of noninterest-bearing demand deposits and interest-bearing checking accounts </li></ul></ul><ul><ul><ul><li>NOW account - an interest-bearing checking account </li></ul></ul></ul><ul><ul><li>negotiable CDs - fixed-maturity interest-bearing deposits with face values of $100,000 or more that can be resold in the secondary market </li></ul></ul><ul><li>Equity </li></ul><ul><ul><li>common and preferred stock, surplus (additional paid-in capital; paid in capital in excess of par), and retained earnings (continued) </li></ul></ul>
  • 13. Balance Sheet <ul><li>Off-Balance-Sheet activities </li></ul><ul><ul><li>off-balance-sheet asset - when an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement </li></ul></ul><ul><ul><li>off-balance-sheet liability - when an event occurs, this item moves onto the liability side of the balance sheet or an expense is realized on the income statement </li></ul></ul><ul><li>Trust services </li></ul><ul><ul><li>generates fees by holding and managing assets of individuals or corporations </li></ul></ul><ul><li>Correspondent banking </li></ul><ul><ul><li>generates fees by provision of banking services to other banks </li></ul></ul>
  • 14. Commercial Banks <ul><li>Primary assets: </li></ul><ul><ul><li>Real Estate Loans: $1,670.3 billion </li></ul></ul><ul><ul><li>C&I loans: $1,048.2 billion </li></ul></ul><ul><ul><li>Loans to individuals: $609.7 billion </li></ul></ul><ul><ul><li>Other loans: $367.5 billion </li></ul></ul><ul><ul><li>Investment security portfolio: $1,662.0 billion </li></ul></ul><ul><ul><ul><li>Of which, Treasury bonds: $710.0 billion </li></ul></ul></ul><ul><li>Inference: Importance of Credit Risk </li></ul>
  • 15. Commercial Banks <ul><li>Primary liabilities: </li></ul><ul><ul><li>Deposits: $4,176.6 billion </li></ul></ul><ul><ul><li>Borrowings: $1,532.5 billion </li></ul></ul><ul><ul><li>Other liabilities: $401.0 billion </li></ul></ul><ul><li>Inference: </li></ul><ul><ul><li>Highly leveraged </li></ul></ul>
  • 16. Small Banks, Nation
  • 17. Large Banks, Nation
  • 18. Structure and Composition <ul><li>Shrinking number of banks: </li></ul><ul><ul><li>14,416 commercial banks in 1985 </li></ul></ul><ul><ul><li>12,744 in 1989 </li></ul></ul><ul><ul><li>8,315 in 2000 </li></ul></ul><ul><li>Mostly the result of Mergers and Acquisitions </li></ul><ul><ul><li>M&A prevented prior to 1980s, 1990s </li></ul></ul><ul><ul><li>Consolidation has reduced asset share of small banks </li></ul></ul>
  • 19. Structure and Composition of Commercial Banks <ul><li>Financial Services Modernization Act 1999 </li></ul><ul><ul><li>Allowed full authority to enter investment banking (and insurance) </li></ul></ul><ul><li>Limited powers to underwrite corporate securities have existed only since 1987 </li></ul>
  • 20. Composition of Commercial Banking Sector <ul><li>Community banks </li></ul><ul><li>Regional and Super-regional </li></ul><ul><ul><li>Access to federal funds market to finance their lending activities </li></ul></ul><ul><li>Money Center banks </li></ul><ul><ul><li>Bank of New York, Bank One, Bankers Trust, Citigroup, J.P. Morgan/Chase, HSBC Bank USA </li></ul></ul><ul><ul><ul><li>declining in number </li></ul></ul></ul>
  • 21. Balance Sheet and Trends <ul><li>Business loans have declined in importance </li></ul><ul><li>Offsetting increase in securities and mortgages </li></ul><ul><li>Increased importance of funding via commercial paper market </li></ul><ul><li>Securitization of mortgage loans </li></ul>
  • 22. Some Terminology <ul><li>Transaction accounts </li></ul><ul><li>Negotiable Order of Withdrawal (NOW) accounts </li></ul><ul><li>Money Market Mutual Fund </li></ul><ul><li>Negotiable CDs: Fixed-maturity interest bearing deposits with face values over $100,000 that can be resold in the secondary market. </li></ul>
  • 23. Off-balance sheet activities <ul><li>Heightened importance of off-balance sheet items </li></ul><ul><ul><li>Large increase in derivatives positions is a major issue </li></ul></ul><ul><ul><li>Standby letters of credit </li></ul></ul><ul><ul><li>Loan commitments </li></ul></ul><ul><ul><li>When-issued securities </li></ul></ul><ul><ul><li>Loans sold </li></ul></ul>
  • 24. Other Fee-generating Activities <ul><li>Trust services </li></ul><ul><li>Correspondent banking </li></ul><ul><ul><li>Check clearing </li></ul></ul><ul><ul><li>Foreign exchange trading </li></ul></ul><ul><ul><li>Hedging </li></ul></ul><ul><ul><li>Participation in large loan and security issuances </li></ul></ul><ul><ul><ul><li>Payment usually in terms of noninterest bearing deposits </li></ul></ul></ul>
  • 25. Key Regulatory Agencies <ul><ul><li>FDIC (BIF and SAIF)- insures deposits </li></ul></ul><ul><ul><li>OCC: Primary function is to charter national banks. </li></ul></ul><ul><ul><ul><ul><li>Power to disapprove mergers </li></ul></ul></ul></ul><ul><ul><li>FRS: monetary policy, lender of last resort. </li></ul></ul><ul><ul><ul><li>requires all banks to meet the same noninterest-bearing reserve requirements. National banks are automatically members of the FRS. State-chartered banks can elect to become members. </li></ul></ul></ul><ul><ul><li>State bank regulators </li></ul></ul><ul><ul><ul><ul><li>performs for state chartered banks similar functions as the OCC does for national banks </li></ul></ul></ul></ul><ul><ul><li>Dual Banking System: Coexistence of nationally and state-chartered banks. </li></ul></ul>
  • 26. Other Regulatory Issues <ul><li>Importance of Bank Holding Companies is increasing. </li></ul><ul><li>BHCs regulated by FRS. </li></ul>
  • 27. Reserve Requirements of Depository Institutions
  • 28. Key Regulatory Legislation <ul><li>1927 McFadden Act: Controls branching of national banks. </li></ul><ul><li>1933 Glass-Steagall: separates securities and banking activities. </li></ul><ul><li>1956 Bank Holding Company Act and subsequent amendments specifies permissible activities and regulation by FRS of BHCs. </li></ul><ul><li>1970 Amendments to the Bank Holding Company Act: Extension to one-bank holding companies </li></ul><ul><li>1978 International Banking Act: Regulated foreign bank branches and agencies in USA </li></ul>
  • 29. Legislation (continued) <ul><li>1980 DIDMCA and 1982 DIA (Garn-St. Germain Depository Institutions Act) </li></ul><ul><ul><li>Mainly deregulation acts. </li></ul></ul><ul><ul><li>Phased out Regulation Q. </li></ul></ul><ul><li>1987 Competitive Equality in Banking Act (CEBA) </li></ul><ul><ul><li>Redefined bank to limit growth of nonbank banks. </li></ul></ul>
  • 30. Legislation (continued) <ul><li>1989 FIRREA </li></ul><ul><ul><li>Imposed restrictions on investment activities </li></ul></ul><ul><ul><li>Replaced FSLIC with FDIC-SAIF </li></ul></ul><ul><ul><li>Replaced FHLB with Office of Thrift Supervision </li></ul></ul><ul><ul><li>Created Resolution Trust Corporation </li></ul></ul>
  • 31. Legislation (continued) <ul><li>1991 FDIC Improvement Act </li></ul><ul><ul><li>Introduced Prompt Corrective Action </li></ul></ul><ul><ul><li>Risk-based deposit insurance premiums </li></ul></ul><ul><ul><li>Limited “too big to fail” </li></ul></ul>
  • 32. Legislation (continued) <ul><li>1994 Riegle-Neal Interstate Banking and Branching Efficiency Act </li></ul><ul><ul><li>Permits BHCs to acquire banks in other states. </li></ul></ul><ul><ul><li>Invalidates some restrictive state laws. </li></ul></ul><ul><ul><li>Permits BHCs to convert out-of-state subsidiary banks to branches of single interstate bank. </li></ul></ul><ul><ul><li>Newly chartered branches permitted interstate if allowed by state law. </li></ul></ul>
  • 33. 1999 Financial Services Modernization Act <ul><li>Financial Services Modernization Act </li></ul><ul><ul><li>Allowed banks, insurance companies, and securities firms to enter each others’ business areas </li></ul></ul><ul><ul><li>Provided for state regulation of insurance </li></ul></ul><ul><ul><li>Streamlined regulation of BHCs </li></ul></ul><ul><ul><li>Prohibited FDIC assistance to affiliates and subsidiaries of banks and savings institutions </li></ul></ul><ul><ul><li>Provided for national treatment of foreign banks </li></ul></ul>
  • 34. Industry Performance <ul><li>Economic expansion and falling interest rates through 1990s </li></ul><ul><ul><li>Commercial banks record earnings of $71.6 billion </li></ul></ul><ul><li>Downturn in early 2000s </li></ul><ul><ul><li>Reduction in performance </li></ul></ul><ul><ul><li>Increased provision for loan losses </li></ul></ul><ul><li>Only 6 failures in 2000 versus 206 in 1989 </li></ul><ul><ul><li>Technology risks remain </li></ul></ul>
  • 35. <ul><li>The Commercial Banking Industry </li></ul><ul><li>I. Sources of Funds A . Deposits at Commercial Banks </li></ul><ul><ul><ul><li>1. Transaction Accounts </li></ul></ul></ul><ul><ul><ul><ul><li>Transaction accounts, widely known as checking accounts, facilitate monetary exchange. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Some transaction accounts pay no interest and are often called demand deposits. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Consumer accounts can pay interest. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The most visible interest-bearing accounts are negotiable orders of withdrawal (NOW). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In many cases, deposit accounts charge fees or maintenance charges. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Recently, the use of debit cards at automated teller machines (ATMs) has given consumers greater flexibility. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Debit cards are used to make purchases via point of sale terminals (POS). </li></ul></ul></ul></ul>
  • 36. <ul><ul><ul><li>2. Savings and Time Accounts </li></ul></ul></ul><ul><ul><ul><ul><li>Called non-transaction deposits or time deposits, these accounts are a major source of funds. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Savings accounts allow deposits and withdrawals at any time without invoking a penalty. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Money market accounts generally offer higher yields while requiring higher balances. They were created to compete with market instruments but yields are lower and slow to adjust. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Certificates of deposit are more restrictive. They are designed to be held to maturity and carry a fixed rate of interest. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>All of these accounts are backed by federal guarantees that indemnify investors in the case of loss up to $100,000. </li></ul></ul></ul></ul>
  • 37. B. Non-deposit Liabilities <ul><ul><ul><li>Banks issue a variety of debt obligations. These are not covered by federal deposit insurance but provide large amounts of cash quickly and of the desired maturity. </li></ul></ul></ul><ul><ul><ul><li>Banks may borrow from their holding companies in addition to the following methods of raising funds: </li></ul></ul></ul><ul><ul><ul><ul><li>Federal Funds </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Security Repurchase Agreements (REPOS) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Floating Rate Notes </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Commercial Paper </li></ul></ul></ul></ul>
  • 38. <ul><ul><li>C. Equity Capital </li></ul></ul><ul><ul><ul><li>Equity capital can be raised through the issuance of common or preferred stock. </li></ul></ul></ul><ul><ul><ul><li>A bank also has retained earnings. </li></ul></ul></ul><ul><ul><ul><li>Hybrid financial obligations have the characteristics of both equity and debt: </li></ul></ul></ul><ul><ul><ul><ul><li>Variable Rate Preferred Stock </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Subordinated Debt </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Perpetual Floaters </li></ul></ul></ul></ul><ul><li>II. Uses of Funds </li></ul><ul><ul><li>What distinguishes a bank is the manner in which it raises funds and </li></ul></ul><ul><ul><li>deploys them. </li></ul></ul>
  • 39. <ul><ul><li>A. Cash and Cash Equivalents </li></ul></ul><ul><ul><ul><li>Banks retain some of their resources in highly liquid form. </li></ul></ul></ul><ul><ul><ul><li>Vault cash is used for day-to-day contingencies. </li></ul></ul></ul><ul><ul><ul><li>Funds are maintained in a clearing account at the Fed. </li></ul></ul></ul><ul><ul><ul><li>Bank regulators determine minimum levels of the preceding resources, referred to as required reserves. </li></ul></ul></ul><ul><ul><ul><li>Unforeseen events lead to the maintenance of excess reserves. </li></ul></ul></ul><ul><ul><ul><li>Checks and drafts issued on other banks are cash in the process of collection. </li></ul></ul></ul><ul><ul><ul><li>Banks also hold CDs of other institutions. </li></ul></ul></ul>
  • 40. <ul><ul><li>B. Investment Securities </li></ul></ul><ul><ul><ul><li>Under current regulations, commercial banks were prohibited from holding non-financial corporate securities. </li></ul></ul></ul><ul><ul><ul><li>Bank portfolios consist largely of government issues. Why hold these when they pay generally lower rates? </li></ul></ul></ul><ul><ul><ul><ul><li>The bank may wish to “play the yield curve.” </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The government may be enticed into further business. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Liquidity may be needed. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>State and local securities may offer higher yields due to creditworthiness or tax considerations. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Government securities serve as temporary investments until more profitable ones arrive. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Portfolio duration can be adjusted quickly through their use. </li></ul></ul></ul></ul>
  • 41. <ul><ul><li>C. Loans </li></ul></ul><ul><ul><ul><li>Banks have superior information about their clients. This natural advantage can be used in making loans. </li></ul></ul></ul><ul><ul><ul><li>Many loans are secured by real estate. Mortgages account for 25% of the total assets of the banking industry. </li></ul></ul></ul><ul><ul><ul><li>Unsecured open-ended consumer debt is known as credit card receivables. </li></ul></ul></ul><ul><ul><ul><li>Commercial and industrial loans are also a large component of commercial bank portfolios. </li></ul></ul></ul><ul><ul><li>D. Tangible Property </li></ul></ul><ul><ul><ul><li>Commercial banks also own real property such as buildings, furniture, etc. </li></ul></ul></ul>
  • 42. <ul><li>III. Beyond the Bank Balance Sheet </li></ul><ul><li>Competition has narrowed the spread between the cost of funds and return on investments. Banks have therefore branched out into various services that are “off balance sheet” activities. </li></ul><ul><ul><li>A. Banking Services through Subsidiaries </li></ul></ul><ul><ul><ul><li>Activities include mortgage banking, consumer lending, leasing, real estate appraisal, and credit insurance. </li></ul></ul></ul><ul><ul><li>B. Investment Management Services </li></ul></ul><ul><ul><ul><li>Through their trust and investment departments, banks manage billions of dollars of corporate securities. They also operate mutual funds, money market funds, and other investment companies. </li></ul></ul></ul>
  • 43. <ul><ul><li>C. Advisory Services </li></ul></ul><ul><ul><ul><li>Advisory services include: economic analysis, investment and financial advising, bankruptcy counseling, real estate appraisal, and bookkeeping and data processing services. </li></ul></ul></ul><ul><ul><li>D. Brokerage Services </li></ul></ul><ul><ul><ul><li>Bank or holding company subsidiaries offer stock and bond brokerage services. </li></ul></ul></ul><ul><ul><ul><li>Credit insurance on loans is often offered. Other types may be offered in the future as the new regulations are implemented. </li></ul></ul></ul><ul><ul><li>E. Underwriting </li></ul></ul><ul><ul><ul><li>Historically, commercial banks had been restricted from the underwriting of debt and equity. This prohibition has changed with the Financial Modernization Act of 1999. </li></ul></ul></ul>
  • 44. <ul><li>IV. Profitability of Commercial Banking </li></ul><ul><ul><ul><li>Performance of the commercial banking industry is frequently measured by the return on assets and return on equity. </li></ul></ul></ul><ul><ul><ul><li>As the exhibits reveal, average return has been rather low over the last fifty years. </li></ul></ul></ul><ul><ul><ul><li>Recently, however, commercial banks are doing well. This has been fueled by a good economy and the movement towards off-balance sheet services. </li></ul></ul></ul>
  • 45. Three Categories of Thrift Institutions: Overview <ul><li>Savings Associations </li></ul><ul><ul><li>concentrated primarily on residential mortgages </li></ul></ul><ul><li>Savings Banks </li></ul><ul><ul><li>large concentration of residential mortgages </li></ul></ul><ul><ul><li>commercial loans </li></ul></ul><ul><ul><li>corporate bonds </li></ul></ul><ul><ul><li>corporate stock </li></ul></ul><ul><li>Credit Unions </li></ul><ul><ul><li>consumer loans funded with member deposits </li></ul></ul>
  • 46. Savings Institutions <ul><li>Comprised of: </li></ul><ul><ul><ul><li>Savings Associations </li></ul></ul></ul><ul><ul><ul><ul><li>Formerly known as S&L (Savings & Loans) </li></ul></ul></ul></ul><ul><ul><ul><li>Savings Banks </li></ul></ul></ul><ul><ul><li>Effects of changes in Federal Reserve’s policy of interest rate targeting combined with Regulation Q (eliminated in 1986) and disintermediation. </li></ul></ul><ul><ul><li>Effects of moral hazard and regulator forbearance. </li></ul></ul><ul><ul><li>Qualified Thrift Lender (QTL) test. </li></ul></ul>
  • 47. Savings Institutions: Recent Trends <ul><li>Industry is smaller overall </li></ul><ul><li>Intense competition from other FIs </li></ul><ul><ul><li>mortgages for example </li></ul></ul><ul><li>Concern for future viability </li></ul>
  • 48. Primary Regulators <ul><li>Office of Thrift Supervision (OTS). </li></ul><ul><ul><li>Charters and examines all federal S&Ls. </li></ul></ul><ul><li>FDIC-SAIF Fund. </li></ul><ul><ul><li>Oversees and manages Savings Association Insurance Fund (SAIF). </li></ul></ul>
  • 49. <ul><li>Regulator forbearance - a policy of the FSLIC not to close economically insolvent FIs, allowing them to continue in operation </li></ul><ul><li>Savings institutions - savings association and savings banks combined </li></ul><ul><li>Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 - abolished the FSLIC and created a new savings association insurance fund (SAIF) under the management of the FDIC </li></ul><ul><li>QTL test - qualified thrift lender test that sets a floor on the mortgage-related assets that thrifts can hold </li></ul><ul><li>Mutual organization - an institution in which the liability holders are also the owners </li></ul><ul><ul><li>Other S&Ls are stock held </li></ul></ul>
  • 50. Savings Banks <ul><li>Mutual organizations </li></ul><ul><ul><li>Primarily East Coast </li></ul></ul><ul><ul><li>Not exposed to the oil-based shocks of 1980s </li></ul></ul><ul><ul><li>Real estate price exposure </li></ul></ul><ul><ul><li>Demutualization </li></ul></ul><ul><ul><li>Since 1989, deposits insured by BIF </li></ul></ul><ul><li>May be regulated at both state and federal level </li></ul>
  • 51. Credit Unions <ul><ul><li>Nonprofit depository institutions owned by member-depositors with a common bond. </li></ul></ul><ul><ul><li>Exempt from taxes and Community Reinvestment Act (CRA). </li></ul></ul><ul><ul><li>Expansion of services offered in order to compete with other FIs. </li></ul></ul><ul><ul><li>Tend to hold higher level of equity than other depository institutions </li></ul></ul><ul><ul><li>Approximately 2/3 federally chartered and subject to NCUA regulation. </li></ul></ul>
  • 52. Assets of Savings Associations and Savings Banks
  • 53. Composition of Credit Union Loan Portfolio, 1999
  • 54. Composition of Credit Union Investment Portfolio, 1999
  • 55. Composition of Credit Union Deposits, 1999
  • 56. Global Issues <ul><li>Near crisis in Japanese Banking </li></ul><ul><li>19 of the biggest Japanese banks on credit watch list </li></ul><ul><li>European banks continued to perform well </li></ul><ul><li>Implications for future competitiveness </li></ul>
  • 57. Other Trends <ul><li>Number of banks continues to decline. </li></ul><ul><li>Increase in off-balance-sheet activities. </li></ul><ul><li>Increase in income derived from fees-for-service rather than spread income. </li></ul><ul><li>Increased competition between banks and across financial services sectors. </li></ul><ul><li>Increased competition from foreign FIs. </li></ul>
  • 58. Pertinent Websites <ul><li>www.federalreserve.gov </li></ul><ul><li>www.cuna.org </li></ul><ul><li> www.fdic.gov </li></ul><ul><li>Banks www. occ .treas. gov </li></ul><ul><li>Savings institutions www. ots .treas. gov </li></ul><ul><li>www.us-banker.com </li></ul><ul><li>Credit unions www. aba .com </li></ul>
  • 59. *Financial Statement Analysis <ul><li>Time series analysis of key ratios </li></ul><ul><li>ROE framework </li></ul><ul><ul><li>ROE = ROA × EM </li></ul></ul><ul><ul><li>ROA = PM × AU </li></ul></ul>

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