Fundamental forces-of-change-in-banking2869

FUNDAMENTAL FORCES OF CHANGE IN BANKING Chapter 1

What makes a bank ‘special?’ Why do we call Bank of America a ‘bank,’ Merrill Lynch a ‘securities brokerage company’ and State Farm an ‘insurance company?’ ,[object Object],[object Object],[object Object],[object Object],[object Object]

The banking industry is consolidating and diversifying simultaneously. ,[object Object],[object Object],[object Object],[object Object]

While competition has increased the number of firms offering financial products and services, … the removal of interstate branching restrictions in the U.S. has dramatically reduced the number of banks but increased the number of banking offices (primarily branches). ,[object Object],[object Object],[object Object],[object Object]

Increased competition … quickly changing the nature of commercial banking. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Regulatory restrictions on products and services offerings worked effectively in promoting a safe banking system until the later half of the twentieth century. ,[object Object],[object Object],[object Object]

Banks were heavily regulated …state banking agencies, the FDIC, the Federal Reserve and the Office of Comptroller of the Currency ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Branching restrictions were primarily responsible for the structure of the banking system. ,[object Object],[object Object],[object Object]

Branching restrictions were effective at reducing competition among depository institutions and promoting a safe banking system until the later half of the twentieth century. ,[object Object]

The removal of branching restrictions during the later half of the twentieth century allowed banks to offer services anywhere in the country and lead to the creation of the first coast-to-coast bank … forever changing the banks market from local to global. ,[object Object],[object Object]

This structural change is frequently attributed to deregulation of the financial services industry. ,[object Object],[object Object]

Five fundamental forces have transformed the financial services market ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Historically, commercial banks have been the most heavily regulated companies in the United States ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Banks and other market participants have consistently restructured their operations to circumvent regulation and meet perceived customer need ,[object Object],[object Object]

Today banks are accessing the formerly forbidden areas of investment banking, by the repeal of the Glass-Steagall Act via the Financial Services Modernization Act (Gramm-Leach-Bliley Act of 1999). ,[object Object],[object Object]

Increased competition ,[object Object],[object Object],[object Object]

The fundamental forces of change … increased competition ,[object Object],[object Object],[object Object],[object Object]

Competition for deposits ,[object Object],[object Object],[object Object],[object Object]

Competition for loans ,[object Object],[object Object],[object Object]

Competition for loans (continued) ,[object Object],[object Object],[object Object]

Competition for loans (continued) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Today, different size banks generally pursue different strategies. ,[object Object],[object Object],[object Object],[object Object]

Loan concentrations: Consumer and commercial credits Credit Risk Diversification 69% 67% 65% 64% 62% 60% 58% 57% 55% 55% 57% 57% 59% 60% 60% 59% 31% 33% 35% 36% 38% 40% 42% 43% 45% 45% 43% 43% 41% 40% 40% 41% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Commercial borrowers Consumer loans Percent of loans

Captive automobile finance companies ,[object Object]

Competition for payment services ,[object Object],[object Object]

Competition for payment services …the impact of technology ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

It's not just electronic payment systems that are eroding the banks traditional markets ,[object Object],[object Object],[object Object]

Although cash remains the dominate form of payment, the average payment size of cash is the smallest 2000 % Total 2000 % of Cashless Payments 2000 Growth: 1995- 2000 1995 2000 % Total 2000 Growth: 1995- 2000 Cash 550,000 82.3% #N/A #N/A 2,200,000 0.3% 4.00 $ Cheques issued 69,000 10.3% 58.2% 1.8% 73,515,000 85,000,000 10.9% 2.9% 1,231.88 $ Electronic Transactions: ACH 6,900 1.0% 5.8% 14.6% 12,231,500 20,300,000 2.6% 10.7% 2,942.03 $ ATM 13,200 2.0% 11.1% 6.4% 656,600 800,000 0.1% 4.0% 60.61 $ Credit Card 20,000 3.0% 16.9% 6.0% 879,000 1,400,000 0.2% 9.8% 70.00 $ Debit Card 9,275 1.4% 7.8% 42.1% 59,100 400,000 0.1% 46.6% 43.13 $ Total retail electronic 49,375 7.4% 41.7% 10.7% 13,826,200 22,900,000 2.9% 10.6% 463.80 $ Chips 58 0.0% 0.0% 2.6% 310,021,200 292,147,000 37.4% -1.2% 5,037,017 $ Fed Wire 108 0.0% 0.1% 7.3% 222,954,100 379,756,000 48.6% 11.2% 3,516,259 $ Total wholesale electronic 166 0.0% 0.1% 5.5% 532,975,300 671,903,000 85.9% 4.7% 4,047,608 $ Total Electronic 49,541 7.4% 41.8% 10.7% 546,801,500 694,803,000 88.8% 4.9% 14,025 $ Volume of Transactions Value of Transactions Average Transaction Size 2000

Competition for other bank services ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

“ Non-bank” activities of banks …the Gramm-Leach-Bliley Act. ,[object Object],[object Object],[object Object],[object Object]

Investment banking ,[object Object],[object Object],[object Object],[object Object],[object Object]

Investment banking ,[object Object],[object Object],[object Object],[object Object]

Deregulation and re-regulation ,[object Object],[object Object]

Efforts at deregulation and re-regulation generally address: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Financial innovation ,[object Object],[object Object],[object Object]

Financial innovation (continued) ,[object Object],[object Object],[object Object]

Response of banks ,[object Object],[object Object],[object Object]

Securitization ,[object Object],[object Object],[object Object],[object Object],[object Object]

The objectives behind securitization include the following: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Off-balance sheet activities, asset sales and Enron ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

From 1999-2001, PNC moved out of certain lending businesses by selling off $20 billion in loans and reducing unfunded loan commitments by $25 billion ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Globalization ,[object Object],[object Object],[object Object]

Increased consolidation ,[object Object],[object Object],[object Object],[object Object]

The later half of the 1990s saw not only a large number of bank mergers but also several of the largest bank consolidations: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The removal of restrictive branching laws as well as “merger mania” of the late 1990s has dramatically reduced the number of banks. ,[object Object]

GE Capital Services is the financial subsidiary of General Electric ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2001 GE Capital Services operating companies and lines of business Segment Data (12/31/2001) Sales (000s) Net Earnings General Electric Co. 74,037,000 13,684,000 GECS 58,353,000 5,417,000 Consumer Services 23,574,000 2,319,000 Equipment Management 12,542,000 1,607,000 Mid-Market Financing 8,659,000 1,280,000 Specialized Financing 2,930,000 557,000 Specialty Insurance 11,064,000 522,000 All Other -416,000 -699,000

Growth in GECS Revenues 1990 – 2001 Source: GE’s Annual Report, 2001 (http://www.ge.com/)

Most of the legal and regulatory differences which have historically separated various types of depository institutions are gone. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Fundamental forces-of-change-in-banking2869

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