The document provides an overview of the structure and organization of banks in the U.S. and international banking systems, detailing categories such as community banks, money center banks, unit banks, and branch banks. It highlights trends in bank classifications, branching growth, and the establishment of bank holding companies, along with their advantages and challenges. Furthermore, it discusses regulatory frameworks affecting banking, including the Riegle-Neal Act and the concept of financial holding companies, as well as the efficiency of banking operations and goals in corporate governance.

1. McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies,
All Rights Reserved
Chapter Three
The Organization and Structure of
Banking and the Financial-Services
Industry

2. 3-2
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Assets Held by U.S. FDIC-insured
Commercial Banks, 2005
87%
11%
2%
Assets Held By
Large Banks
Assets Held By
Medium Banks
Assets Held By
Small Banks

3. 3-3
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Number of U.S. FDIC-insured
Commercial Banks, 2005
47%
47%
6%
Small < $100
Million
Medium $100
Million - $1 Billion
Large > $1 Billion

4. 3-4
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Bank Management and Financial Services, 7/e
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Community Banks
• ‘Typical’ Size is $250 Million
• Organizational Chart is Not Complicated
• Significantly Affected by Health of Local
Economy
• Limited Opportunities for Advancement
• Generally Know their Customers Well

5. 3-5
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Bank Management and Financial Services, 7/e
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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 Many
Different Services
• Better Able to Withstand Risks of Fluctuating
Economy
• Able to Raise Large Amounts of Capital at
Relatively Low Costs

6. 3-6
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Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Common Classifications of U.S. Banks,
2005
2%
98%
0% 20% 40% 60% 80% 100% 120%
Not FDIC Insur ed
FDIC Insur ed Banks
75%
25%
0% 10% 20% 30% 40% 50% 60% 70% 80%
State Banks
Nati onal Banks
64%
36%
0% 10% 20% 30% 40% 50% 60% 70%
Non M ember Banks
M ember Banks

7. 3-7
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Bank Management and Financial Services, 7/e
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Deposits Held By Banks in 2005
23%
77%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Deposi ts of Non Member Banks
Deposi ts of Member Banks
45%
55%
0% 10% 20% 30% 40% 50% 60%
Deposi ts of State Banks
Deposi ts of Nati onal Banks

8. 3-8
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Bank Management and Financial Services, 7/e
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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

9. 3-9
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Branch Banks
• Offer Full Range of Services from Several
Locations
• Senior Management at the Home Office
• Each Branch has its Own Management
Team with Limited Decision Making
Ability
• Some Functions are Highly Centralized,
While Others are Decentralized

10. 3-10
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Reasons for Growth of
Branching
• Exodus of Population to Suburban
Communities
• Increased Bank Failures in Recent Years
• Business Growth

11. 3-11
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Electronic Branches
• Internet Banking Services
• Automated Teller Machines (ATMs)
• Point of Sale (POS) Terminals

12. 3-12
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Virtual Banks
• Provides their services Exclusively
Through the Web
• Can Generate Cost Savings Over
Traditional Brick and Mortar Banks
• Have Not Yet Demonstrated They Can Be
Consistently Profitable

13. 3-13
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Bank Management and Financial Services, 7/e
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Bank Holding Companies
(BHC)
• A Corporation Chartered for the Purpose
of Holding the Stock of One or More
Banks
• Control of a bank is Assumed When 25%
or More of the Stock is Owned
• Must Get Approval from Federal Reserve
Board to Control a Bank

14. 3-14
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Bank Management and Financial Services, 7/e
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Nonbank Businesses of BHCs
• Finance Companies
• Mortgage Companies
• Data Processing
Companies
• Factoring Companies
• Security Brokerage Firms
• Financial Advising
• Credit Insurance
Underwriters
• Merchant Banking
• Investment Banking
Firms
• Trust Companies
• Credit Card Companies
• Leasing Companies
• Insurance Companies
and Agencies
• Real Estate Services
• Savings Associations

15. 3-15
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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

16. 3-16
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Bank Management and Financial Services, 7/e
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Reasons for Full-Service
Interstate Banking
• Need to Bring New Capital to Revive Struggling
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 Banks are
More Efficient and Less Prone to Failure
• Advances in Technology

17. 3-17
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Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994
• Allows BHCs to Acquire Banks Anywhere in the
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

18. 3-18
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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 in the System
Opponents
• Increased Bank
Concentration
• Less Competition
• Higher Prices for
Services
• Drain Resources from
Community

19. 3-19
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Financial Holding Companies
• Special Type of Holding Company
• Offers the Broadest Range of Services
• List of Activities Offered May Expand as
Regulators Decide What Services are
‘Compatible’ with Banking
• Each Affiliated Financial Firm has its Own
Capital and Management and its Own
Profit or Loss

20. 3-20
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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

21. 3-21
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Structure and Organization of
Banks 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 1990’s

22. 3-22
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Structure and Organization of
Banks in Asia
• China – Large Dominating Government
Sector, Although Private Banks are
Expanding
• Japan – Dominated by the Big Four
Financial Group with More than One
Hundred Smaller Domestic Banks and
Seventy Foreign Banks

23. 3-23
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Efficiency
• Economies of Scale
– As Output Doubles Economies of Scale Mean Less
Than the Doubling of Production Costs
– Producing Multiple Units of the Same Package Costs
Less Because of Efficiencies
• Economies of Scope
– A Financial Services Provider can Save Operating
Costs When it Expands the Mix of Products it Offers
– Resources are Used More Efficiently in Jointly
Producing Multiple Services

24. 3-24
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Banking and Financial Firm Goals
• Expense Preference Behavior
– Managers Value Fringe Benefits Over Pursuit of
Maximizing Return for Shareholders
• Agency Theory
– Explores Whether Mechanisms Exist to Compel
Management to Act to Maximize the Return to
Shareholders
• Corporate Governance
– Relationships Among Managers, the Board of
Directors, the Stockholders and Other Stakeholders of
a Corporation