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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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Unit Banks
• Offer All Services From One Office
• One of the Oldest Kinds of Banks
• New Banks are Generally Unit Banks

9. 3-9
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Reasons for Growth of
Branching
• Exodus of Population to Suburban
Communities
• Increased Bank Failures in Recent Years
• Business Growth

11. 3-11
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Electronic Branches
• Internet Banking Services
• Automated Teller Machines (ATMs)
• Point of Sale (POS) Terminals

12. 3-12
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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