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Banking Industry

Banking Industry. Number of banks ~7 ,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~ 90,000 increasing (result of relaxed geographical restrictions) About 4,000 are small banks (< $100 million in assets) Banks most commonly ranked by (1) assets.

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Banking Industry

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  1. Banking Industry • Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures) • Number of branches ~90,000 increasing (result of relaxed geographical restrictions) • About 4,000 are small banks (< $100 million in assets) • Banks most commonly ranked by (1) assets. • But sometimes ranked by (2) marketcap

  2. Banks vs. Branches

  3. Balance Sheet for a Commercial Bank Uses of Funds Sources of Funds (Assets) (Liabilities + Capital) Cash Assets (8%)Deposit Liabilities (69%) FF sold/Rev repos (4%)Borrowed Funds (16%) Investments (19%) Other Liabilities (3%) Loans & Leases (55%) Subordinated Notes & Deben (1%) Premises (1%) Capital Accounts (11%) Other (13%) (See pp. 417 & 411)

  4. First Three Items on Left Cash Assets (8%): • Vault cash (physical currency and coin) • Reserves at the Fed Fed Funds Sold/Rev repos (4%): • Fed Funds sold • Reverse Repurchase Agreements Investments (19%): cushion in case need more liquidity • U.S. Treasury securities • Agency securities • Municipal bonds

  5. Fourth Item on Left Loans and Leases (55%) Loans • commercial and industrial • real estate • agricultural • consumer Leases • fast-growing line of business for the big banks • fleet assets (aircraft, ships,..), rolling stock (railroad cars, trucks,..), equipment (cranes, generators,..)

  6. First Two Items on Right Deposit Liabilities (69%): • Transaction Deposits • Savings Deposits • Time Deposits (retail and negotiable CDs) Borrowed Funds (16%): • Fed Funds purchased • Repurchase Agreements • Eurodollars (dollars borrowed abroad) • Discount Window loans

  7. Last Two Items on Right Subordinated Notes and Debentures (1%) • Subordinated to claims of depositors Capital Accounts (11%) • Paid-in capital (from sale of stock) • Retained earnings

  8. Capital Adequacy • Capital adequacy ratio: • Numerator is subordinated notes & bonds + capital stock + retained earnings • Denominator is a weighted average of assets • Riskfree, weight of 0 • Very risky assets like CDOs, weight of 1 • Everything else, weight in between

  9. Balance Sheet for a Commercial Bank Uses of Funds Sources of Funds (Assets) (Liabilities + Capital) Cash Assets (8%)Deposit Liabilities (69%) FF sold/Rev repos (4%)Borrowed Funds (16%) Investments (19%) Other Liabilities (3%) Loans & Leases (55%) Subordinated Notes & Deben (1%) Premises (1%) Capital Accounts (11%) Other (13%)

  10. Base Rate Pricing • Markups to base rate include adjustments for default risk, term-to-maturity, and competitive factors. rL = BR + DR + TM + CF • In this way, business loans can vary from customer to customer. • BR could be prime rate, Libor, or a T-bill rate. • Loan pricing is one of most important managerial decisions is banking.

  11. Five ‘C’s of Credit • Five “C”s of Credit: • Character (willingness to pay) • Capacity (cash flow) • Capital (wealth or net worth) • Collateral (security for the loan) • Conditions (economic conditions)

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