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Chapter 3 – Depository Institutions. BA 543 Financial Markets and Institutions. Chapter 3 – Depository Institutions. Types Commercial Banks (Check-writing Institutions) Savings and Loans (NOW accounts) Savings Banks (NOW accounts) Credit Units (Share Draft accounts ) Basic Business

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chapter 3 depository institutions

Chapter 3 – Depository Institutions

BA 543 Financial Markets and Institutions

chapter 3 depository institutions1
Chapter 3 – Depository Institutions
  • Types
    • Commercial Banks (Check-writing Institutions)
    • Savings and Loans (NOW accounts)
    • Savings Banks (NOW accounts)
    • Credit Units (Share Draft accounts)
  • Basic Business
    • Receive Deposits (Funds Borrowed from Customers) – Demand Deposits
    • Charge Fees for Services
    • Invest: Loans to Customers or Securities
    • Provide Conveniences (Checking or NOW Accounts)
chapter 3 depository institutions2
Chapter 3 – Depository Institutions
  • Commercial Banks
    • Two major Types
      • Banking Act of 1863 established National Banks
        • Office of the Comptroller of Currency Regulation Authority
      • National Banks – Federal Charter and must be insured by Bank Insurance Fund or BIF (administered by FDIC)
      • State Banks – State Chartered each State Regulates
      • State Banks may elect to join Federal System and if they do must insure with BIF (about 15% elect to join)
  • Federal Reserve Act of 1913 - Established Federal Reserve System
    • Today about 7,100 FDIC insured or supervised
    • http://www.federalreserve.gov/releases/lbr/current/default.htm
    • http://www.fdic.gov/bank/statistical
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Chapter 3 – Depository Institutions
  • Savings and Loan Association
    • Assets – Traditionally Mortgages and Mortgage Backed Securities
    • Liabilities (Funding) – Passbook Savings
      • Today NOW accounts
    • Regulation
      • Originally - Home Owners Loan Act of 1933
      • Now – Federal S&Ls by Office of Thrift Supervisor
    • S&L Crisis of the 1980s - Disintermediation
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Chapter 3 – Depository Institutions
  • Savings Banks
    • Similar to S&Ls
    • Broader Assets and so they weathered the interest changes of the 80s
  • Credit Unions
    • Common Bond among members
    • Cooperative or Mutual – No Corporate Stock
    • Numbers bigger than commercial banks but total assets very small compared to commercial banks
    • Typically strong local player in banking
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Chapter 3 – Depository Institutions
  • Bank Funding
    • Demand Deposits – Checking and Savings
      • Regional Banks rely primarily on demand deposits
    • Time Deposits – Certificates of Deposit
    • Borrowed Funds – Fed Window (Bank of last resort)
    • Selling of Securities
      • Short Term Notes, Bonds, Repos, etc.
      • Money Center Banks rely on this form of funding
    • Reserve Requirement – More Later
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Chapter 3 – Depository Institutions
  • Income Generation
    • Individual Banking – charges for services
      • Fees for checking, mortgage origination, credit cards, trusts, etc.
      • Spread on consumer loans
    • Institutional Banking –charges for services
      • Commercial and Real Estate Financing, Leasing, Factoring Accounts Receivable, etc.
    • Global Banking
      • Bond Dealers, Currency Dealers, Banker’s Acceptance, Letters of Credit, etc.
      • Financial Products such as SWAPS
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Chapter 3 – Depository Institutions
  • Asset/Liability Problem
    • Credit (Default) Risk
      • Loans are not fully backed by assets
      • Defaults on personal loans
    • Regulatory Risk
      • Rule changes adversely impact income of bank
    • Interest Rate Risk – Example
      • Borrow $1 million for 1 year at 5%
      • Buy $1 million Five year Zero Coupon Bond at 7%
      • Interest rates raise to 8% in year two
    • Liquidity Issues
      • Ways to pay off demand deposits
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Chapter 3 – Depository Institutions
  • Capital Requirements
    • Very Low Equity Stake
      • Equity Stake is the “risk” position of owners
    • Tier One and Tier Two
      • Different types of Equity Holdings
    • Risk Weights of Assets
      • TABLE 3-3 Page 50
      • Arrived at on no particular scientific basis
    • Basle Committee on Banking Regulations and Supervisory Practices 1988 (G-10 Countries)
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Chapter 3 – Depository Institutions
  • Regulations
    • McFadden Act 1927 – States Right to Set Rules for Banking – Unit Banking States, Branches Allowed or Not Allowed
    • Banking Act 1933 - Glass-Steagall (Sections 16, 20, 21, and 32) Separate Investment Banking and Commercial Banking - WHY?
    • Garn-St. Germain Act 1982 – NOW Accounts
    • Interstate Banking and Branching Act – 1994
    • Gramm-Leach-Bliley Act 1999