THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 304

272 PA R T I I I Financial Institutions The growth of the bank holding companies in the United States has been dramatic over the past three decades Today bank holding companies own almost all large banks, and more than 90% of all commercial bank deposits are held in banks owned by holding companies Another financial innovation that avoided the restrictions on branching is the automated teller machine (ATM) Banks realized that if they did not own or rent the ATM, but instead let it be owned by someone else and paid for each transaction with a fee, the ATM would probably not be considered a branch of the bank and thus would not be subject to branching regulations This is exactly what the regulatory agencies and courts in most states in the United States concluded Because they enable banks to widen their markets, a number of these shared facilities (such as Cirrus and NYCE) have been established nationwide Furthermore, even when an ATM is owned by a bank, states typically have special provisions that allow wider establishment of ATMs than is permissible for traditional brick and mortar branches As we saw earlier in the chapter, avoiding regulation was not the only reason for the development of the ATM The advent of cheaper computer and telecommunications technology enabled banks to provide ATMs at low cost, making them a profitable innovation This example further illustrates that technological factors often combine with incentives such as the desire to avoid restrictive regulations like branching restrictions to produce financial innovations AUTOMATED TELLER MACHINES COM PE T IT I ON ACROSS AL L FO U R P I LLA RS Another important feature of the structure of the banking industry in Canada until recently was the separation of the banking and other financial services industries such as securities, insurance, and real estate Regulations enforced the separation of institutions according to their core financial service, and only four distinct types of financial services were identified: banking, brokerage, trusts, and insurance This approach to regulation by institution (versus regulation by function) has been known as the four-pillar approach The separation of the four pillars prohibited chartered banks from engaging in insurance and real estate activities In turn, it prevented investment banks and insurance companies from engaging in commercial banking activities and thus protected banks from competition Convergence In recent years, however, financial markets have opened up and Canada s traditional four-pillar system has changed Despite the prohibitions in the legislation, the pursuit of profits and financial innovation stimulated both banks and other financial institutions to bypass the intent of the legislation and encroach on each other s traditional territory For example, credit unions long offered insurance to their members and brokerage firms engaged in the traditional banking business of issuing deposit instruments with the development of money market mutual funds and cash management accounts Not surprisingly, the regulatory barriers between banking and other financial services markets have been coming down in response to these forces Before the 1950s, for example, legislation allowed chartered banks to make loans for commercial purposes only and prohibited them from making residential mortgage loans It was only after the 1967 revision of the Bank Act that banks were allowed to make conventional residential mortgage loans, thereby directly competing with trust and mortgage loan companies, and credit unions and caisses populaires