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Market Structure and Regulation in the U.S. Banking Industry Professor Wayne Carroll Department of Economics University of Wisconsin-Eau Claire carrolwd@uwec.edu Slides available at www.uwec.edu/carrolwd Roles of Banks in the Economy Facilitate borrowing and lending Facilitate payments Risk management Issue financial assets that allow firms to share risks Provide guarantees and lines of credit Role of Banks in Lending Source: Available online at http://www.wiwi.uni-frankfurt.de/schwerpunkte/finance/wp/550.pdf Financial Intermediaries “Banks” include: Commercial banks Savings and loan associations (S&L’s) Also sometimes called “thrifts” or “thrift institutions” Credit unions Financial Intermediaries Assets at end of 2002 (in billions) Ownership of Banks U.S. banks are privately owned – no banks are owned by the government. In most cases a bank’s stock is held by a large number of investors, so a bank has many “owners.” It is relatively easy to establish a new bank in the U.S. Bank Market Structure There are a large number of banking firms in the U.S., but the number is falling due to mergers between banks. Thousands of U.S. banks are very small, each having only a single office. Many banks today have multiple branches or offices. A “bank holding company” is a firm that owns one or more banking firms. Size Distribution of U.S. Banks Commercial Banks Number of Asset Size (as of June 30, 2006) Institutions Offices Deposits (millions) 586 712 $7,661 $25 Million to $50 Million 1,098 1,701 $33,511 $50 Million to $100 Million 1,718 4,007 $105,754 $100 Million to $300 Million 2,427 10,338 $349,740 $300 Million to $500 Million 672 5,088 $211,495 $500 Million to $1 Billion 494 6,322 $265,540 $1 Billion to $3 Billion 275 6,856 $338,909 $3 Billion to $10 Billion 120 6,601 $427,340 Greater than $10 Billion 89 38,848 $3,580,817 7,479 80,473 $5,320,767 Less than $25 Million TOTALS Source: www2.fdic.gov/sod/index.asp Bank Market Structure: An Example Wells Fargo & Company is a bank holding company based in South Dakota (with historic roots in Minnesota and California). It includes: 28 chartered bank companies a total of over 3,000 branches in 23 states Some Wells Fargo branches Wells Fargo’s Broad Scope Source: www.wellsfargo.com/about/today1 20 Largest U.S. Banks (as of June 30, 2006) Rank Institution Name State Headquartered Number of Offices Deposits (thousands) 1 Bank of America, NA North Carolina 5,781 $563,906,844 2 JPMorgan Chase Bank, NA Ohio 2,679 $434,752,000 3 Wachovia Bank, NA North Carolina 3,136 $306,348,000 4 Wells Fargo Bank, NA South Dakota 3,200 $298,672,000 5 Washington Mutual Bank Nevada 2,167 $209,927,984 6 Citibank, NA New York 267 $142,508,000 7 SunTrust Bank Georgia 1,758 $117,956,301 8 U.S. Bank, NA Ohio 2,525 $117,337,830 9 HSBC Bank USA, NA Delaware 436 $75,588,320 10 World Savings Bank, FSB California 286 $61,321,407 11 PNC Bank, NA Pennsylvania 831 $58,134,805 12 Keybank, NA Ohio 957 $57,327,323 13 Regions Bank Alabama 1,397 $57,231,022 14 Merrill Lynch Bank USA Utah 3 $52,331,967 15 Branch Banking and Trust Company North Carolina 918 $51,246,133 16 Countrywide Bank, NA Virginia 2 $50,657,812 17 ING Bank, fsb Delaware 1 $46,440,495 18 Comerica Bank Michigan 387 $43,081,270 19 Sovereign Bank Pennsylvania 661 $40,829,851 20 The Bank of New York New York 354 $40,014,000 Source: www2.fdic.gov/sod/index.asp A Simple Bank Balance Sheet Assets reserves "loans" securities bank loans Liabilities deposits borrowings Bank capital (equity) Detailed Balance Sheet for the Banking Industry Source: Mishkin, Economics of Money, Banking, and Financial Markets, 7 th edition Two Important Ratios Capital/asset ratio – bank capital as a percentage of bank assets. The average capital/asset ratio for U.S. banks was about 9% at the end of 2002. Reserve ratio – bank reserves as a percentage of checkable deposits. Information on U.S. Banks It is easy to get a lot of financial data on U.S. banks. A great source: www2.fdic.gov/idasp/index.asp An Example: Data on Wells Fargo What Can Go Wrong? “Bank failure” – the bank goes out of business. Bank depositors might lose some of their funds. Bank creditors might lose some of their investment Bank owners lose their capital. The bank suffers significant losses – the government might have to help. Reasons for Bank Regulation Banks must be regulated because: a bank failure can be devastating to depositors. there’s a risk of systemic failure: the failure of one bank can make it more likely that other banks will fail. depositors can’t monitor how the bank invests their funds, creating a moral hazard problem. government assistance to a bank can be very costly. Reasons for Bank Regulation Banks are less stable than other businesses because: bank liabilities tend to be short-term – many depositors could withdraw their funds with little notice. bank assets tend to be longer-term – reserves and other liquid assets are only a small share of the total. the behavior of depositors depends on their confidence that the bank is sound, and this confidence can be easily shaken. A Closer Look at Bank Failure Two reasons for bank failure: The value of bank assets falls, so assets[...]... Bank Regulation: An Overview In the U. S the government regulates banks in many ways: Federal deposit insurance Imposing capital requirements (minimum capital/asset ratios) Imposing reserve requirements (minimum reserve ratios) Restricting the types of assets that banks may hold Performing bank examinations (periodic auditing reviews) Bank Regulation: An Overview Primary bank regulators in the. .. countries An Example: Continental Illinois Bank Why did Continental Illinois fail? Starting in the late 197 0s, the bank grew fast, with lots of loans to businesses Poor quality loans Too many loans to firms in the oil industry Too many loans to borrowers in Latin America “Continental Illinois is willing to do just about anything to make a deal.” High cost of funds Large share of funds... is sound, and this confidence can be easily shaken A Closer Look at Bank Failure Two reasons for bank failure: The value of bank assets falls, so assets ... number of investors, so a bank has many “owners.” It is relatively easy to establish a new bank in the U.S Bank Market Structure There are a large number of banking firms in the U.S., but the. .. Liabilities deposits borrowings Bank capital (equity) Detailed Balance Sheet for the Banking Industry Source: Mishkin, Economics of Money, Banking, and Financial Markets, th edition Two Important... Foreign investors would lose confidence in U.S banks An Example: Continental Illinois Bank Rescuing Continental Illinois Bank Continental Illinois Bank had $3 billion in insured deposits and $30