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Definitions |
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Different Banks
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Global
Super Regional
Community
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Insurance companies
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Underwrote insurance products
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Saving Institutions Lead in
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Mortgages
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Depository institutions are amongst the most highly regulated institutions
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...
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Consumer Credit
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commercial banks
ABS issuers
Finance Companies
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Equity Multiplier EM
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total assets/total equity
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OTS
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Charters federal saving banks and savings associations
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Credit Unions
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Nonprofit insitutions with the original purpose of encouraging savins and providing lonas within a community at low cost of their members
"COMMON BONDS"
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OTD
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Originate to distribute approach to lending, spearates laon origination form ownership.
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Community
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limited geographic mkt. Loans to Indiv, Small busin.,
and Agriculture
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online terminal
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subtracts the transactions immediately from the customers account
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Unit Banks
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(board, officers, separate docs and technology)
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Check 21
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Created a framework for the elimination of paper checks by allowing any institution to truncate the paper check at any point in process
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Savings Institutions (Thrifts)
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Specialize in real estate lending
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Market Risk
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Management's ability to identify , measure control,and monitor price risk
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In store
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Offer a limited range of services
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BHC
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A shell organization that owns and manages subsidiary firms. Any organization that owns controlling interest in one or more commercial banks.
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corporate governance
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describes the relationship that exists among managers, the board of directs the stockholders, and other stakeholders of the corporation. exposes managers to greater monitoring and discipline
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Large banks
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have many specialized departments and divisions including separate departments for different kinds of loans, depts to manage security holdings and borrow in the money market, a division or department to manage international operations, a marketing division and a planning unit along with other divisions
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Discount Window
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department in each federal reserve bank that receives requests to borrow reserves from banks & other depository institutions which are eligible to obtain credit from the fed for short periods of time.
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Small Time & Savings Deposits
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Commercial Banks
Savings Institutions
Credit Unions
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offline terminal
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accumulates all transactions until the end of the day when all transactions are subtracted from a customers account
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National Credit Union Administration NCUA
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Charters federal credit unions
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CAMELS
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Helps asses the overall quality of a commercial bank's condition:
Capital adequacy
asset quality
management quality
earnings quality
liquidity
sensitivity to market risk
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Global Impact
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Govt of Great Britain, germany, and Iceland purchased stocks in large institutions
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IO, Alt A, ARMs
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Names given to questionable mortgages
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Subprime borrowers
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Borrowers whose income did not truly recover the payment amount that would have repaid the obligated principal
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Commercial bank
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an entity that both accepted demand deposits and made loans to businesses
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Thrifts
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Firms regulated by the Office of Thrif Supervision and were initially organized to emphasize mortgage lending to individuals
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Fee Income Ratio
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non interest income/ (net interest income+non interest income)
higher value indicates the bank is producing more of its net operating revenue from non-interest income (fees)
higher ratio is usually considered positive. fees might be less volatile than interest rates
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Off-balance sheet items
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transactions that generate fee income for a bank or help hedge against risk
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expense preference behavior
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approach to management in which managers use the resources of the firm to provide them with personal benefits non needed to produce and sell products. leads to increasing costs of production and declining returns of the firm's owners
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disadvantage of interstate banking
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threatens to increase the concentration of banking in the US especially among larger banks . could lead to higher prices and less service if the antitrust laws are not enforced.
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Primary motivator for branch banks
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efficiency in a "lead" economy
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Efficient and competitive financial system
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Prevent undue concentration of depoistory instituion resources that would be anticompetitive.
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Results of these acts
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Short list of products and services
Narrow geographic arease in which to compete
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Open mkt operations
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Conducted by the Federal rerserva Bank of New York under the direction of the Federal Open Market Committee
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Equity investment
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The value of the subsidiary stock at the time of purchase
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Internet online banking
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Access the acct info and conduct routine banking business via secured web sites
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Buying long term securities
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increases the amount of excess reserves
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Gross Loans
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equal the total of all loans currently outstanding that are recorded on the banks books
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time deposits
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carry a fixed maturity and banks may impose penalty if you withdraw funds before maturity date. interest rate can be fixed or floating, depending on negotiations between banks and customers
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Shortcomings of restrictive bank regulation
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Regulation does not prevent bank failures
It does not eliminate risk
Does not guarantee that bank mgt. will make good decisions
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Federal agencies that issue and enforce regulations
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Fed (Federal reserve System)
FDIC (Federal Deposit Insurance Corporations)
OCC (Office of the comptroller of the currency
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Changes in reserve requirements
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Directly affect the amount of legally required reserves that depository institutions are required to hold as an assett and thus change the amount of funds a depository institution can lend out.
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Results in the crisis
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Bear Stearns collapsed and absorbed by JP. MORGAN
Failures of Countrywide, Lehman Brothers
Bank of America absorbed Countrywide
JP Morgan absorbed Washing Mutual
Wells fargo absorbed Wachovia
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One BHC or OBHC
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Control only one bank and typically arise when the owners of an existing bank exchange their shares for stock in the holding company
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ROE
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NPM x AU x EM = net income common equity
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Non deposit borrowings include
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short term non deposits
long term non deposits
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Quantitative Easing - To bring down long term rates we need to
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buy long term securities
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US Government actions during the crisis
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Put govt sponsored enterprises (FSE, Fannie mae and Freddie Mac) into conservatorship (fully operated by govt)
Took over American International Group loaning them $150bln
Insured money market mutual funds
Authorized Bk. of America to acquire merrill Lynch
Approved Goldman Sachs, Morgan Stanley, and American Express as bank holding companies
Created a commercial paper funding facility
Increased Federal Deposit Insurance Corporation for domestic deposits and provided unlimited coverage for interest bearing business deposits
Passed the TARP (Trouble Asset Relief Program)
Bought preferred stock in nine large U.S. banks
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Advantage of being a depository institution
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Access to FDIC deposit insurance ($250,000 per account). the FDIC charges a bank premium for the insurance
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importance of off-balance sheet items
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important as a supplement to income from loans and to help a bank reduce its exposure to interest rate risk
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what trends are affecting the way banks are organized today
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deregulation and service innovations have accelerated the trend as intense competition encourages banks to become larger, serving broader and more diversified market areas
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Demand deposits or checking accounts
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accounts against which a customer can write checks or make any number of personal withdrawals
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Three drawbaks of restricting the geographic and product scope of banking
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It assumed that the markets for commercial bank products could be protected and that other firms could not encroach upon these markets
It disciriminated against US based firms vs foregin based firms
Historical regulation has penalized commercial bank customers who do not have convenient access to the range of products they demand
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Primary reason for banks to exist
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Is hard to bring depositors and borrowers together. Banks facilitate information. Large institutions are better equipped to reduce costs than smaller institutions are
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Advantages of a unit bank
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less costly to operate they are able to offer personalized services
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Net interest margin after provision for loan losses NIMPLL
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net interest income - provision for loan losses/ average (total)assets
Alternative version of NIM that considers the higer risk that might be considered earning assets or loans
better version when comparing banks with products with different risks
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who charters new banks in the US
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chartered by the state banking commissions, or at federal level by Comptroller of the Currency
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Key role of the FDIC in chartering
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exercises some control over state bank charter as wel as federal charters because most states insist that new banks qualify for federal deposit insurance before they can open for business
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benefit of new branch offices over the chartering of financial firms
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process is normally far simpler and less costly
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