Chapter 12

Chapter 12 - Chapter 12-Banking Industry Structure and...

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Chapter 12 - Banking Industry: Structure and Competition Historical Development of the Banking System •Bank of North America chartered in 1782 •Controversy over the chartering of banks. •National Bank Act of 1863 creates a new banking system of federally chartered banks –Office of the Comptroller of the Currency –Dual banking system •Federal Reserve System is created in 1913. Primary Supervisory Responsibility of Bank Regulatory Agencies •Federal Reserve and state banking authorities: state banks that are members of the Federal Reserve System. •Fed also regulates bank holding companies. •FDIC: insured state banks that are not Fed members. •State banking authorities: state banks without FDIC insurance. Financial Innovation and the Growth of the “Shadow Banking System” •Financial innovation is driven by the desire to earn profits •A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable –Financial engineering Responses to Changes in Demand Conditions: Interest Rate Volatility •Adjustable-rate mortgages –Flexible interest rates keep profits high when rates rise –Lower initial interest rates make them attractive to home buyers •Financial Derivatives –Ability to hedge interest rate risk –Payoffs are linked to previously issued (i.e. derived from) securities. Responses to Changes in Supply Conditions: Information Technology •Bank credit and debit cards –Improved computer technology lowers transaction costs •Electronic banking –ATM, home banking, ABM and virtual banking •Junk bonds •Commercial paper market
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•Securitization –To transform otherwise illiquid financial assets into marketable capital market securities. –Securitization played an especially prominent role in the development of
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Chapter 12 - Chapter 12-Banking Industry Structure and...

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