Ch 2 Fully Revised 2011

Ch 2 Fully Revised 2011 - Chapter 2 The Financial Services...

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Unformatted text preview: Chapter 2 The Financial Services Industry: Depository Institutions 1 Overview of Depository Institutions • In this segment, we begin our focus on depository FIs (commercial banks, thrift institutions, & credit unions): ▫ Size, structure, and composition. ▫ Balance sheets and off-balance sheet activities, and recent trends. ▫ Regulation of depository institutions. ▫ Depository institutions’ performance. 2 Products of U.S. FIs • Comparing the products of FIs in 1950 to products of FIs in 2010: ▫ Much greater distinction between types of FIs in terms of products in 1950 than in 2010. ▫ Blurring of product lines and services over time. ▫ Wider array of services offered by all FI types. n Depositories can now provide all major financial services under the FSMA (Financial Services Modernization Act) of 1999 aka Gramm Leach Bliley Act. ▫ Refer to Tables 2-1A and 2-1B in the text showing depository institutions can underwrite equity, debt, and insurance. n Must be done through financial services holding companies. 3 Outputs of depository FIs • Products and services 1950: ▫ Primarily Loans, Deposits, Payment services, Savings products, Fiduciary services. • By 2010, products and services further expanded to include: ▫ Off-Balance Sheet activities: n Financial guarantees - promises to pay under certain conditions (e.g., loan commitments and standby letters of credit). n Derivatives: instruments in which value depends on market prices. ▫ Underwriting of debt and equity, insurance, and risk management products. 4 Size of Depository FIs • Consolidation has created some very large depository FIs. Mostly bank holding companies. • Combined effects of disintermediation, global competition, regulatory changes, technological developments, competition across different types of FIs 5 Largest US Depository Institutions (BHCs) Bank of America Corp. $ 2,366 JPMorgan Chase & Co. 2,014 Citigroup 1,938 Wells Fargo & Co. 1,226 Goldman Sachs Group 884 Morgan Stanley 809 MetLife 574 Barclays Group US 356 Taunus Corp. 349 HSBC North America Holdings 334 Total Assets ($Billions) – Sep. 10 Institutions 6 http://www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx Wells Fargo moved from 5 th to 4 th after buying Wachovia in late 2008 (used to be 4th). Some of the top 10 are investment banks and insurance companies that own banks. Depository Institutions • Commercial Banks ▫ Largest depository institutions are commercial banks. ▫ Banks gain their size through M&As. This has occurred primarily because of changes in regulatory policy (e.g., changes permitting interstate mergers and branching). ▫ Key legislation: Riegle-Neal Act of 1994 7 Depository Institutions • Commercial Banks ▫ Differences in profitability across size classes....
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Ch 2 Fully Revised 2011 - Chapter 2 The Financial Services...

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