Chapter 11 - COMMERCIAL BANKS
Depository Institutions - commercial banks, savings banks (thrifts) and credit unions. See Table 11-1
on p. 321, 1950 vs. 2006. See Figures 11-1 and 11-2, page 321 and 322.
Commercial banks vs. savings banks/credit unions. Commercial bank loans are wider in range
(consumer, commercial, international and mortgages) than savings banks (mortgages) or credit unions
(consumer loans). Commercial banks rely more on nondeposit (notes and debentures) sources of funds
(vs. checking and savings deposits) than thrifts and credit unions. See Table 11-2 and Figure 11-3 on
Loans are the main revenue-generating assets for banks, but they also hold investment securities
(Treasuries, municipals, MBSs) to protect against
Other risks include credit/default risk
(Reserve for losses is about 2%), and insolvency risk. Commercial banks are
(10% E/A). See Table 11-2 and Figure 11-3 on p. 323.
See Figure 11-4 on p. 325 for trends, Portfolio Shift. Loans have gone up from about 40% to 70%,
Securities have gone down from 50% to 30% (negotiable CDs, etc.). Mortgages and consumer loans
have gone up, commercial/business loans have gone down (CP, junk bonds).
Liabilities are deposits and borrowed funds, mostly short term (vs. long term loans), exposing
commercial banks to interest rate (maturity mismatch) risk.
Off-Balance-Sheet (OBS) activities (Swaps, forwards, options, and futures) generate: a) fee income for
the bank, and b) allow banks to avoid regulatory costs (no reserve requirements and no FDIC for
OBS). OBS activities can be used for risk-reduction (interest rate, ex-rate, credit) but can also increase
risk. See Table 11-3 on p. 328 for volume of OBS activities and Figure 11-5 on p. 329, market more
than doubled every three years!
Mostly for risk management OBS, no need to make balance-sheet
Size, Structure, Composition
Number of banks went from 14,500 in 1984 to 7,660 in 2004, due to: a) bank failures (S&L crisis), b)
bank mergers (deregulation), and c) financial disintermediation. See Figure 11-6 on p. 330 and Table
11-4 (mergers) on p. 331.
Banks can now merge across state lines (1994), and commercial and investment banks can
now merge (1999). Reasons:
1. Economies of scale
- Cost efficiencies from size (scale), partly due to FC/q. FC would include
technology infrastructure, Internet banking. ATC declines over some range of output (q), where q = #
customers, # loans or # deposits because of declining AFC.
Merger Example: First Union acquired Signet for $3.2B, for cost efficiencies by consolidating