Commercial Banking Industry Structure

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Questions and Answers

What is the dominant supplier of credit and payments services to businesses and households?

Investment banks

Central banks

Savings and loan associations

Commercial banks (correct)

What percentage of total industry assets do the smallest financial institutions hold?

Less than 0.5%

More than 50%

Little more than 1% (correct)

Around 10%

Which of the following banks is NOT one of the largest financial service organizations on the planet?

Citigroup

Wells Fargo (correct)

JP Morgan Chase

Bank of America

What is the combined asset value of Citigroup, JP Morgan Chase, and Bank of America?

Approximately 6 trillion dollars Signup and view all the answers

What is the trend in the banking industry?

Increasing size and concentration Signup and view all the answers

What is the characteristic of many banks in the United States compared to global standards?

They are small Signup and view all the answers

What is the primary focus of a large money center bank?

Wholesale or wholesale plus retail banking Signup and view all the answers

What is the primary approach of some of the largest banks?

Profit-centered or performance approach Signup and view all the answers

What is an advantage of large money-center banks?

They are better diversified Signup and view all the answers

Why can large money-center banks better withstand an economy with fluctuations?

They are more diversified Signup and view all the answers

What is an advantage of large money-center banks in terms of capital?

They can raise huge amounts of financial capital at relatively low cost Signup and view all the answers

What is another advantage of large money-center banks?

They can attract top managerial talent Signup and view all the answers

What is the term used to describe banks owned by holding companies?

Affiliated banks Signup and view all the answers

What is the criticism of holding company banking by its critics?

Reducing competition Signup and view all the answers

What is one of the benefits of holding company banking according to its supporters?

Lower probability of organizational failure Signup and view all the answers

What is the characteristic of holding company banks compared to independent banks of similar size?

Lower failure rate Signup and view all the answers

What is the concern about multibank holding companies?

They may drain scarce capital from some communities and weaken smaller towns and rural areas Signup and view all the answers

What is the term used to describe banks not owned by holding companies?

Independent banks Signup and view all the answers

What is the overall effect of holding company expansion on the number of independently owned banking organizations?

A sharp decline Signup and view all the answers

What is the characteristic of a holding company as a whole compared to banking organizations that do not form holding companies?

It is more profitable Signup and view all the answers

What is a key feature of financial holding companies (FHCs) under the Gramm-Leach-Bliley Act?

They can offer a broad range of financial services, including dealing in and underwriting securities. Signup and view all the answers

What is a characteristic of each affiliated financial firm in an FHC?

They have separate capital, management, and profits or losses. Signup and view all the answers

What is a benefit of being an FHC affiliate?

Some protection against companywide losses. Signup and view all the answers

What has been the result of the emergence of FHCs in the industry?

Consolidation and convergence within the industry. Signup and view all the answers

What is the purpose of the Gramm-Leach-Bliley Act?

To define financial holding companies and their operations. Signup and view all the answers

What is the relationship between FHCs and the Federal Reserve Board?

FHCs are registered with the Federal Reserve Board. Signup and view all the answers

What is a characteristic of a branching organization?

Having a centralized management team at the head office Signup and view all the answers

What is the role of the management team at each full-service branch?

To have limited authority to make decisions Signup and view all the answers

What is the purpose of a branch banking organization's supporting network?

To supplement the services offered at full-service branches Signup and view all the answers

What was the situation with bank branches in the 1930s?

Only one in five American banks operated a full-service branch office Signup and view all the answers

What is a characteristic of the average U.S. bank by the 21st century?

Operating multiple full-service branch offices Signup and view all the answers

What is a key feature of a branching organization's structure?

A combination of centralized and decentralized management Signup and view all the answers

Study Notes

The Organization and Structure of the Commercial Banking Industry

Commercial banking is the dominant supplier of credit and payments services to businesses and households
Many banks in the United States are small, holding little more than 1% of total industry assets
In contrast, some of the largest financial service organizations in the world are in the United States, with companies like Citigroup, JP Morgan Chase, and Bank of America holding around $6 trillion in combined assets

Size and Concentration of Assets

Banking continues to become increasingly concentrated, not only among the smallest but also the largest financial firms
The largest money-center banks possess advantages over community-oriented institutions, such as:
- Better diversification
- Ability to withstand risks of a fluctuating economy
- Access to huge amounts of financial capital at relatively low cost
- Ability to attract top managerial talent

Internal Organization of the Banking Firm

Large money center banks are usually located in large cities and focus on wholesale or wholesale plus retail activities
Departments within large banks strive to maximize their contribution to profitability or other performance indicators
Larger banks have a more centralized organizational structure, with senior management located at the home office and each full-service branch having its own management team with limited authority

Branching Organizations

As a unit financial firm grows in size, it usually decides to establish a branching organization
Branching organizations offer a full range of services from several locations, including a head office and one or more full-service branch offices
They also offer limited services through a supporting network of ATMs, computers, and other advanced communications systems

The Array of Organizational Structures and Types in the Banking Industry

Branching has led to a sharp decline in the number of independently owned banking organizations
Banks acquired by holding companies are referred to as affiliated banks, while banks not owned by holding companies are known as independent banks
Holding companies have been blamed for reducing competition, but supporters argue that they bring greater efficiency, more services, lower probability of organizational failure, and higher and more stable profits

Financial Holding Companies (FHCs)

Under the Gramm-Leach-Bliley (GLB) Act, FHCs are defined as a special type of holding company that can offer a broad range of financial services, including dealing in and underwriting securities and selling and underwriting insurance
FHCs provide each affiliated financial firm with its own capital, management, and profits or losses, as well as some protection against company-wide losses
FHCs have led to consolidation and convergence within the industry

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Description

This quiz covers the organization and structure of the commercial banking industry, including the concentration of assets and the role of small banks in the US.