Commercial Banking Industry Structure

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