34 Questions
What did the Riegle-Neal Act of 1994 allow holding companies to do?
Acquire banks throughout the United States without needing any state's permission and establish branch offices across state lines
Why did the federal government enact and states support interstate banking laws?
To bring in new capital to revive struggling local economies, expand financial-service offerings, and increase geographical diversification
What was one consequence of advances in financial-services delivery technology?
Permitting service to customers over broader geographic areas
Why did regulators believe larger financial firms may be more desirable?
Because they may be more efficient and less prone to failure
What was a goal of the largest financial firms?
To geographically diversify their operations and open up new marketing opportunities
What was a challenge posed by nonbank financial institutions?
They faced few restrictions on their ability to expand nationwide
What is a common organizational structure adopted by unit financial firms as they grow in size?
A branching organization
What types of services are typically offered by a branching organization?
Full range of services from several locations, including head office and full-service branch offices
Where is senior management of a branching organization usually located?
At the home office
What is the purpose of a supporting network in a branching organization?
To offer limited services through drive-in windows, ATMs, computers, point-of-sale terminals, the Internet, and other advanced communications systems
What was the proportion of American banks operating a full-service branch office during the Great Depression of the 1930s?
One in five
What was the trend in branching expansion by the beginning of the 21st century?
Average U.S. banks had expanded their branching operations
What is the dominant supplier of credit and payments services to businesses and households?
Commercial banking
What percentage of total industry assets do the smallest financial institutions hold?
Little more than one percent
Which banks hold about 6 trillion dollars combined?
Citigroup, JP Morgan Chase, and the Bank of America
What is happening to the banking industry in terms of size and concentration of assets?
It is becoming increasingly concentrated
What is exhibited in Exhibit 3–1?
The Structure of the U.S. Commercial Banking Industry, December 31, 2009
In what year was the data exhibited in Exhibit 3–1 collected?
2009
What factor has fueled the rise of branching, bank holding companies, and financial holding companies?
Their ability to carry out mergers and acquisitions
How many bank mergers have occurred in the United States since 1980?
Over 12,000
What type of firms are banking's principal competitors?
Credit unions, savings associations, finance companies, insurance firms, security dealers, hedge funds, and other financial firms
What is meant by 'convergence' in the financial-services industry?
Great structural and organizational changes that have spilled over into one financial-service industry after another
Why have some financial institutions become some of the largest businesses on the planet?
Despite not necessarily operating at lower costs, they have become large through mergers and acquisitions
How have financial firms been affected by rising operating costs and rapidly changing technology?
They have been forced to adapt and change their structures and offerings
What has been a notable exception to the trend of financial firms changing their structures and offerings?
Hedge funds, until very recently
What is a result of the consolidation of the financial-services industry?
Financial firms are starting to look alike, especially in the menu of services offered
What is expense-preference behavior in a financial firm?
When management prioritizes benefits for managers over stockholders or the public.
What does Agency Theory examine in a firm?
The relationships between the firm's owners and managers, and mechanisms to maximize owner welfare.
What is a key factor in reducing agency costs and improving company performance?
Effective corporate governance.
What is the primary objective of a firm that exhibits expense-preference behavior?
To benefit managers, rather than stockholders or the public.
What is the primary role of managers in a firm, according to Agency Theory?
To act as agents for the owners (stockholders).
What is the goal of effective corporate governance?
To compel managers to maximize the welfare of the firm's owners.
What is the relationship between bank size, efficiency, and operating costs?
There appears to be an inverse relationship between bank size and operating costs per unit of service produced and delivered.
What is a potential advantage of allowing interstate banking?
Increased efficiency and reduced operating costs.
Study Notes
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
- Allows holding companies to acquire banks across the US without state permission
- Enables the establishment of branch offices across state lines
Reasons for Enacting Interstate Banking Laws
- Bringing in new capital to revive local economies
- Expansion of financial-service offerings by nonbank financial institutions
- Desire of large financial firms to diversify geographically and open new markets
- Belief that larger financial firms are more efficient and less prone to failure
- Advances in financial-services delivery technology, permitting service to customers over broader areas
Commercial Banking Industry
- Dominant supplier of credit and payments services to businesses and households
- Many small banks in the US, holding little more than 1% of total industry assets
- Large banks, like Citigroup, JP Morgan Chase, and Bank of America, hold about $6 trillion combined
- Industry is increasingly concentrated in both small and large financial firms
Branching Organizations
- Larger financial firms establish branching organizations
- Offer full range of services from multiple locations, including head office and full-service branch offices
- May offer limited services through drive-in windows, ATMs, computers, point-of-sale terminals, internet, and advanced communications systems
- Senior management located at the home office, with limited authority at each full-service branch
Mergers and Acquisitions
- Fueled the rise of branching, bank holding companies, and financial holding companies
- Over 12,000 bank mergers have occurred in the US since 1980
- Bigger companies pursue smaller financial-service providers and purchase their assets
Changing Organization and Structure of Banking's Principal Competitors
- Credit unions, savings associations, finance companies, insurance firms, security dealers, hedge funds, and other financial firms are affected by rising operating costs and rapidly changing technology
- All financial firms are starting to look alike, especially in the menu of services offered (convergence)
Efficiency and Size of Financial Firms
- Do bigger financial firms operate at lower costs?
- Financial firm goals, such as expense-preference behavior and agency theory, impact operating cost, efficiency, and performance
The quiz is about the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which allowed holding companies to acquire banks across the US and establish branch offices across state lines. It also covers the reasons behind the enactment of interstate banking laws.
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