The Commercial Banking Industry

Structure and Management

 1-The structure of US commercial
banking
Unique characteristic of the US banking industry:
US counts around 5000 commercial banks (75% state-
chartered)
50% of all US commercial banks = total assets under
$100 million
Only 5% hold assets over $1 billion and compete in the
international markets
Largest US banks (over $trillion) = Bank of America, J.P
Morgan, CitiBank, Wells Fargo
Consolidation of the industry:
Through branch banking (Mc Fadden act repealed)
Bank Holding Companies:
• The company can hold stocks of one or more banks + non bank
business
• BHC = a strategy to get around regulation (branch banking +
Glass Steagall Act)
 Number of Insured Commercial Banks in
the United States, 1934–2014

Source: Federal Reserve Bank of St. Louis, FRED database: http://research.stlouisfed.org/fred2/.

Ten Largest U.S. Banks,
September 30, 2005
Major recent changes in the top 10
Wachovia (North Carolina based) has been
taken over by Wells Fargo (California based) in
Oct 2008
Citigroup was suposed to take over Wachovia with
FDIC support
Among the « big five » investment banks:
Goldman Sachs, Morgan Stanley, Merrill Lynch,
Lehman Brothers and Bearn & Stearn
JP Morgan Chase bought Bear and Stearns (with the
Fed and government financial support) March 2008
Bank of America bought Merill Lynch, Sept 15th 2008
Lehman Brothers went bust, Sept 15th 2008
Goldman Sachs and Morgan Stanley requested to the
FED to become commercial banks, Sept 2008
Ten Largest U.S. Banks,
December 30, 2010
Size Distribution of Insured Commercial
Banks, March 30, 2011
 Ten largest US banks,2013
Bank Assets in $ Billion Deposits in $Billion

1. JP Morgan Chase 2 389 1 092.7

2. Bank of America 2 174 1 041.4

3. Citigroup 1 881 851.3

4. Wells Fargo 1 436 895.4

5. Goldman Sachs 959 222.6

6. Morgan Stanley 801 210.9

7. Bank of NY Mellon 356 210.7

8. US Bancorp 355 116

9. HSBC North America 305 209.7

10. PNC Financial 300 135.0

 Size Distribution of Insured
Commercial Banks, June 30, 2014
Ten Largest U.S. Banks
June 30, 2014
 Ten largest US banks,2017
(total assets)
1 JPMorgan Chase & Co. $2.55 trillion
2 Bank of America Corp. $2.25 trillion
3 Wells Fargo & Co. $1.95 trillion
4 Citigroup Inc. $1.82 trillion
Goldman Sachs Group
5 $894.09 billion
Inc.
6 Morgan Stanley $832.39 billion
7 U.S. Bancorp $449.52 billion
PNC Financial Services
8 $371.28 billion
Group Inc.
TD Group US Holdings
9 $353.62 billion
LLC
Capital One Financial
10 $348.55 billion
Corp.
Ten Largest Banks in the World, 2011
Ten Largest Banks in the World,
2014
 The structure of US commercial
banking
Convergence trend in banking = combining
commercial and investment banking
Move toward universal banking through creation of
financial holding companies
• Citigroup = example of the move toward universal banking
Universal banking = one-stop shopping
• Synergies between activities in order to increase income
Changing technology:
ATM + high speed info (Internet) = industry less labor
intensive and more capital intensive:
• Increase economies of scale and scope
• Trend in favor of more consolidation
 2- Major Changes in the Banking
Environment
Banks underwent through major changes in
their activity due to:
Volatility of interest rates
Change in the information technology
Response to the interest rate volatility:
Adjustable-rate mortgages
• Flexible interest rates keep profits high when rates
rise
• Lower initial interest rates make them attractive to
home buyers
Financial Derivatives
• Ability to hedge interest rate risk
Responses to Changes in Information
Technology
Bank credit and debit cards
Improved computer technology lowers the
transaction costs
Electronic banking and online banking
Development of the junk bonds market
Development of the commercial paper market
Securitization
 Decline of Traditional Banking

As a source of funds for borrowers,

market share has fallen
Share of total financial intermediary
assets has fallen
No decline in overall profitability
Increase in income from off-balance-
sheet activities
 Decline of Traditional Banking
Decline in cost advantages in acquiring funds
(liabilities)
Rising inflation led to rise in interest rates and
disintermediation
Low-cost source of funds, checkable deposits,
declined in importance
Decline in income advantages on uses of
funds (assets)
Information technology has decreased need for
banks to finance short-term credit needs or to
issue loans
Information technology has lowered transaction
costs for other financial institutions, increasing
competition
 Banks’ Responses

Expand into new and riskier areas

of lending
Commercial real estate loans
Leveraged buyouts
Corporate takeovers
Pursue off-balance-sheet activities
Non-interest income
Concerns about risk