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Fundamental Forces of Change in Banking
Fundamental Forces of Change in Banking
FUNDAMENTAL FORCES
OF CHANGE IN BANKING
Chapter 1
What makes a bank ‘special?’
Why do we call Bank of America a ‘bank,’ Merrill
Lynch a ‘securities brokerage company’ and State
Farm an ‘insurance company?’
The answer lies in our history; with the implementation of:
The Glass-Steagall Act which created three separate
industries: commercial banking, investment banking, and
insurance.
The Bank Holding Act determined activities closely related to
banking and limited the scope of activities a company could
engage in if it owned a bank.
The McFadden Act limited the geographic market of banking
by allowing individual states to determine the extent to which
a bank could branch intra- or inter-state.
As a result of these acts, the United States developed a unique
banking system which had a large number of smaller banks;
limited in the scope of products and services offered; and limited
in the geographic areas covered by banks.
The banking industry is consolidating and
diversifying simultaneously.
The traditional definition of a bank has been blurred by
the introduction of new products and a wave of mergers,
which have dramatically expanded the scope of activities
that banks engage in and where products and services
are offered.
Formerly, a commercial bank was defined as a firm that
both accepted demand deposits and made commercial
loans.
Today, these two products are offered by many financial
services companies: including commercial banks, savings
banks, credit unions, insurance companies, investment
banks, finance companies, retailers, and pension funds.
What constitutes a bank, today is not as important as
what products and services are offered and in what
geographic markets the financial services company
competes in.
While competition has increased the number of
firms offering financial products and services,
… the removal of interstate branching restrictions in the
U.S. has dramatically reduced the number of banks but
increased the number of banking offices (primarily
branches).
a brokerage firm, or
AT&T.
You can deposit money electronically, transfer funds from one
account to another, purchase stocks, bonds and mutual funds,
or even request and receive a loan from any of these firms.
Most allow you to conduct this business by phone, mail, or over
the Internet.
Regulatory restrictions on products and
services offerings worked effectively in
promoting a safe banking system until the
later half of the twentieth century.
20.0%
10.0%
0.0%
90
99
86
7
88
89
91
92
93
94
95
96
97
98
00
01
8
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Captive automobile finance companies
70,000 66,177
58,353
60,000 55,749
48,694
50,000
Millions of Dollars
39,931
40,000
32,713
30,000 26,492
17,276 19,875
20,000
13,053 14,418
11,851
10,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
FUNDAMENTAL FORCES
OF CHANGE IN BANKING
Chapter 1