Chapter 11 Banking Industry: Structure and Competition

Preview This chapter examines the historical trends in the banking industry(銀行產業的歷史趨勢) that help explain the unique structure of the U.S. system.

Learning Objectives Recognize the key features of the banking system(銀行體系) and the historical context of the implementation of these features. Explain how financial innovation(金融創新) led to the growth of the shadow banking system(影子銀行體系). Identify the key structural changes(關鍵的結構型改變) in the commercial banking industry. Summarize the factors that led to consolidation(併購) in the commercial banking industry.

Learning Objectives Assess the reasons for separating banking(分拆銀行的理由) from other financial services through legislation. Summarize the distinctions between thrift institutions(儲貸機構) and commercial banks. Identify the reasons for U.S. banks to operate in foreign countries and for foreign banks to operate in the United States.

Historical Development of the Banking System Bank of North America chartered in 1782 Controversy(爭論) over the chartering of banks National Bank Act of 1863 creates a new banking system of federally chartered banks Office of the Comptroller of the Currency(聯邦貨幣局) Dual banking system(雙元銀行體系) Federal Reserve System(聯邦準備體系) is created in 1913.

Figure 1 Time Line of the Early History of Commercial Banking in the United States

Primary Supervisory Responsibility of Bank Regulatory Agencies Federal Reserve(聯儲局) and state banking authorities(州銀行監理單位): state banks that are members of the Federal Reserve System. Fed(聯儲局) also regulates bank holding companies.(銀行控股公司) FDIC(聯邦存款保險公司): insured state banks that are not Fed members. State banking authorities(州政府銀行局): state banks without FDIC insurance.

Financial Innovation and the Growth of the “Shadow Banking System” Financial innovation is driven(金融創新被激發) by the desire to earn profits A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable Financial engineering (財務工程)

Responses to Changes in Demand Conditions: Interest-Rate Volatility Adjustable-rate mortgages(浮動利率房貸) Flexible interest rates keep profits high when rates rise Lower initial interest rates make them attractive to home buyers Financial derivatives(衍生性金融商品) Ability to hedge interest rate risk (規避利率風險) Payoffs are linked to previously issued (i.e. derived from) securities.(償付與已發行的證券連接)

Responses to Changes in Supply Conditions: Information Technology Bank credit and debit cards(信用卡與轉帳卡) Improved computer technology lowers transaction costs(電腦科技的進步可降低交易成本) Electronic banking(電子銀行) ATM (自動櫃員機), home banking (家庭銀行), ABM (自動銀行機) and virtual banking (網路銀行) Junk bonds(垃圾債券) Commercial paper market Improvements in information technology 1970-33 billion 2008-1.7 trillion

Securitization and the Shadow Banking System To transform otherwise illiquid financial assets(不具流動性的金融資產) into marketable capital market securities. Securitization played an especially prominent role in the development of the subprime mortgage(次級房貸) market in the mid 2000s.

Avoidance of Existing Regulations Loophole Mining(鑽漏洞): Reserve requirements act(應提準備法案) as a tax on deposits Restrictions on interest paid on deposits led to disintermediation(逆中介) Money market mutual funds(貨幣市場共同基金) Sweep accounts(一帳通)

Financial Innovation (金融創新) and the Decline of Traditional Banking As a source of funds for borrowers(資金來源透過借入款), market share has fallen(通貨膨脹導致利率上漲超出上限，則存款流失) Commercial banks’ share of total financial intermediary assets has fallen(junk bond, securitization, and rise in commercial paper market) No decline in overall profitability Increase in income from off-balance-sheet activities(表外操作)

Figure 2 Bank Share of Total Nonfinancial Borrowing, 1960–2014 Source: Federal Reserve Bank of St. Louis, FRED data base: http://research.stlouisfed.org/fred2/; https://www2.fdic.gov/hsob/index.asp.

台灣的直接金融與間接金融

Financial Innovation and the Decline of Traditional Banking Decline in cost advantages in acquiring funds (liabilities) (獲取資金的成本優勢下降) Rising inflation led to rise in interest rates and disintermediation Low-cost source of funds, checkable deposits, declined in importance Decline in income advantageson uses of funds (assets) (使用資金的獲益優勢下降) Information technology(資訊技術) 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

Financial Innovation and the Decline of Traditional Banking Banks’ Responses Expand into new and riskier areas of lending Commercial real estate loans(商業不動產放款) Corporate takeovers and leveraged buyouts(高槓桿收購) Pursue off-balance-sheet activities Non-interest income(利息以外收入) Concerns about risk

Structure of the U.S. Commercial Banking Industry Restrictions on branching(分行限制) McFadden Act(1927) and state branching regulations. Response to ranching restrictions(圈養式限制) Bank holding companies.(銀行控股公司) Automated teller machines. (ATM)

Table 1 Size Distribution of Insured Commercial Banks, June 30, 2014

Table 2 Ten Largest U.S. Banks, June 30, 2014

Bank Consolidation and Nationwide Banking The number of banks has declined dramatically over the last 30 years. Bank failures and consolidation.(銀行失敗與合併) Deregulation: Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Economies of scale and scope (規模經濟與範疇經濟) from information technology Results may be not only a smaller number of banks but a shift in assets to much larger banks.

Figure 3 Number of Insured Commercial Banks in the United States, 1934–2014 (Third Quarter) Source: Federal Reserve Bank of St. Louis, FRED database: http://research.stlouisfed.org/fred2/.

What will the Structure of the U. S What will the Structure of the U.S. Banking Industry Look Like in the Future? Although the U.S. retains a unique banking structure in possessing a large number of banks, its structure is converging with systems in Europe and Japan.(雖然美國仍維持龐大數量的單一銀行結構，然而其結構正朝向歐洲與日本靠攏) How far the convergence between banking systems will extend is the subject of ongoing academic debate(學術辯論)

Are Bank Consolidation and Nationwide Banking Good Things? Benefits Increased competition, driving inefficient banks out of business(將無效率的銀行驅逐出去) Increased efficiency also from economies of scale and scope(規模經濟與範疇經濟) Lower probability of bank failure(銀行失敗機率下降) from more diversified portfolios

Are Bank Consolidation and Nationwide Banking Good Things? Costs Elimination of community banks(社區銀行消失) may lead to less lending to small business(小額貸款減少) Banks expanding into new areas may take increased risks and fail (冒更多的風險)

Separation of the Banking and Other Financial Service Industries Erosion(凋零) of Glass-Steagall Act Prohibited commercial banks from underwriting (發行) corporate securities or engaging in brokerage activities(經紀業務) Section 20(Glass-Steagall) loophole was allowed by the Federal Reserve enabling affiliates of approved(允許) commercial banks to underwrite securities as long as the revenue did not exceed a specified amount U.S. Supreme Court validated the Fed’s action in 1988

Separation of the Banking and Other Financial Service Industries Gramm-Leach-Bliley Financial Services Modernization Act of 1999 Abolishes(廢止) Glass-Steagall States regulate insurance activities(州政府維持監督保險行為) SEC keeps oversight of securities activities(證管會持續監督證券相關行為) Office of the Comptroller of the Currency regulates bank subsidiaries engaged in securities underwriting Federal Reserve oversees bank holding companies

Separation of the Banking and Other Financial Service Industries Universal banking(綜合銀行) No separation between banking and securities industries British-style universal banking May engage in security underwriting Separate legal subsidiaries(依法區隔子公司) are common Bank equity holdings of commercial firms(銀行資本購入商業公司) are less common Few combinations of banking and insurance firms(少見銀行與保險合併)

Separation of the Banking and Other Financial Service Industries Some legal separation Allowed to hold substantial equity stakes in commercial firms but holding companies are illegal

Thrift Industry: Regulation and Structure Savings and loan associations Chartered by the federal government or by states Most are members of Federal Home Loan Bank System (FHLBS) Deposit insurance provided by Savings Association Insurance Fund (SAIF), part of FDIC Regulated by the Office of Thrift Supervision

Thrift Industry: Regulation and Structure Mutual savings banks Approximately half are chartered by states Regulated by state in which they are located Deposit insurance provided by FDIC or state insurance

Thrift Industry: Regulation and Structure Credit unions Tax-exempt Chartered by federal government or by states Regulated by the National Credit Union Administration (NCUA) Deposit insurance provided by National Credit Union Share Insurance Fund (NCUSIF)

International Banking Rapid growth Growth in international trade(國際貿易) and multinational corporations(多國籍企業) Global investment banking is very profitable Ability to tap into(打入) the Eurodollar market

Eurodollar Market(歐洲美元市場) Dollar-denominated deposits held in banks outside of the U.S. Most widely used currency in international trade Offshore deposits (境外存款) not subject to regulations Important source of funds for U.S. banks

Structure of U.S. Banking Overseas Shell operation(空殼操作)(branches in Bahamas and Cayman Islands) Edge Act corporation(邊緣行動公司) International banking facilities (IBFs)(國際銀行業務好處) Not subject to regulation and taxes May not make loans to domestic residents

Foreign Banks in the United States Agency office (辦事處) of the foreign bank Can lend and transfer fund in the U.S. Cannot accept deposits from domestic residents Not subject to regulations Subsidiary U.S. bank(美國子銀行) Subject to U.S. regulations Owned by a foreign bank

Foreign Banks in the United States Branch of a foreign bank(外國銀行在美國分行) May open branches only in state designated as home state(與本地銀行相同待遇) or in state that allow entry of out-of-state banks(允許外地銀行進入本地的州) Limited-service (有業務限制的)may be allowed in any other state Subject to the International Banking Act of 1978

Table 3 Ten Largest Banks in the World, 2014

資料來源：中央銀行

國內銀行最近七年ROA前五名 ROA\排名 1 2 3 4 5 2006 中華開發 上海商銀 彰化商銀 臺灣工銀 兆豐國際 5.25% 1.84% 1.08% 0.91% 0.85% 2007 臺灣工業 第一商銀 4.24% 1.67% 2008 中國信託 華南商業 中國輸出入 台北富邦 0.98% 0.89% 0.73% 0.63% 0.61% 2009 花旗 國泰世華 2.14% 1.32% 0.88% 0.74% 2010 京城 2.75% 2.25% 1.33% 1.23% 1.19% 2011 渣打 2.07% 1.71% 1.39% 1.17% 2012 萬泰 2.40% 2.06% 1.92% 1.44% 1.21%

國內銀行最近七年ROE前五名 ROE\排名 1 2 3 4 5 2006 中央信託 彰化商銀 上海商銀 第一商銀 華南商銀 25.28% 17.18% 16.83% 16.34% 14.64% 2007 台中商銀 17.58% 16.59% 15.40% 14.18% 13.00% 2008 中國信託 台北富邦 合庫商銀 12.37% 12.30% 9.89% 9.48% 9.04% 2009 國泰世華 花旗 遠東國際 兆豐國際 11.94% 9.63% 9.00% 8.47% 8.40% 2010 台新 京城 渣打 安泰 21.07% 17.78% 15.22% 13.95% 13.73% 2011 21.77% 19.35% 18.27% 14.67% 14.50% 2012 萬泰 24.12% 19.92% 18.14% 16.00% 15.46%

國內銀行最近七年ROA倒數五名 ROA\排名 5 4 3 2 1 2006 台灣新光 臺中商銀 台新 萬泰 日盛 -2.21% -2.42% -3.11% -5.56% 2007 聯邦 花旗 大眾 安泰 -1.70% -2.95% -3.00% -5.12% -7.40% 2008 陽信 元大 全國農業金庫 -0.92% -1.11% -1.61% -1.84% -2.27% 2009 京城 渣打 0.02% -0.13% -0.77% -3.72% -6.29% 2010 臺企銀 臺銀 三信商銀 高雄銀行 0.20% 0.18% 0.12% 0.10% -2.13% 2011 板信商銀 0.11% -0.19% -0.39% 2012 板信 臺灣工銀 0.19% 0.16% 0.08% 0.07%

國內銀行最近七年ROE倒數五名 ROE\排名 5 4 3 2 1 2006 大眾 萬泰 台新 臺中商銀 日盛 -39.57% -47.12% -52.56% -78.43% -118.78% 2007 聯邦 安泰 -29.74% -32.36% -35.97% -41.25% -162.78% 2008 元大 全國農業金庫 -21.14% -23.73% -50.20% -65.68% -98.36% 2009 京城 陽信 渣打 0.29% -2.91% -13.56% -54.10% -64.12% 2010 臺銀 三信 高雄銀行 中國輸出入 2.81% 2.59% 2.13% 1.41% -21.89% 2011 板信 2.64% 1.81% -2.11% -4.12% -7.47% 2012 大台北商銀 星展 臺灣工銀 3.10% 2.83% 2.49% 2.40% 0.42%