chapter 3 depository institutions: activities and characteristics
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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1
Depository Institutions:
Activities and Characteristics
Chapter 3
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Asset/Liability Problem
Spread IncomeTypes of Risk
Credit RiskRegulatory RiskInterest Rate Risk
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Liquidity ConcernsWays to accommodate withdrawals and loan demandAttract additional depositsUse currently-owned securities as collateral for loans from other institutions
Raise short-term funds in the money market
Sell currently-owned securities
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Depository Institutions
Commercial Banks
Savings and Loan Associations
Savings Banks
Credit Unions
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Commercial Banks
As of Q2 2007, 7350
commercial banks
25% national banks, but holds
65% assets
Bank deposits insured by FDIC
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Asset Size of Banks
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Top 30 Largest Banks
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Top 30 Largest Banks (continued)
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Bank ServicesConsumer Banking
Installment loans, residential mortgage loans, credit card loans, brokerage services, student loans, etc.
Institutional Banking Commercial real estate finance, leasing, factoring
Global BankingCorporate finance, capital market and foreign exchange market products and services
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Bank Funding
DepositsDemand and Time Deposits
Non-Deposit BorrowingFed Discount Window and Federal Funds Market
Retained Earnings and Equity Securities
Other Non-deposit BorrowingIssuance of Debt Securities
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Capital Requirements for BanksRisk-based capital requirements Basel 1 Framework Basel 2 Framework Three “pillars”
Minimum risk-based capital requirements
Supervisory review of capital adequacy Market discipline through public disclosure
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Capital RequirementsRisk-Based Capital Guidelines
Tier 1 (Core Capital) Common stock, certain preferred stock, and minority interest
Tier 2 (Supplementary Capital) Loan-loss reserve, certain preferred stock, perpetual debt, hybrid capital instruments, and subordinated debt
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Credit Risk Weight Capital Requirement
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Savings and Loan Associations
Principal assetsMortgagesMortgage-backed securitiesGovernment securities
Principal sources of fundsPassbook savings accountsTime deposits
Regulation
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Regulation of S&Ls
Home Owners Loan Act of 1933
Office of Thrift SupervisorDepository Institutions Deregulation and Monetary Control Act of 1980 Deregulated interest rates on deposits
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Factors in The S&L CrisisBorrowing short and lending long
Interest rate ceilings on deposits
Volatile interest ratesFraudulent management activities
High-risk strategies
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Savings BanksMutually owned or stockholder owned
Principal assetsResidential mortgages
Principal source of fundsDeposits
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Credit UnionsOwned by membersPrincipal assets
Small consumer loansResidential mortgagesSecurities
Principal source of fundsMember deposits
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Types of Credit UnionsNational person credit union
Provide services to qualified members of the general public
Corporate credit union Provides services to national person credit unions
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