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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%
88
93
95
97
86
87
89
0
91
92
94
96
98
9
00
01
9
9
19
19
19
19
19
19
19
19
19
19
19
19
20
20
19
19
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
14,418
11,851 13,053
10,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
FUNDAMENTAL FORCES
OF CHANGE IN BANKING
Chapter 1