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FDIC Banking Review


*Former Associate Director, Division of Insurance and Research, Federal Deposit Insurance Corporation.

1Throughout the paper, “this study” refers to the FDIC’s collective project on the future of banking (FOB), consisting of the 16 papers listed in the first section of the references.

2FDIC (1987).

3This section is based on the FOB paper by Jiangli. Long-term reductions in population in some rural areas also have implications for banks and are discussed in the section on community banks.

4Actions taken by the FDIC, as well as interagency efforts to reduce regulatory burden, were outlined in congressional testimony by the Vice Chairman of the FDIC (Reich [2004]).

5This section is based on interviews with large-bank supervisory personnel at the Office of the Comptroller of the Currency and the Federal Reserve Board and on information received from FDIC examiners who have experience performing or reviewing information technology examinations. The results are discussed in detail in the FOB paper by Golter and Solt.

6This section is based on the FOB paper by Murphy.

7Trends in the importance of banks in U.S. credit markets are discussed in the FOB paper by Samolyk.

8Rajan and Zingales (2003).

9Tabulations by the FDIC, based on data from Standard and Poor’s Compu­ stat. For other measures of banks’ market share, see the FOB paper by Samolyk, and Boyd and Gertler (1994).

10In 2002 Citicorp earned net income of $10.7 billion from banking operations, and Bank of America Corp. earned $9.2 billion, whereas the four largest nonbank financial companies earned net income ranging from $4.6 billion to $5.8 billion (tabulations by the FDIC, based on data from Standard and Poor’s Compustat).

11This section is based on the FOB paper by Reidhill, Lamm, and McGinnis. Information on individual institutions is based on publicly available data.

12These studies consider the cost structures of the bank as a whole. This is not to deny that there may be scale efficiencies in specific business lines, such as credit card operations. See the section on limited-purpose banks.

13“Too big to fail” is a misnomer. The question for investors is whether unsecured and uninsured creditors of such a bank would be protected if the bank were to fail.

14The eight largest banking organizations, in descending order of asset size as of January 2004, are Citigroup, J. P. Morgan Chase, Bank of America, Wells Fargo, Wachovia, Bank One, Washington Mutual, and FleetBoston. In the aggregate, these institutions account for 41 percent of total banking industry assets.

15This section is based on the FOB paper by Gratton.

16According to this definition, a bank would be considered a “true” regional bank if it operated in more than one state and had less than 60 percent of its deposits in one MSA.

17This section is based on the FOB paper by Critchfield, Davis, Davison,
Gratton, Hanc, and Samolyk.

18Bank size groups are adjusted for inflation so that, for community banking organizations, the number of organizations with less than $1 billion in bank/thrift assets in 2002 is compared with the number that had less than about $650 million in 1985.

19The location of community banks is determined by the location of the holding company headquarters or, when there is no holding company, the location of the institution’s headquarters. Division into rural, small metro, suburban, and urban areas depends on whether the bank is located in a metropolitan statistical area (MSA) and on population density.

20Although banks in counties suffering depopulation showed no greater proportional decline in number than banks in other areas, the performance of banks in counties suffering depopulation differed from that of banks in growing areas, as discussed in the FOB paper by Anderlik and Walser, and in Myers and Spong (2003).

21The 12 states where unit banking existed as of the end of 1977 were Colorado, Illinois, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming (Conference of State Bank Supervisors [1978], 95).

22During the 1980s, failures were higher among new or “young” banks than among existing banks. In the early 1980s a large number of new national banks were chartered following a change in policy by the Office of the Comptroller of the Currency, a change designed partly to increase competition. At the time, banks obtaining a national charter were, by statute, automatically insured by the FDIC. In 1991, as a result of the FDIC Improvement Act, the FDIC obtained separate authority to approve insurance for national banks. See FDIC (1997), 106.

23Such reasoning does not apply, or applies with considerably less force, to owner-operated banks that do not rely on uninsured or unprotected sources of funds. Returns of owner-managers may be augmented by compensation received as officers of the bank, and there may be no outside shareholders to challenge the decision to remain independent.

24From 1992 to 2001 community banks located in counties experiencing population declines recorded ROAs ranging from 1.0 percent to 1.2 percent—not much lower than the ROAs of banks located in counties experiencing population growth.

25Myers and Spong (2003) reached a similar conclusion.

26Credit union offices and deposits are classified geographically according to the location of the organization’s headquarters. For the large majority of credit unions this probably is acceptable, although for large credit unions—such as those serving military personnel—this may distort data on the location of credit union resources.

27Eighty percent of credit unions are located in MSAs, compared with 54 percent of community bank offices.

28Bassett and Brady (2001) reached a similar conclusion. It should be noted that the more rapid percentage growth rates of small banks may partly reflect the fact that the internal growth rates of very large banks may be more limited by the size of markets and the marginal cost of increases in funding.

29The extensive literature on the economic role of community banks is discussed in the FOB paper by Critchfield et al.

30This section is based on the FOB paper by Yom. Credit card banks are defined as institutions that have more than 50 percent of total assets in loans and credit card asset-backed securities (ABS) and have more than 50 percent of total loans and credit card ABS in credit card loans and credit card ABS. Subprime lenders are institutions with more than 25 percent of tier 1 capital in subprime loans. Internet banks’ primary contact with customers is the Internet. Data used in this study are based on 37 credit card banks, 120 subprime banks, and 17 Internet banks.

31This section is based partly on the FOB paper by Critchfield and Jones.

32See the FOB paper by Critchfield and Jones.

33Current law requires that special assessments in systemic-risk resolutions be based on assets less tangible equity and subordinated debt, whereas regular assessments are based on domestic deposits. Large banks tend to fund assets with nondeposit liabilities and foreign deposits to a greater extent than small banks.

34Evidence on the effect of consolidation on small business credit is discussed in Avery and Samolyk (2003).

35The section on combinations of banking and commerce is based on the FOB paper by Blair.

36This section is based on the FOB paper by Bennett and Nuxoll.

37The section on governance issues is based on the FOB paper by Craig.

38Litan (2002).

39The Sarbanes-Oxley Act applies to publicly held institutions—institutions that issue securities registered with the SEC or with a federal financial regulatory agency. In addition, nonpublic banking institutions with more than $500 million in assets are required to comply with the SEC’s definition of auditor independence.

40See The Report of the Task Group on Regulation of Financial Services (1984).

41This section is based on the FOB paper by Kushmeider.

42The last issue has implications for the operation of U.S. financial conglomerates in Europe, where they must meet a requirement for consolidated supervision.

43This section is based on the FOB paper by Bradley and Shibut.

44This section is based on the FOB paper by Jones.

Last Updated 10/29/2004 Questions, Suggestions & Requests

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