mishkin ppt19

42
Pearson Prentice Hall Financial Markets and Institutions 19 - 1 Multiple Regulatory Agencies Overlapping jurisdictions 1. Office of the Comptroller of Currency primary supervisory responsibility for the 1,500 national banks that own > 50% of assets of the commercial banking system 2. Federal Reserve & State Banking Authorities primary responsibility for the 858 Fed member state banks 3. Federal Reserve primary responsibility for bank holding companies; secondary responsibility for the national banks. 4. FDIC & State Banking Authorities jointly supervise the 4,500 Non Fed state banks that have FDIC insurance 5. State Banking Authorities – sole jurisdiction over the fewer than 500 state banks without FDIC insurance

Upload: pat-lanugon

Post on 12-Dec-2015

273 views

Category:

Documents


3 download

DESCRIPTION

cr4jv

TRANSCRIPT

Pearson Prentice Hall Financial Markets and Institutions 19 - 1

Multiple  Regulatory  Agencies    

–  Overlapping  jurisdictions  1.  Office   of   the   Comptroller   of   Currency   -­‐   primary   supervisory  

responsibility  for  the  1,500  national  banks  that  own  >  50%  of  assets  of  the  commercial  banking  system  

2.  Federal   Reserve   &   State   Banking   Authorities   -­‐   primary    responsibility  for  the  858  Fed  member  state  banks  

3.  Federal   Reserve   -­‐   primary   responsibility   for   bank   holding  companies;  secondary    responsibility  for  the  national  banks.  

4.  FDIC  &  State  Banking  Authorities  -­‐    jointly  supervise  the  4,500  Non-­‐Fed  state  banks  that  have  FDIC  insurance  

5.  State  Banking  Authorities  –  sole    jurisdiction  over  the  fewer  than  500  state  banks  without  FDIC  insurance  

Pearson Prentice Hall Financial Markets and Institutions 19 - 2

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Shadow  Banking   System   –   bank   lending   replaced   by   lending   via  the  securities  market  

Financial   Innovation:      A  change  in  the  +inancial  environment  will  stimulate   a   search   by   +inancial   institutions   for   innovations   that  are  likely  to  be  pro@itable.  

Why  Financial  Innovation  Occurs:  1.  Responses  to  Changes  in  Demand  Conditions:  Interest  Rate  Volatility  

2.  Responses  to  Changes  in  Supply  Conditions:  Information  Technology  

3.  Avoidance  of  Existing  Regulation  4.  Decline  of  Traditional  Banking  

Pearson Prentice Hall Financial Markets and Institutions 19 - 3

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Responses  to  Changes  in  Demand  Conditions:  Interest  Rate  Volatility  

1.  Adjustable-­‐Rate   Mortgages   -­‐   lending   institutions   adjusts   rate  based   on   T-­‐bill   rate   changes.     Initial   rate   is   lower   than  conventional  fixed  rate  mortgages  

2.  Financial  Derivatives  -­‐  instruments  with  payoffs  that  are  linked  to  previously  issued  securities;  Hedge:  protection  against  risk  

Futures   contracts   -­‐   seller   agrees   to   provide   a   certain  standardized  commodity   to   the  buyer  on  a   specific   future  date  at  an  agreed-­‐on  price.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 4

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Responses  to  Changes  in  Supply  Conditions:  Information  Technology  -­‐  Lowered  transaction  costs,  made  available  financial  info  

1.  Bank  Credit  &  Debit  Cards   -­‐   charged  accounts  started  by  Sears,  Macy’s  Goldwater’s;     income:  payment’s  from  stores  –  5%;  Visa  &  MasterCard  

2.  Electronic   Banking   -­‐   ATM   (24/7),   US:250,000;     Phils:     14,530        (BSP,  Sep  2013);    home  banking;    ABM  –  ATM  +  internet  Website  +   telephone   to     customer   service;    Virtual  Bank   –   cyberspace  only  e.g.  Security  First  Network  Bank,  Bank  of  America;      

3.  Electronic  Payment  –  bills  payment  online,  auto-­‐debits  

-­‐    Scandinavians  &  Finland  ahead  of  Americans  

Pearson Prentice Hall Financial Markets and Institutions 19 - 5

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Responses  to  Changes  in  Supply  Conditions:  Information  Technology  -­‐  Lowered  transaction  costs,  made  available  financial  info  

4.  E-­‐money   -­‐  substitute  for  checks  &  money;    stored-­‐value  card  &  smart  cards;    e-­‐cash  

Phils  -­‐  Happy  Plus,  various  rewards/loyalty  cards  

5.  Junk   bonds   -­‐   fallen   angels,   below   Baa,   have   not   yet   achieved  investment-­‐grade  

6.  Commercial  Papers  -­‐  ST  debt  securities  (large  banks  &  corps)  

7.  Securitization  –  process  of    transforming  illiquid  financial  assets    into  marketable  capital  market  securities  

 

Pearson Prentice Hall Financial Markets and Institutions 19 - 6

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Avoidance  of  Existing  Regulation  -­‐  Heavily  regulated  industry;    loophole  mining    2  Sets  of  Regulations  have  been  Major  Forces  for  Innovation:  

1.  Reserve  Requirement  -­‐  recognized  as  a  tax  on  deposit  

2.  Deposit   rate   ceilings   -­‐   restrictions  on   interest  paid  on  deposits:    prohibition  on  paying   interest   on  checking   accounts   deposits;    Regulation  Q:    Fed  sets  limits  on  interest  rates  on  time  deposits  

Reason:     depositors  withdrew   funds   from   banks   to   put   them  into   higher-­‐yielding   securities,   if   market   interest   rates   rose  above   the  maximum   rates   that   banks   paid.     Loss   of   deposits  restricted  banks  lending  funds:    disintermediation.    

Pearson Prentice Hall Financial Markets and Institutions 19 - 7

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Avoidance  of  Existing  Regulation  2  Sets  of  Innovation:  1.  Money   Market   Mutual   Fund   -­‐   issued   shares,   redeemable   at   a  

fixed  price  by  writing  checks;     created  by  Bruce  Bent  &  Henry  Brown   in   1970;     boomed   during   the   rapid   rise   of   inflation   in  1978;     not   subject   to   reserve   requirements,   but   came   to  regulation  scrutiny  as  government  safety  came  to  the  rescue  in  2008  (Mini-­‐case:    Bruce  Bent  &  the  Money  Market  Mutual  Fund  Panic  of  2008)  

2.  Sweep   Accounts   –   any   balances   above   a   certain   amount   in   a  corporation’s  checking  account  at  the  end  of  a  business  day  are  “swept  out”  of  the  account  and  invested  in  overnight  securities  that  pay  interest  

Pearson Prentice Hall Financial Markets and Institutions 19 - 8

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Decline  of  Traditional  Banking  

-­‐  Traditional   banking:    make   LT   loans,   issue   ST   deposits;     asset  transformation,  referred  to  as  “borrowing  short,  lending  long”  

-­‐  US  Banks  as  a  source  of  fund,  market  share:    

a.  Commercial  banks  -­‐  1974:  40%    down  to  26%  in  2009  

b.  Thrift  banks  -­‐  late  1970s:    20%  down  to  3%  2010  

-­‐   US  Banks  asset  size,  market  share:    

a.  Commercial  banks  -­‐  1960  to  1980:  40%    down  to  25%  in  2009  

b.  Thrift  banks  -­‐  1960  to  1980:    20%  down  to  3%  2010  

-­‐  Phils:    81.3  %  total  assets  of  the  Financial  System  (BSP,  2013)  

Pearson Prentice Hall Financial Markets and Institutions 19 - 9

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Decline  of  Traditional  Banking  

Liabilities  side:    Decline  in  Cost  Advantages  in  Acquiring  Funds  -­‐  1960:     rise   in   inflation   made   investors   more   sensitive   to   yield  

differentials   on   different   assets.   People   began   to   take   their  money   out   of   banks,   with   their   low   interest   rates   on   both  checkable   &   time   deposits,   and   began   to   seek   out   higher-­‐yielding  investments.  

-­‐  Result:  disintermediation  

-­‐  Legislative  response:  1980s  -­‐  elimination  of  Regulation  Q  ceilings  on   time   deposit   interest   rates   &   allowed   checkable   deposit  accounts  that  paid  interest  

Pearson Prentice Hall Financial Markets and Institutions 19 - 10

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Decline  of  Traditional  Banking  

Asset  side:    Decline  in  Income  Advantages  on  Uses  of  Funds  -­‐  Loss   of   market   share   from   financial   innovations:   junk   bonds,  

securitization,  &    commercial  paper  (CP)  market  

-­‐  Result:  shadow  banking  growth  

-­‐  Finance  Companies:  depend  primarily  on  CP  to  acquire  funds,  to  expand   their   operations   at   the  expense  of  banks.  Many  of   the  banks’  best  business  customers  find  it  cheaper  to  go  instead  to  the  CP  market  for  funds.  

-­‐  Securitization   -­‐   due   to   IT:   accurately   evaluate   credit   risk  with  statistical  methods  &  lower  transaction  costs  

Pearson Prentice Hall Financial Markets and Institutions 19 - 11

Financial  Innovation  &  Growth  of  Shadow  Banking  System    

Decline  of  Traditional  Banking  

Banks’  Response  to  survive:    Seek  out  new  lines  of  business  1.  Expanding   into   new   and   riskier   areas   of   lending   -­‐   increased  

their  risk  taking  by  placing  a  greater  %  of  their  total  funds  in:  a.  commercial  real  estate  loans  b.  lending  for  corporate  takeovers  &  leveraged  buyouts  

2.  Pursue   new   off-­‐balance-­‐sheet   activities   -­‐   embrace   shadow  banking:    non-­‐interest-­‐income  activities.  

Result:    Challenge  to  regulators  

Pearson Prentice Hall Financial Markets and Institutions 19 - 12

Structure  of  the  US  Commercial  Banking  Industry  

1.  Physical:  approximately  7,000  commercial  banks  

Philippines:    As  of  end-­‐December  2013,  there  were  9,935  operating  banking  units  -­‐  5,461  Universal  &  KBs,  1,828  TBs,  2,646  Rural  &  Coop    

Pearson Prentice Hall Financial Markets and Institutions 19 - 13

Structure  of  the  US  Commercial  Banking  Industry  

Pearson Prentice Hall Financial Markets and Institutions 19 - 14

Structure  of  the  US  Commercial  Banking  Industry  

2.  Restriction   on   Branching:   reflected   hostility   to   large   banks,  protection  of  small  banks.    McFadden   Act   of   1927   –   prohibited   banks   from   branching  across  state  lines  &  forced  all  national  banks  to  conform  to  the  branching   regulations   of   the   state   where   their   headquarters  were  located.  Bank  response:      bank  holding  companies  &  ATMs  

Bank   Holding   Companies     own   controlling   interest   in   several  banks  even   if   branchings  not  permitted;     can  engage   in  other  banking-­‐related  activities   ,  such  as  the  provision  of   investment  advice,  data  processing  &  transmission  services,   leasing,  credit  card  services,  and  servicing  of  loans  in  other  states.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 15

Bank  Consolidation  &    Nationwide  Banking  

v Bank  Failure:  100  per  year  from  1985  to  1992  v Number   of   banks   declined:   3,000   from   1985   to   1992   &                      

3,800  from  1992  to  2007  v Bank  consolidation:    merging  to  create  larger  entities;  loophole  

mining  undermining    branching  restrictions  v 1975  Maine:  1st  interstate  banking  legislation  that  allowed  out-­‐of-­‐

state  purchase  of  banks    v 1982  Massachusetts:    regional  compact  with  other  New  England  

states  to  allow  interstate  banking  v 1990:      almost  all  states    allowed  some  form  of  interstate  banking  

Pearson Prentice Hall Financial Markets and Institutions 19 - 16

Bank  Consolidation  &    Nationwide  Banking  

v Diversification:    if  one  state’s  economy  was  weak,  another  state  might  have  a  strong  economy  

v Superregional   banks:     bank   holding   companies   that     rival   the  money  center  banks   in   size  but  whose  headquarters  are  not   in  one   of   the    money   center   cities   (New   York,   Chicago,   and   San  Francisco).   E.g.   Bank   of   America   of   Charlotte,   North   Carolina,  and  Banc  One  of  Columbus,  Ohio  

v Web  &  improved  IT:  economies  of  scale  &  scope  Economies  of   scope:       ability     to  use  one   resource   to  provide  many  different  products  and  services;    synergies  

v Large,  complex  banking  organizations  (LCBOs)  

Pearson Prentice Hall Financial Markets and Institutions 19 - 17

Bank  Consolidation  &    Nationwide  Banking  

Riegle-­‐Neal  Interstate  Banking  &  Branching  Efficiency  Act  of  1994  

v Established  the  basis  for  a  true  nationwide  banking  system  v Expands  regional  compacts  to  the  entire  nation  &  overturns  the  

McFadden  Act  &  Douglas  Amendment  (prohibition  of  interstate  banking)  

v Allow   bank   holding   companies   to   acquire   banks   in   any   other  state,   merge   banks   they   own   into   1   bank   with   branches   in  different  states    

v 1998   Bank   of   America   &   NationsBank   merger   created   the                          1st   bank   with   branches   on   both   coasts;   banking   industry  consolidation   led   to   banking   organizations   with   operations   n  almost  all  of  the  50  states  

 

Pearson Prentice Hall Financial Markets and Institutions 19 - 18

Bank  Consolidation  &    Nationwide  Banking  

What  Will  the  Structure  of  the  U.S.  Banking  Industry  Look  Like  in  the  Future?  

v Surge  of    Mergers  and  Acquisitions  v Decline  in  number:    from  several  thousands  to  several  hundred  v Concentration  of    Assets:    shift   in  assets  from  smaller  banks  to  

larger  banks  v More  efficient  banks  &    healthier  banking  system   less  prone  to  

bank  failures    v Fear:      eliminate  small  banks,   referred  to  as  community  banks;  

historically  untrue  –  New  York,  California  v Economies  of  scale  &  scope  

 

Pearson Prentice Hall Financial Markets and Institutions 19 - 19

Separation  of  Banking  &  Other  Financial  Service  Industries  

Other  Financial  Service  Industries:  securities,  insurance,  &  real  estate  Erosion  of  Glass-­‐Steagall  v Federal  Reserve  used  a  loophole  in  Section  20  of  the  Glass-­‐Steagall  

Act   in   1987   to   allow   bank   holding   companies   to   underwrite  previously   prohibited   classes   of   securities,   banks   began   to   enter  this  business.  

v U.S.  Supreme  Court  validated  the  Fed’s  action  in  July  1988  v Fed  allowed  J.  P.  Morgan,  to  underwrite  corporate  debt  securities  

(Jan   1989)   &   to   underwrite   stocks   (Sep   1990),   with   the   privilege  later  extended  to  other  bank  holding  companies  

v Regulatory   agencies   also   allowed   banks   to   engage   in   some   real  estate  &  insurance  activities  

Pearson Prentice Hall Financial Markets and Institutions 19 - 20

Separation  of  Banking  &  Other  Financial  Service  Industries  

The  Gramm-­‐Leach-­‐Bliley  Financial  Services  Modernization  Act  of  1999:  Repeal  of  Glass-­‐Steagall  

v allows   securities   firms   &   insurance   companies   to   purchase  banks,   and   allows   banks   to   underwrite   insurance   &   securities  and  engage  in  real  estate  activities  

v State  regulatory  authority:    insurance  activities  v Securities   &   Exchange   Commission   (SEC):     oversight   of  

securities  activities  v Office  of  the  Comptroller  of  the  Currency:      authority  to  regulate  

bank  subsidiaries  engaged  in  securities  underwriting  v   Federal  Reserve:      oversight  of  bank  holding  companies  

Pearson Prentice Hall Financial Markets and Institutions 19 - 21

Separation  of  Banking  &  Other  Financial  Service  Industries  

Implications  for  Financial  Consolidation  v Demise  of  large,  free-­‐standing  investment  bank  v 2008:     (from   Mar   to   Sep)   5   of   the   largest   free-­‐standing  

investment  banks  ceased  to  exist  in  old  form  a.     Bear  Stearns  sold  to  J.P.  Morgan  b.     Lehman  Brothers  c.     Merrill  Lynch  sold  to  Bank  of  America  d.     Goldman  Sachs  e.     Morgan  Stanley  

 

Pearson Prentice Hall Financial Markets and Institutions 19 - 22

Separation  of  Banking  &  Other  Financial  Service  Industries  

Separation  of  Banking  &  Other  Financial  Services  Industries  Throughout  the  World  

v 3  Basic  Frameworks  for    Banking  &  Securities  Industries:  a.   Universal  Banking  –  (Germany,  Netherlands,  &    Switzerland)  

No   separation   at   all   between   the   banking   &   securities  industries.    In   a   universal   banking   system,   commercial   banks   provide   a  full   range   of   banking,   securities,   real   estate,   &   insurance  services,  all  within  a  single  legal  entity.    Banks  are  allowed  to  own  sizable  equity  shares  in  commercial  firms,  and  often  they  do.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 23

Separation  of  Banking  &  Other  Financial  Service  Industries  

Separation  of  Banking  &  Other  Financial  Services  Industries  Throughout  the  World  

v 3  Basic  Frameworks  for    Banking  &  Securities  Industries:  b.   British-­‐style  universal  banking  system  –   (UK,  US,  Canada,  

&    Australia)  Bank   engages   in   securities   underwriting,   but   it   differs   from  the  German-­‐style  universal  bank  in  3  ways:  a.  Separate  legal  subsidiaries:    more  common  b.  Bank  equity  holdings  of  commercial  firms:  less  common  c.  Combinations  of  banking  &  insurance  firms:  less  common  

Pearson Prentice Hall Financial Markets and Institutions 19 - 24

Separation  of  Banking  &  Other  Financial  Service  Industries  

Separation  of  Banking  &  Other  Financial  Services  Industries  Throughout  the  World  

v 3  Basic  Frameworks  for    Banking  &  Securities  Industries:  c.   Japan-­‐style  banking  system    

Some   legal   separation   of   the   banking   &   other   financial  services  industries.    Major  differences:  a.  Substantial   Bank   equity   holdings   of   commercial   firms:  

allowed  b.  Bank  Holding  Companies:      illegal  

Section   65   of   the   Japanese   Securities   Act   allow   commercial  banks  to  engage    in  securities  activities  (British-­‐style  UKBs)  

Pearson Prentice Hall Financial Markets and Institutions 19 - 25

Thrift  Industry:    Regulation  &  Structure  

Savings  &  Loan  Associations  v Regulatory   authority:     chartered   by   federal   government   or   by  

the  states  

v Most  S  &  L  are  members  of  the  Federal  Home  Loan  Bank  System  (FHLBS),  styled  like  the  Federal  Reserve  System  

v Office   of   Thrift   Supervision:     supervises     12   District   Federal  Home  Loan  banks  

v FDIC:      Federal  deposit  insurance  up  to  $250,000  per  account  for  S&Ls;   Office   of   the   Comptroller   of   the   Currency   regulates  federally  insured    S&Ls  

v   FHLBS  discount  loan    program  provides  a  subsidy  to  S  &  L  

Pearson Prentice Hall Financial Markets and Institutions 19 - 26

Thrift  Industry:    Regulation  &  Structure  

Mutual  Savings  Bank  v 400:      similar  to  S&Ls  but  are  jointly  owned    by  the  depositors  

v Chartered  by  states  v FDIC:      Federal  deposit  insurance  up  to  $100,000  per  account    v mutual   savings   banks   whose   deposits   are   not   insured   by   the  

FDIC  have  their  deposits  insured  by  state  insurance  funds  v branching  regulations  for  mutual  savings  banks  are  determined  

by  the  states;  not  particularly  restrictive,   there  are  few  mutual  savings  banks  with  assets  of  less  than  $25  million  

Pearson Prentice Hall Financial Markets and Institutions 19 - 27

Thrift  Industry:    Regulation  &  Structure  

Credit  Unions  v Small  cooperative   lending   institutions   around  particular   group  

of  individuals,  e.g.  union  members  or  employees  

v only   depository   institutions   that   are   tax-­‐exempt   &   can   be  chartered  either  by  the  states  or  by  the  federal  government  

v National  Credit  Union  Administration  (NCUA):         issues  federal  charters  &  regulates  federally  chartered  credit  unions  by  setting  minimum   capital   requirements,   requiring   periodic   reports,   &  examining  the  credit  unions    

v National   Credit   Union   Share   Insurance   Fund   (NCUSIF):  (subsidiary  of  NCUA)      deposit  insurance  $100,000-­‐per-­‐account  

   

Pearson Prentice Hall Financial Markets and Institutions 19 - 28

Thrift  Industry:    Regulation  &  Structure  

Credit  Unions  v   typically  quite    small;  most  hold  less  than  $10  million  of  assets  

v  lending   is   for   consumer   loans   with   short   terms   to   maturity,  these   institutions  did  not   suffer   the  financial  difficulty  of    S&Ls  and  mutual  savings  banks  

v their   ties   to  a  particular   industry  or   company  make   them  more  likely  to  fail  when  large  numbers  of  workers   in  that   industry  or  company  are  laid  off  &  have  trouble  making  loan  payments  

v Navy  Federal  Credit  Union  whose  shareholders  are  members  of  the  U.S.  Navy  and  Marine  Corps    branches  throughout  the  world  

Pearson Prentice Hall Financial Markets and Institutions 19 - 29

International  Banking  

v 1960:    8  US  banks    operated  branches  in  foreign  countries,  total  assets  were  less  than  $4  billion  

v Current:  100  US  banks    operated  branches   in   foreign  countries,  total  assets  were  less  than  $1.5  trillion  

v 3  Factors:  a.  rapid  growth  in  international  trade  &  multinational  corps  

b.  US  banks  have  been  able  to  earn  substantial  profits  by  being  very  active  in  global  investment  banking:    underwrite  foreign  securities,  investment  banking  &  insurance  activities      

c.  US  banks  wanted  to  tap  into  dollar-­‐denominated  deposits  in  foreign  countries  known  as  Eurodollars    

Pearson Prentice Hall Financial Markets and Institutions 19 - 30

International  Banking  

v 1960:    8  US  banks    operated  branches  in  foreign  countries,  total  assets  were  less  than  $4  billion  

v Current:  100  US  banks    operated  branches   in   foreign  countries,  total  assets  were  less  than  $1.5  trillion  

v 3  Factors:  a.  rapid  growth  in  international  trade  &  multinational  corps  

b.  US  banks  have  been  able  to  earn  substantial  profits  by  being  very  active  in  global  investment  banking:    underwrite  foreign  securities,  investment  banking  &  insurance  activities      

c.  US  banks  wanted  to  tap  into  dollar-­‐denominated  deposits  in  foreign  countries  known  as  Eurodollars    

Pearson Prentice Hall Financial Markets and Institutions 19 - 31

International  Banking  

Eurodollar  Market  v created  when  deposits  in  accounts  in  the  US  are  transferred  to  a  

bank  outside  the  US  &  are  kept  in  the  form  of  dollars  

v More   than   90%  are   time   deposits;  more   than   half   of   them   are  certificates  of  deposit  with  maturities  of  30  days  or  more  

v Reasons  for  US$  denomination:      

a.  dollar   is   the   most   widely   used   currency   in   international  transactions  

b.  Eurodollars   are   “offshore”   deposits   -­‐     not   subject   them   to  regulations  such  as  reserve  requirements  or  capital  controls  

Pearson Prentice Hall Financial Markets and Institutions 19 - 32

International  Banking  

Eurodollar  Market  v Main  center:    London  

v Eurodollars    also  held  outside  Europe  in   locations    that  provide  offshore  status  to  these  deposits,  like    Singapore,  Bahamas,  and  the  Cayman  Islands  

v Minimum    transaction:    $1  million;    75%  deposits  held  by  banks  

Pearson Prentice Hall Financial Markets and Institutions 19 - 33

International  Banking  

Structure  of  U.S.  Banking  Overseas  v Most   foreign   branches   of   US   banks:     Latin   America,   Far   East,  

Caribbean,  &  London  

v London:   largest   volume   of   assets     because   it   is   a   major  international   financial   center   and   the   central   location   for   the  Eurodollar  market.  

v Far  East  &  Latin  America:  important  regions  in  U.S.  trade  v Caribbean  (Bahamas  and  the  Cayman  Islands):    tax  haven;    “shell  

operations”   because   they   function   primarily   as   bookkeeping  centers  &  do  not  provide  normal  banking  services  

Pearson Prentice Hall Financial Markets and Institutions 19 - 34

International  Banking  

Structure  of  U.S.  Banking  Overseas  v Edge  Act  Corporation   :     special   subsidiary  engaged  primarily   in  

international  banking.  

U.S.   banks   (through   their   holding   companies)   can   also   own   a  controlling   interest   in   foreign   banks   and   in   foreign   companies  that  provide  financial  services,  such  as  finance  companies.    

The   international   activities   of   U.S.   banking   organizations   are  governed  primarily  by  the  Federal  Reserve’s  Regulation  K.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 35

International  Banking  

Structure  of  U.S.  Banking  Overseas  v  International    Banking  Facilities  (IBFs)  -­‐    can  accept  time  deposits  

from  foreigners  but  are  not  subject  to  either  reserve  requirements  or  restrictions  on  interest  payments.    

IBFs  are  also  allowed  to  make  loans  to  foreigners,  but  they  are  not  allowed  to  make  loans  to  domestic  residents.  

States   have   encouraged   the   establishment   of   IBFs   by   exempting  them  from  state  &  local  taxes.  The  purpose  of  establishing  IBFs  is  to   encourage   American   &   foreign   banks   to   do   more   banking  business  in  the  United  States  rather  than  abroad.  

Assets   climbed   to   nearly   $200   billion   in   the   first   2   years,   &  were          $1.3  trillion  at  the  end  of  2009.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 36

International  Banking  

Foreign  Banks  in  the  U.S.    v Foreign  banks  encouraged  to  establish  offices  in  the  US  –  hold  

more   than   16%  of   total  U.S.   bank  assets  &   26%  market   share   in  lending    Phil:    10.4%  of  total  assets  &    10.7%  of  TLP  of  Phil.  Banking  System  

v Foreign  banks  engage   in  banking  activities   in   the  United  States  by  operating  an  agency  office  of  the  foreign  bank,  a  subsidiary  U.S.  bank,  or  a  branch  of  the  foreign  bank.  

An   agency   office   can   lend   and   transfer   funds   in   the   US,   but    cannot    accept  deposits  from  domestic  residents.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 37

International  Banking  

Foreign  Banks  in  the  U.S.    v Foreign  banks  encouraged  to  establish  offices  in  the  US  –  hold  

more   than   16%  of   total  U.S.   bank  assets  &   26%  market   share   in  lending    Phil:    10.4%  of  total  assets  &    10.7%  of  TLP  of  Phil.  Banking  System  

v Foreign  banks  engage   in  banking  activities   in   the  United  States  by  operating  an  agency  office  of  the  foreign  bank,  a  subsidiary  U.S.  bank,  or  a  branch  of  the  foreign  bank.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 38

International  Banking  

Foreign  Banks  in  the  U.S.    An   agency   office   can   lend   and   transfer   funds   in   the   US,   but    cannot    accept  deposits  from  domestic  residents.      

Advantage:      not  being  subject  to  regulations  that  apply  to  full-­‐service  banking  offices.  

A   subsidiary   U.S.   bank   is   just   like   any   other   U.S.   bank   (it   may  even   have   an   American-­‐sounding   name)   and   is   subject   to   the  same  regulations,  but  it  is  owned  by  the  foreign  bank.    

A  branch  of  a  foreign  bank  bears  the  foreign  bank’s  name  and  is  usually  a  full-­‐service  office.    Foreign  banks  may  also  form  Edge  Act  corporations  and  IBFs.  

Pearson Prentice Hall Financial Markets and Institutions 19 - 39

International  Banking  

Foreign  Banks  in  the  U.S.    v Result  of    internationalization  of  banking:        

a.  financial  markets  throughout  the  world    have  become  more  integrated;  

b.  growing   trend     toward   international   coordination   of   bank  regulation,  e.g.  Basel  Accord  

c.  bank  consolidation  abroad:      creation  of  the  1st    trillion  dollar  bank   with   the   proposed   merger   of   the   Industrial   Bank   of  Japan,  Dai-­‐Ichi    Kangyo    Bank,  and  Fuji  Bank,  announced   in  August  1999,  but  which  took  place  in  2002  

Pearson Prentice Hall Financial Markets and Institutions 19 - 40

International  Banking  

Pearson Prentice Hall Financial Markets and Institutions 19 - 41

Philippine  Banking  System  

-­‐  Moody’s:      only  banking  system  in  Southeast  Asia  rated    positive  

-­‐  S  &  P:    positive,  together  with  Singapore,  Indonesia,  &  Thailand  

-­‐  Fitch:    stable,    along  with  Malaysia  vs  negative  on  China,  India,  Indonesia,  Mongolia,  Sri  Lanka,  Thailand  &  Vietnam    

-­‐  BSP   is   setting   the   downstage   for   foreign   investment   and  competition   as   the   country   joins   the   ASEAN   Economic  Community   by   2015   and   stands   ready   to   tap   consequential  opportunities  from  the  ASEAN  Banking  Integration  by  2020.    

Pearson Prentice Hall Financial Markets and Institutions 19 - 42

Philippine  Banking  System  

Philippine  Banking  System    -­‐ Universal  &  Commercial  banks:    36  with  5,425  branches/other  offices    

-­‐  Thrift  banks:  71  with  1,757    branches/other  offices    -­‐  Rural  &  Coop  banks:    566  with  2,080    branches/other  offices  -­‐  BSP   is   setting   the   downstage   for   foreign   investment   and  competition   as   the   country   joins   the   ASEAN   Economic  Community   by   2015   and   stands   ready   to   tap   consequential  opportunities  from  the  ASEAN  Banking  Integration  by  2020.