final ppt on us banking and bank of america
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US BANKING INDUSTRY
Prepared By:-•Ankit Gupta (11DM-020)•Kanishka Rao (11FN-049)•Rohit Iyer (11FN-082)•Simran Preet (11FN-105)•Sahil Gupta (11IB-069)•Sahil Singhal (11FN-087)•Sri Lasya Gade (11FN-037)
US Banking Industry RiskStrengths:
•Highly diversified and market-oriented economy, with an adaptable and resilient economic structure.
•Core retail deposits constitute a large share of system wide funding needs.
•The U.S. benefits from the dollar's standing as a key reserve currency, which helps compensate for the country's external debt and leads to minimal foreign-currency funding of the banking system.
Weaknesses:
•Even though losses on loans have abated in recent quarters, continued weakness in the real estate segment poses latent credit risks.
•Large and active nonbank competitors should continue to undermine the "competitive dynamics" of U.S. banks.
•The supervisory challenges of monitoring the U.S.' innovative, complex, and dynamic financial system remain formidable, despite the regulatory overhaul underway.
Time Line of the Early History of US Banking
A timeline of Banking Regulation
1863 1927
1933
1980
1956 1999
1994
Res
tric
tio
ns
on
ac
tivi
ties
Res
tric
tio
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on
C
om
pet
itio
n McFadden Act
Banking Act
Holding Company Act
Monetary Control Act
Riegle-Neal
Holding Company Act
Glass - Steagall
Graham - Leach - Bliley
Great Depression
A Brief HistoryDUAL BANKING SYSTEM• Banking at state level until Civil War
• state charters, regulation• banknotes as local currency• failures, fraud were common
• National Bank Act 1963• federal charters for banks• Comptroller of the Currency• federal banknotes• tax on state banknotes• state banks survived by accepting deposits
-- dual banking system
CENTRAL BANK• U.S. had two prior central banks
• the Bank of the U.S. (1791-1811))• the Second Bank of the U.S.
(1816-63)• U.S. central banks not popular
• ranchers & farmers• states rights
• 1863-1907• no central bank• regular financial crises• panic of 1907
--bankers demanded a central bank• Federal Reserve System (1913)
Branching Restrictions
• McFadden Act 1927• restricted intra and interstate branching of national banks• meant to protect small banks & increase competition• repealed 1994
(Riegle-Neal)
• Glass-Steagall Act• separated permissible activities of commercial, investment banks• idea: limit risk for commercial banks• weakened over time• repealed 1999
Great Depression
• 1930-33, 1/3 of all U.S. banks failed• Congress responded to legislation• FDIC
• federal insurance for bank deposits• banks pay premiums
Regulators• Comptroller of the Currency
• national banks
• Federal Reserve• bank holding companies• state member banks• national banks (secondary)
• FDIC• nonmember state banks
• state regulators• state banks (secondary)
Five Largest Financial Institutions By Assets
Long-term counterparty credit
rating/ outlookAssets (bil. $) Systemic
Importance
JP Morgan Chase & Co. A/ Negative 2290 High
Bank of America Corp. A-/ Negative 2161 High
Citigroup Inc. A-/ Negative 1916 High
Wells Fargo & Co. A+/ Negative 1336 High
The Goldman Sachs Group Inc. A-/ Negative 951 High
Source:- Standard & Poor's Financial Institutions Ratings
Loans62%
Bonds30%
Stocks2%
Other6%
A majority of external funds raised by non-financial businesses come from bank loans. In particular, small businesses rely entirely on banks for financing
LoansBankDepositors
There is a moral hazard problem/adverse selection problem between both the bank and its depositors as well as between the bank and its potential loan customers
A bank can deal with this problem with:
•Credit Scoring
•Collateral
•Optimal Debt Contracts
This problem must be dealt with through regulation
Depository Institutions are broadly defined as businesses that accept deposits and make loans
Depository Institutions
Commercial Banks
Savings & Loans
Savings Banks
Credit Unions
Non-Bank Thrifts
•Deal almost exclusively in short term deposits and mortgages
•Are generally mutual companies (depositors are the owners)
•Are allowed to hold corporate equities/bonds
All Depository Institutions in the US are chartered
Depository Institutions
Commercial Banks
Savings & Loans
Savings Banks
Credit Unions
National Banks Comptroller of the Currency
State Banks State Authority
Federal Associations Office of Thrift Supervision
State Associations State Authority
Federal Unions National Credit Union Administration
State Unions State Authority
Federal Reserve Membership (1913)
• National Banks are Required to be members of the Federal Reserve System (Membership is optional for state banks)• Federal Reserve members are required to purchase
stock in the federal reserve system.• Federal Reserve members provide input to the
election of Federal Reserve Board Members• The Federal Reserve provides check clearing
services
National Banks 2001
State Banks (Non-Member)
935
State Banks (Non-Member)
4833
Of the 7,769 banks in 2003, a vast majority are non-member state banks
Federal Deposit Insurance (1934)
• Federal reserve members are required to purchase deposit insurance. Insurance is optional for state banks (98% of all banks have deposit insurance)• FDIC insured banks are charged up to 27 cents per $100 of eligible
deposits• All deposits up to $100,000 are insured by the FDIC.
Decentralization & Consolidation
McFadden Act resulted in many small banks • Meant to protect small banks & increase competition
-- but protected inefficient banks
-- limited economies of scale• Loopholes
-- bank holding companies
-- owned several banks
-- limited service banks
-- deposits or loans, not both
-- ATMs• Repealed 1994
Consolidation
• Bank failures in 1980s• Loopholes in McFadden• Repeal of McFadden• Over 14,000 banks in 1985
• less than 8,000 today
Commercial Banks in the US
Shaded areas indicate US recessions. Source:- Federal Financial Institutions Examination Council
Year Number of Banks Total Branches
1900 12,500 13,000
2000 7800 68,000
Until the mid 1900’s, US was a nation of unit banks
Main Office
Branch Offices
National Banks
Prohibited from interstate branching
Must comply with state branching rules
McFadden Act (1927)
State Banks
Unit Banking
Limited Branching
Statewide Branching
A good thing?
• Economies of scale• Diversification• But
• risks with expansion?• responsive to small customers?
Following the great depression, the activities of commercial banks were severely restricted
The Glass-Steagall Act of 1934 was designed to put a wall between commercial banking and investment banking
Glass-Steagall (1934)
Commercial Banks are restricted from participating in equities markets
Interest rates on non- transaction deposits is restricted to be below 5.25%
No interest allowed on transaction deposits
Regulation Q
Branching Restrictions could be avoided by forming holding companies
Main Office
Branch Offices
Illegal under the McFadden Act
Holding Company
Subsidiaries
Legal under the McFadden Act
The Bank Holding Company act allowed holding companies with only one bank to provide limited non-bank financial services on an interstate basis. This created a loophole around Glass-Steagall!!
Holding Company
Prior to Bank Holding Company Act
Bank Bank Bank
Holding Company
After Bank Holding Company Act
Non-Bank Branches
Non- Bank Offices
Collects deposits, but doesn’t make loans
Makes loans, but doesn’t collect deposits
Financial Services
Deregulation of the Financial Services sector began in the 1980’s.
The Monetary Control Act (1980)
Began the phase out of interest rate ceilings at depository institutions
Imposed uniform reserve requirements on Banks and Thrifts
Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)
Allowed holding companies to acquire banks in any state
Allowed banks to branch across state lines
Financial Services Modernization Act (Graham Leach-Bliley) (1996)
Permitted financial holding companies offering banking, insurance, securities and other services under one controlling corporation (allowed Citicorp to buy Traveler’s Insurance)
Capital AdequacyAsset QualityManagementEarningsLiquiditySensitivity to Interest Rate Risk
Problems with Monitoring
Banks are monitored using the camels system. However, It’s not always easy to accurately assess the risk a bank is taking on
Off Balance Sheet Activities
Derivatives
Financial Guarantees (SLC)
Asset Securitization
In 1995, Barings Bank went bankrupt due to losses in the Derivatives market. At the time, it was holding $60B worth of derivative contracts – a staggering number when compared to Baring’s reported equity of $615M!!
The CAMELS System
Problems with Restricting Activities Banks compete with other financial services companies as well as other banks!!
During the late 1970’s, market interest rates rose well above 10%, but banks were restricted by regulation Q to pay only 5.25% in savings accounts and 0% on checking accounts
Banks Financial Companies
Checking Accounts (0%) Money Markey Mutual Funds (10%)
As households pulled their money out of banks, mortgage and small business lending was seriously curtailed!
Problems with Restricting Competition (Branching)
Restricting entry gives banks limited monopoly power, they can use this to increase profits at the customers expense!
Banking is a decreasing cost industry (i.e. large startup costs, but small marginal costs). By forcing banks to remain small and local, they are forced to operate at an inefficiently small scale!
By forcing banks to remain in a confined geographical location, you are forcing them to take on idiosyncratic (area specific) risk!
Decline of Traditional Banking
• Traditional bank activities• decline in profitability• decline in importance
Declining share of loans
Rising profitability
But due to nontraditional activities
share of incomeNOT from interest
Why the decline?• Liability side:
• cost of acquiring funds has risen
• Asset side:• income generated has declined
• Causes:• financial innovation since 1970s
Money market mutual funds• Substitute for checking account from investment
companies• pay interest• not insured (but low risk)
• Banks had to offer own version• raised the cost of funds
Junk bond market• No market for new, low-rated debt prior to 1980
• only for ratings of Baa (BBB) or better
• Improvements in credit risk screening created market for new risky debt
• Before 1980• low-rated firms relied on banks
• After 1980• low-rated firms could borrow by issuing junk bonds
• Junk bond markets competing with banks for lending business
Commercial Paper• Easier to issue with improvements in credit risk screening• Demanded by money market mutual funds• Replaced corporate short-term borrowing from banks
Securitization• Transform illiquid loans into liquid debt securities• Individual loans bundled together• Debt securities issued, backed by pool of loans
• owners of security get a share of the loan payments
The implications..• other financial institutions take a part of the lending process
-- originate the loan
-- service the loan
-- issue and sell security• finance companies that just specialize in originating loans
In total• Higher cost of obtaining funds
• due to competition from money market
• Lower income from loans• due to competition from
-- junk bond market
-- commercial paper market
-- financial companies
Result of decline
•Bank failures•Newer activities
•fee income•credit cards•commercial real estate
0
1
2
3
4
5
6
1979 1986 1989 1992 1995 1998
Since the 1970’s, there has been tremendous growth in international trade
World Trade (in Trillions of $s)
Globalization- The Final Frontier
0
50
100
150
200
250
300
350
400
1979 1986 1989 1992 1995 1998
Even more impressive is the growth in foreign exchange
Currency Transactions (in Trillions of $s)
Globalization- The Final Frontier
US Banks Operating Abroad
Subsidiaries: Governed by Federal Reserve Regulation K – must be involved in business “closely related to banking.
International Banking Facilities: Accepts time deposits and makes loans to foreign households & firms. Exempt from reserve requirements, but may not do business in the US.
Edge Act Corporations: Makes loans/accepts deposits. Can deal with both US and foreign citizens , but is limited to international trade transactions
Branches: Offer a full line of banking services, but are subject to foreign laws
US Banks locate facilities abroad to aid in international trade as well as to avoid regulation and taxes
Foreign Banks Operating in the US
Agency Office: Can’t accept deposits from US citizens, but can transfer funds from abroad and make loans in the US
Subsidiaries: Treated as a US bank. Subject to all US regulations. Subsidiaries may also set up edge act corporations and international lending facilities
Branches: Offers a full range of banking services for US citizens
Likewise for Foreign Banks…
Important Dates in International Banking
1930 1978 1988 1991
Bank for International (BIS) Settlements Created
International Banking Act Basle Accords I
Foreign Bank Supervision Act
BCCI Scandal
Bank of EnglandFederal Reserve
United States
Under whose jurisdiction do international banks fall? (it’s a gray area)
United Kingdom
Regulating International Banking
International Banking Act (1978)
Brought foreign banks operating in the US under federal regulation for the first time
Foreign banks, however, were not monitored as closely as US banks
Foreign Bank Supervision Act (1991)
Passed shortly after the BCCI scandal
Gave the Federal Reserve and the Comptroller of the Currency greater control over foreign banks operating in the US
Bank For International Settlements (1930)
• Established to handle German WWI reparations, the BIS has become a center for international cooperation.• Played a central role in the Bretton Woods Exchange Rate System• Integral in the Establishment of the Euro
• The BIS is like a central bank for central banks.
Risk weighted assets
Asset Risk Weight
Cash and equivalents 0
Government securities 0
Interbank loans 0.2
Mortgage loans 0.5
Ordinary loans 1.0
Standby letters of credit 1.0
The Basle Accords established uniform capital requirements for banks around the world. Equity capital was required to equal at least 4% of a bank’s risk weighted assets.
Risk Weighted Assets
Assets Liabilities
$ 2,000 (T-Bills)
$1,000B (Equity)
US Banking Sector
$ 3,000 (Other)
$ 54B (Cash)$ 46B (Reserves)
Res. Req. = 5%
$ 2,701 (Mortgage)
$ 800B (Checking)$ 4,500B (Saving)
$ 1B (Discount)
Loans Loans
(0)( $54B)
(0)($46B)
(0)($2,000B)
(.5)($2,701B)
(1)($3,000B)
= $0
= $0
= $3,000B
= $0
= $1,350.5B
$4,350.5B
Required Equity = (.04)($4350.5B) = $174.2B
+
Problems with International Regulation
• The key issue is that the banking industry in Japan and Europe is Fundamentally different from the US.
Why BOFA?Rank Institution Name Location
Total Assets 09/30/2012
Total Assets 06/30/2012
1 JPMORGAN CHASE & CO. NEW YORK, NY $2,321,284,000 $2,290,146,000
2BANK OF AMERICA CORPORATION
CHARLOTTE, NC
$2,168,023,105 $2,162,083,396
3 CITIGROUP INC. NEW YORK, NY $1,931,346,000 $1,916,451,000
4WELLS FARGO & COMPANY
SAN FRANCISCO, CA
$1,374,715,000 $1,336,204,000
5GOLDMAN SACHS GROUP, INC., THE
NEW YORK, NY $949,475,000 $948,981,000
6 METLIFE, INC. NEW YORK, NY $846,285,485 $825,188,490
7 MORGAN STANLEY NEW YORK, NY $764,985,000 $748,517,000
8 U.S. BANCORP MINNEAPOLIS, MN
$352,253,000 $353,136,000
9BANK OF NEW YORK MELLON CORPORATION, THE
NEW YORK, NY $340,102,000 $330,490,000
10HSBC NORTH AMERICA HOLDINGS INC.
NEW YORK, NY $320,833,451 $317,482,381Source:http://www.ffiec.gov/nicpubweb/nicweb
Asset Size:US vs World
Source:www.relbanks.com
Market Capitalization:US vs World
Source:www.relbanks.com
INTRODUCTION•American multinational banking and financial services corporation headquartered in Charlotte, North Carolina.
•Largest bank holding company in the United States by assets.
•As of 2010, Bank of America is the fifth-largest company in the United States by total revenue, as well as the third-largest non-oil company in the U.S.
•The bank's 2008 acquisition of Merrill Lynch made Bank of America the world's largest wealth management corporation and a major player in the investment banking market.
• One of the Big Four banks in the United States, along with Citigroup, JPMorgan Chase and Wells Fargo—its main competitors.
• Bank of America operates in all 50 states of the U.S., the District of Columbia and more than 40 other countries.
• It has a retail banking footprint that covers approximately 80 percent of the U.S. population and serves approximately 57 million consumer and small business relationships at 5,600 banking centers and 16,200 ATMs.
HISTORYBank of Italy• The history of Bank of America dates back to 1904,
when Amadeo Giannini founded the Bank of Italy in San Francisco in an effort to cater to immigrants denied service by other banks.
• In 1922, Giannini established Bank of America and Italy in Italy by buying Banca dell'Italia Meridionale, the latter established in 1918.
• On March 7, 1927, Giannini consolidated his Bank of Italy (101 branches) with the newly formed Liberty Bank of America (175 branches).
• In 1928, A. P. Giannini merged with Bank of America, Los Angeles. He renamed the Bank of Italy on November 3, 1930, calling it Bank of America.
Growth in California
• Federal banking regulators prohibited Bank of America's interstate banking activity, and Bank of America's domestic banks outside California were forced into a separate company.
• It was not until the 1980s with a change in federal banking legislation and regulation that Bank of America was again able to expand its domestic consumer banking activity outside California.
• In 1958, the bank introduced the BankAmericard, which changed its name to Visa in 1975.
• A consortium of other California banks introduced Master Charge (now MasterCard) to compete with BankAmericard.
Expansion outside California
• In 1983, acquired Seafirst Corporation of Seattle, Washington, as well as its wholly owned banking subsidiary, Seattle-First National Bank.
• BankAmerica experienced huge losses in 1986 and 1987 by the placement of a series of bad loans in the Third World, particularly in Latin America.
• In 1992, acquired its California rival, Security Pacific Corporation and its subsidiary Security Pacific National Bank in California. Later that year, BankAmerica expanded into Nevada by acquiring Valley Bank of Nevada.
• In 1994, BankAmerica acquired the Continental Illinois National Bank and Trust Co. of Chicago.
• In 1997, BankAmerica acquired Robertson Stephens, a San Francisco-based investment bank specializing in high technology for $540 million. Robertson Stephens was integrated into BancAmerica Securities and the combined subsidiary was renamed BancAmerica Robertson Stephens
Merger of NationsBank and BankAmerica
• In 1997, BankAmerica lent D. E. Shaw & Co., a large hedge fund, $1.4 billion in order to run various businesses for the bank.
• BankAmerica was acquired by Nations Bank of Charlotte in October 1998.
• The merged bank took the name Bank of America Corporation.
• the integration of BancAmerica Robertson Stephens and NationsBanc Montgomery Securities, was renamed Banc of America Securities in 1998.
SWOT
Product Developments
KEY HAPPENINGS• In 2004, Bank of America announced it would purchase
Boston-based bank FleetBoston Financial for $47 billion in cash and stock.
• On June 30, 2005, Bank of America announced it would purchase credit card giant MBNA for $35 billion in cash and stock.
• In May 2006, Bank of America and Banco Itaú entered into an acquisition agreement through which Itaú agreed to acquire BankBoston's operations in Brazil and was granted an exclusive right to purchase Bank of America's operations in Chile and Uruguay.
• On November 20, 2006, Bank of America announced the purchase of The United States Trust Company for $3.3 billion.
• On September 14, 2007, Bank of America won approval from the Federal Reserve to acquire LaSalle Bank Corporation from Netherlands's ABN AMRO for $21 billion. With this purchase, Bank of America possessed 1.7 trillion in assets.
• The deal increased Bank of America's presence in Illinois, Michigan, and Indiana by 411 branches, 17,000 commercial bank clients, 1.4 million retail customers, and 1,500 ATMs.
• Bank of America became the largest bank in the Chicago market with 197 offices and 14% of the deposit share, surpassing JPMorgan Chase.
• LaSalle Bank and LaSalle Bank Midwest branches adopted the Bank of America name on May 5, 2008.
Acquisition of Countrywide Financial• On August 23, 2007, the company announced a $2 billion
repurchase agreement for Countrywide Financial.
• This purchase of preferred stock was arranged to provide a return on investment of 7.25% per annum and provided the option to purchase common stock at a price of $18 per share.
• On January 11, 2008, Bank of America announced they would buy Countrywide Financial for $4.1 billion.
• This purchase made Bank of America Corporation the leading mortgage originator and servicer in the U.S., controlling 20–25% of the home loan market.
• Countrywide Financial has changed its name to Bank of America Home Loans.
Acquisition of Merrill Lynch• On September 14, 2008, Bank of America announced its intentions to
purchase Merrill Lynch & Co., Inc. in an all-stock deal worth approximately $50 billion.
• At the same time Bank of America was reportedly also in talks to purchase Lehman Brothers.
• The market capitalization of Bank of America, including Merrill Lynch, was then $45 billion, less than the $50 billion it offered for Merrill just four months earlier, and down $108 billion from the merger announcement.
• The acquisition made Bank of America the number one underwriter of global high-yield debt, the third largest underwriter of global equity and the ninth largest adviser on global mergers and acquisitions.
• As the credit crisis eased, losses at Merrill Lynch subsided, and the subsidiary generated 3.7 billion of Bank of America's 4.2 billion in profit by the end of quarter one in 2009, and over 25% in quarter 3 2009.
Federal Troubled Asset Relief Program (TARP)• Bank of America received $20 billion in the federal bailout from
the U.S. government through the Troubled Asset Relief Program (TARP) on January 16, 2009, along with a guarantee of $118 billion in potential losses at the company.
• The additional payment was part of a deal with the U.S. government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.
• On December 2, 2009, Bank of America announced it would repay the entire $45 billion it received in TARP and exit the program, using $26.2 billion of excess liquidity along with $18.6 billion to be gained in "common equivalent securities"
Downsizing (2011 to 2014)
• During 2011, Bank of America began conducting personnel reductions of an estimated 36,000 people, contributing to intended savings of $5 billion per year by 2014.
• Bank of America will cut around 16,000 jobs in a quicker fashion by the end of 2012 as revenue continues to decline because of new regulations and a slow economy.
• This will put a plan one year ahead of a time to eliminate 30,000 jobs under a cost-cutting program called Project New BAC.
Operations
• Bank of America generates 90% of its revenues in its domestic market and continues to buy businesses in the U.S.
Consumer• The Consumer Banking organization includes over 5,800 retail
branches and over 18,000 ATMs across the United States.
• Competes with the retail banking arms of America's three other megabanks: Citigroup, JPMorgan Chase, and Wells Fargo.
• member of the Global ATM Alliance
Corporate
• The bank's investment banking activities operate under the Merrill Lynch subsidiary and provides mergers and acquisitions advisory, underwriting, capital markets, as well as sales & trading in fixed income and equities markets.
• Its strongest groups include Leveraged Finance, Syndicated Loans, and mortgage-backed securities.
Investment management
• Global Wealth and Investment Management manages assets of institutions and individuals. It is among the 10 largest U.S. wealth managers.
• Bank of America has recently spent $675 million building its U.S. investment banking business
• looking to become one of the top five investment banks worldwide.
• Its clients include 98% of the Fortune 500 companies in the U.S. and 79% of the Global Fortune 500.
International operations
• In 2005, Bank of America acquired a 9% stake in China Construction Bank, one of the Big Four banks in China, for $3 billion.
• Bank of America currently has offices in Hong Kong, Shanghai, and Guangzhou and was looking to greatly expand its Chinese business as a result of this deal.
• In 2008, Bank of America was awarded Project Finance Deal of the Year at the 2008 ALB Hong Kong Law Awards.
• In November 2011, Bank of America announced plans to divest most of its stake in the China Construction Bank.
• Bank of America operated under the name BankBoston in many other Latin American countries, including Brazil. In 2006, Bank of America sold BankBoston's operations to Brazilian bank Banco Itaú, in exchange for Itaú shares.
• Bank of America's Global Corporate and Investment Banking spans the Globe with divisions in United States, Europe, and Asia.
FinancialsParameters 2011 2010
Tier 1 Capital Adequacy Ratio(%) 9.86 8.60
Debt Service Coverage ratio(%) 0.50 1.08
Current ratio 2.30 2.41
Assets to deposits ratio 2.06 2.24
Efficiency ratio (%) 85.01 74.61
Loans to deposits (%) 89.66 93.07
Cash Deposit ratio(%) 11 17
Net interest yield (%) 2.78 1.96
Earnings (loss) per common share ($) 0.01 -0.37
Diluted earnings (loss) per common share ($) 0.01 -0.37
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