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Chapter: 03

The Organization & Structure of Banks & Their Industry

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Organizational Forms of Banks

The arrangement of personnel & departments within a bank to produce & deliver its services. A bank with heavy involvement in consumer loans & deposits is called “Retail Bank”. The bank which concentrates mainly upon serving commercial customers & making large corporate loans is called “Wholesale Institution”.

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Differences between Large & Small Banks

Small Banks: The service operations of small banks are usually monitored by a Cashier & Auditor working in the accounting division & by Vice-Presidents heading up the bank’s loan-fund raising, marketing & trust departments. These officers reports to the Senior Executives of the bank, consisting of the board Chairman; the President, who usually runs the bank from day to day; & Senior Vice Presidents, who are responsible for long-range planning & for assisting heads of the various departments in solving their most pressing problems. Senior management, in turn, reports periodically to the members of the Board of Directors that is selected by the Stockholders.

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Differences between Large & Small Banks---Contd

Large Banks: This bank is owned & controlled by a holding company whose stockholders elect a Board of Directors to oversee the bank & nonbank firms allied with the same holding company. The largest institutions serve many different markets with many different services, they are better diversified – both geographically & product line – to withstand the risks of a fluctuating economy.

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Unit Banking Organization

The oldest kinds of banking, offer all of their services from one office, though a small number of services [taking deposits, cashing checks ] may be offered from limited-service facilities such as:

• Drive-up windows.

• Automated teller machine (ATM)

• Retail store point-of-sale terminals.

Reasons for the growth of Unit banking system are:• Rapid formation of new banks.

• On-line banking.

• Megamergers.

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Branch Banking

It serves a rapidly growing region & finds itself under pressure either to follow its business & household customers as they move into new areas or lose them to more conveniently located competitors.

Senior management of a branch banking organization is usually located at home office, though each full-service branch has its own management team with limited authority to make decisions on customer loan applications & other facets of daily operations.

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Branch Banking----Contd

Branch Banking System

Full-ServiceBranchOffice

Home orHeadOffice

Full-ServiceBranchOffice

Drive-upWindow

ATM orPoint-of-saleTerminals in

Store

ElectronicCommunications

networks

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Branch Banking----Contd

Reasons for the growth of Branch Banking: Shifting of population from cities to suburban communities. Bank failures causes healthier banks to take over sick ones &

convert them into branch offices. Growth of business increases the credit needs of rapidly growing

corporations.

Advantages of Branch Banking/Argument for Branch Banking: Greater operating efficiency. Increases the availability & convenience of services to customers. Stimulate faster economic growth. Fewer bank failures because a branch bank is less dependent on

the volume of business from single industry or local market area.

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Branch Banking----Contd

Argument Against Branch Banking:– Drives out small competitors.

– Leaving the customer with fewer sources of banking services.

– Leads to higher service fees.

– Drains scarce capital away from local communities toward the largest cities.

– Slowing local economic development.

– Loans & deposits interest rates increases through mergers.

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Bank Holding Company Organizations

A bank holding company is simply a corporation chartered for the purpose of holding the stock of at least one bank.. Banks acquired by holding company are identified as Affiliated Bank. Any company has control over a bank or over any company if—

(A)The company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any class of voting securities of the bank or company;

(B)The company controls in any manner the election of at least two directors of at least one bank or company; or

The Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.

(C) Prior approval taken from Fed.

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Types of Bank Holding Company

Two types of Bank Holding Company One Bank Holding Company Multi-bank Holding Company

For any multi-bank holding company to acquire direct or indirect ownership or control of any voting shares of any additional bank if, after such acquisition, such company will directly or indirectly own or control more than 5 percent of the voting shares of such bank; again prior approval from the fed is required.

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Advantages of Bank Holding Company

- Greater Efficiency- Different types of Services- Lower possibilities of Failure- Higher & stable profit

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Disadvantages of Bank Holding Company

- Reduce competition- Increase service charges- Ignore the credit needs of small towns &

cities- Accept higher High

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Other forms of Bank

Financial Holding Companies (FHC)– Offers broadest range of financial services– Each affiliated financial firm has its own capital,

management, profit/loss which are separated form each other. So, each firm has protection against company-wide losses.

Bank Subsidiaries (BS)- Parent bank controls the subsidiaries and can

offer different financial services. Profit/loss of each subsidiary affects the parent bank and thus the risk exposure is high.

- Size limits are imposed upon this (BS) form of organization

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Foreign Bank penetration of Domestic Market

Representative Offices: Facilities operated in a different region or nation from a bank’s home office that provide links back to the home office.

Agency Offices: Offices that provide limited services to customers in distant markets, such as credit & cash management services.

Full-Service Branches: Offices that provide the same full menu of services as a bank’s home office.

Shell Branches: Special offshore facilities set up to raise new funds & avoid some regulations.

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Reasons for the Rapid Growth of Foreign Bank Activities

1. The financing of exports from the home country to host country.

2. Providing services to foreign nationals who have come to study or work.

3. Tapping the Money Market for liquid funds.

4. Assisting with the flow of foreign capital into the most promising local investments.

5. Avoiding regulatory restrictions on banking in their home countries by entering the more open local market.

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Foreign Banks in Bangladesh

1. American Express Bank Ltd. 2. Citibank N.A 3. Commercial Bank of Ceylon Limited. 4. Habib Bank Ltd. 5. National Bank of Pakistan 6. Shamil Bank of Bahrain E.C. 7. Standard Chartered Bank Ltd. 8. State Bank of India 9. The Hong Kong and Shanghai Banking Cor.

Ltd.(HSBC)

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Goals of Financial Firms

Expense Preference Behavior Agency Theory

- Agency cost and performance depend on effectiveness of corporate governance

Shareholders wealth maximization