BANKING INDUSTRY ANALYSIS

Team J.D.

• Rick Amburgey

• Melinda Badovick

• Steve Bannen

• Nick Benko

• Graham Blackwell

Outline to Our Presentation

• The regulation and deregulation that banking has gone through.

• The push towards globalization of the banking industry.

• Competition between banking and other financial service companies.

Outline of Presentation cont.

– New technology and how it has changed financial services for the future.

– Finally, how the economic future of the U.S. and other countries will impact the industry.

History of the Banking Industry

• Historically the banking industry has been highly regulated.

• In 1864 the National Bank Act was passed.– This established a national bank system– Also allowed the chartering of national banks.

• In the nearly 150 years since this act, the banking industry has gone through drastic changes.

Regulation

• In 1927 the McFadden Act was passed by Congress, prohibiting interstate banking.

• States had already put heavy branching restrictions on intrastate banking.– The combination of these restrictions created

very little competition as only small, local banks were permitted.

Regulation cont.

• Proponents of regulation:– Small regional banks that could not compete on

a large scale. – The majority of banks at this time were small.– People who feared a monopolistic bank

controlling too much of the nation’s currency.

Regulation cont.

• After stock market crash of 1929, The Glass-Steagal Act was passed in 1933.

• Broke up investment and commercial banking and was direct result of crash.– Government felt must break up these two

sectors in order to preserve economy.– Before the crash banks held 60% of U.S.

financial assets.

Regulatory Institutions

• After depression, regulatory institutions had an enormous job in watching over banks.

• The Federal Reserve is in charge of:– Monetary policies– Regulate state-chartered banks and subsidiaries– Also given power to regulate new

“superbanks”

Regulatory Institutions cont.

• Federal Deposit Insurance Corporation (FDIC) is in charge of:– Guaranteeing deposits of regulated banks up to

$100,000.– Also, regulates banks not covered by the Fed.

• The Office of the Comptroller charters, regulates and supervises all national banks.

• The Fed, FDIC and OCC are the major regulators for financial institutions.

Deregulation

• In 1978 interstate and intrastate deregulation began to occur.

• The Riegle-Neal Act in 1997 eliminated the few branching regulations that were still in existence.

Deregulation cont.

• The recent Financial Services Act freed up banking to enter into all types of financial services.

• This allowed banks to become “Superbank”• The leader in this new financial service

industry has been CitiGroup

Reasons for Deregulation

• Deregulation was desired by larger banks • Consumers also desired access to the best

investment opportunities.• Small banks were opposed to the change.

Globalization

• U.S. financial institutions are now looking to expand into other nations.

• The Internet has provided a new channel to other markets at an inexpensive cost.

• Major efforts for expansion have been made through foreign subsidiaries and joint ventures.

Foreign Subsidiaries

• A subsidiary is another company that is owned by a parent company.– Parent companies in the U.S. are buying foreign

organizations.

• Advantages to owning subsidiary:– It is easier to get around foreign and U.S. tax

laws.– Also limited liability for parent company.

Joint Ventures

• Expansion through purchase of stock in foreign firms.

• This is becoming more common as foreign markets ease regulations.– Singapore is removing its 40% cap on foreign

ownership.– China plans to open up its financial institutions

by 2005.

World Trade Organization

• The WTO has put increased pressure on countries to open up financial industries.

• In 1997 a pledge was made to open up financial institutions.

• In a few years more than 95% of world’s financial service activity will become intertwined.

The Euro

• It has collectively brought together 11 economies.

• This has made the currency almost as large as the dollar.

• Tapping into this new economy will be a emphasis of financial service companies in future.

Foreign Banking In U.S.

• In 1996 foreign banking institutions held almost one trillion in U.S. financial assets.

• This number will increase in the future as the U.S. economy is expected to continue to grow.

• Europe and Japan are leaders in foreign financing.

Competition

• Brokerage and investment firms can now offer banking features.

• The economies bull run since 1991 has made investing much more attractive than savings.

• Companies such as CitiGroup, Merrill Lynch and others are fighting to be leaders in this combined industry.

Technology

• E-commerce offers online banking and investing.

• Offers a channel to communicate at low cost.

• It has created employment problems for brokerage industry.– Online trading and investing threatens job security.

Economy

• Interest rates raised .25 percentage point on Wednesday. Another raise expected in March.

• Higher interest rates causes less borrowing from corporations and individuals.

• This was done in an effort to slow the economy as companies borrow and expand less.

• If less money is borrowed financial institutions will be hurt.

Future of Financial Services

• Deregulation has erased the borders keeping financial institutions apart.

• Combination of services will be required.

• E-commerce will be essential in accessing new markets and customers.

• Utilizing these new options will be essential to achieving success in the future.