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Commercial banks
Commercial banks as a sector of the financial institutions industry overview
The products that modern financial institutions sell and the risks they face are becoming increasingly similar, as are the techniques they use to measure and manage these risks. The two panels in table 11-1 indicate the product sold by the financial service industry in 1950 and in 2003.Three major FI groups-commercial banks, savings institutions, and credit unions –are also called depository institutions because a significant proportion of their funds come from customer deposits. Chapters 11 through 14 describe depository institutions, their financial statement, and the regulation that govern their operations.

Depository institutions

P
art three of the text summarizes the operation of depository institutions. Chapter 11 describes the key characteristics and recent trends in the commercial banking sector.
Chapter 12 does the same for the thrift institutions sector. Chapter 13 describes the financial statement of a typical depository institutions and the rations used to analyze those statement .
Chapter 14 provides a comprehensive look at the regulation under which these financial institutions operate and, particularly, at the effect of recent changes in regulations.

7 . Technology in commercial banking

Certain to affect the future performance of commercial banks (as well as all financial institutions ) is the extent to which banks adopt the newest technology. Including the extent to which industry participants embrace the internet and online banking. Technological innovation has been a major concern of all types of financial institutions in recent years. Since the 1980s, banks, insurance companies, and investment companies have sought to improve operational efficiency whit major investment in internal and external communication, computer and expended technological infrastructure. Internet and wireless communications technologies are having a profound effect on financial services. These technologies are more than just new distribution channels-they are completely different way of providing financial service. Indeed, a global financial service firm such as Citigroup has operations in more than 100 countries connected in real time by a proprietary-owned satellite system.
Technology is important because well-chosen technological investment have the potential to increase both the FI’ s net interest margin –or the difference between interest income and interest expense-and other net income. Therefore , technology can directly improve profitability. The following subsections focus on some specific technology-based product found in modern retail and wholesale banking. Note that this list is far from complete.

Wholesale Banking Services

Probably the most important area on which technology has impacted wholesale or corporate customer services is a bank’s ability to provider cash management or working capital services. Cash management service needs have largely resulted from (1) corporate recognition that excess cash balances result in a significant opportunity cost due to lost or forgone interest and (2) corporate need to know cash or working capital positions on a real-time basis. Among the services that modern banks provider to improve the efficiency with which corporate clients manage their financial positions are these:
1. controlled disbursement accounts. An account feature that allows all payment to be made in a given day to be known in the morning. the bank informs the corporate client of the total funds it needs to meet disbursement, and the client wire transfers the amount needed. These checking accounts are debited early each day so that corporations can obtain an early insight into their net cash positions .
2. account reconciliation. A checking feature that records which of the firm’s checks have been paid by the bank .
3. lockbox services. A centralized collection service for corporate payments to reduce the delay in check clearing, or the float . in a typical lockbox arrangement, a local bank sets up a lockbox at the post office for a corporate client located outside the area. Local customers mail payment to the lockbox rather than to the out-of-town corporate headquarters. The bank collects these checks several times per day and deposits them directly into the customer’s account. Details of the transaction are wired to the corporate client.
4. electronic lockbox. Same as item 3 but the customers receives on-line payments for public utilities and similar corporation clients.
5. funds concentration. A service that redirects funds from accounts in a large number of different banks or branches to a few centralized accounts at one bank.
6. electronic funds transfer. Includes overnight payments via CHIPS or Fed wire , Automated payment of payrolls or dividends via automated clearinghouses (ACH s), and automated transmissions of payment massage by SWIFT, an international electronic massage service owned and operate by U.S. and European banks that instructs banks to make specific payments.
7. check deposit services. Encoding ,endorsing, microfilming, and handling customers’ checks.
8. electronic initiation of letters of credit. allows customers in a network to access bank computers to initiate letters of credits.
9. treasury management software. allows efficient management of multiple currency and security portfolios for trading and investment purposes.
10. electronic data interchange. A specialized applications of electronic mail, allowing businesses to transfer and transact invoice, purchase orders, and shipping notices automatically, using banks as clearinghouse.
11. facilitating business-to-business e-commerce. A few of the largest commercial banks have begun to offer firms the technology for electronic business-to-business commerce. The banks are essentially automating the entire information flow associated with the procurement and distribution of goods and services among businesses
12. Electronic billing. provides the presentment and collection services for companies that send out substantial volumes of recurring bills. banks combine the email capability of internet to send out bills with their ability to process payment electronically through the inter bank payment networks
13. verifying identities. using encryption technology a bank certifies the identities of its own account holders and serves at the intermediary through which its business customers can verify the identities of account holders at other banks
14. Assisting small business entries in e-commerce. helps smaller firms in setting up the infrastructure-interactive website and payment capabilities for engaging in commerce.



Retail banking services
Retail customers have demanded efficiency and flexibility in their financial transaction. using only checks or holding cash is often more expensive and time consuming than using retail oriented electronic payment technology, and increasingly , the internet. Some of the most important retail payment product innovations include the following

1. automated teller machines (ATM).allow customers 24 hours access to their checking accounts. they can play bills as well as withdraw cash from these machines. in addition, if the bank ATM’s are part of a bank network (such as CIRRUS,PLUS or HONOR) retail depositors can gain direct nationwide and in many cases international access to their deposit accounts by using the ATM of other bank in the network to draw on their accounts
2. point of sale debit (POS) cards. allow customers who choose not to use cash, checks, or credit cards for purchases to buy merchandise using debit card/point of sale (POS) terminals. the merchant avoids the check float and any delay in payment associated with credit card receivables since the bank offering the debit card/POS service immediately and directly transfer funds from customers deposit account to the merchants deposit account at the time of card use. unlike check or credit card purchases, the use of debit card results in an immediate transfer of funds from the customer’s account to the merchant’s account. Moreover, the customers never runs up a debit to the card issuer as is common with a credit card .
3. home banking. Connects customers to their deposit and brokerage accounts and provides such services as electronic securities trading and bill-playing service via personal computers.
4. preauthorized debits/credits. Includes direct deposit of payroll checks into bank accounts and direct payments of mortgage and utility bills.
5. paying bills via telephone. Allows direct transfer of funds from the customer’s bank account to outside parties either by voice command or by touch-tone telephone.
6. email billing. Allows customers to receive and pay bills by using the internet. Thus saving postage and paper.

7. on-line banking. Allows customers to conduct retail banking and investment services offered via the internet in some cases this involves building a new on-line internet only bank, such as Security First Network Bank of Atlanta.
8. smart cards ( stored-value cards ). Allows the customers to store and spend money for various transaction using a card that has a chip storage device, usually in the farm of strip. these have become increasingly popular at universities .

Early entrants into internet banking have been bank that have introduced new technology in markets with demographic and economic characteristic that help ensure customers acceptance, e.g., urban banks with a strong retail orientation that have tailored their internet offering to their retail customers. For example, in early 2001, city-group reported a total of 2.2 million online customers. Similarly, J. P. Morgan chase repotted a total of 750.000 online customers and wells Fargo 2.5 million. Bank of America reported it had been signing up 130.000 online customers per month in early 2001. these early entrants have generally developed their internet related product to gain access to non core , less traditional sources of funds. Bank that have invested internet banking as a complement to their existing services, have performed similar to those without internet banking, despite relatively high initial technology related expenses. in particular, these bank generally have higher non interest income (which offsets any increased technology expenses ) . further, the risk of banks offering internet related banking product appears to be similar to the risk of those bank without internet banking.

In addition to development of internet banking as a complement to the traditional services offered by commercial banks, a new segment of the industry has arisen that consist of internet-only banks, that is, these banks have no “brick and mortal” facilities, or are “bank without walls” in these banks, all business is conducted over the internet. However, internet-only banks have yet to capture more than a small fraction of the banking market. While ATMs and internet banking may potentially lower bank operating costs compared to employing full-service tellers, the inability of machines to address customers concerns and question flexible may drive retail customers away : revenue losses may counteract any cost-saving effect. Customers still want to interact with a person for many transaction. For example, a survey of the home buying and mortgage processing by the mortgage bankers association ( in 2000) found that, while 73 percent of home buyers used the internet to obtain information on mortgage interest rates, only 12 percent applied for mortgage via the internet and only 3 percent actually closed on a mortgage on the internet. as new technology is implemented, banks cannot ignore the issue of service quality and convenience. Indeed , the survival of small banks in the face of growing nation wide branching may well be due in part to customers’ beliefs that overall service quality is higher with tellers who provide a human touch rather than the internet banking and ATMs more common at bigger banks, even internet-only banks are recognizing this as “ virtual” bank such as security first network bank (the first internet-only bank) added 150 “ bricks” (branches ) in 2000. further, a new type of customers service will be needed; customers require prompt , well-informed support on technical issues as they increasingly conduct their financial business electronically.

8 regulators
While chapter 14 provides a detailed description of the regulation governing commercial banks and their impact on the banking industry, this section provides a brief overview of the regulators of this group of Fl S. Unlike other countries that have on or sometimes two regulators, U.S. banks may be subject to the supervision and regulation of as many as four separate regulators. These regulators provider the common rulers and regulation under which banks operate. They also monitor banks to ensure they abide by the regulation imposed. As discussed in chapter 4 it is the regulators’ job to among other things, ensure the safety and soundness of the banking system. The key commercial bank regulators are the federal deposit insurance corporation ( FDIC), the office of the comptroller of the currency (OCC), the federal reserve system (FRS), and state bank regulators. The next section discuss the principal role that each plays.

Federal deposit insurance corporation
Established in 1933, the federal deposit insurance corporation ( FDIC ) insures the deposit of commercial banks. In so doing, it levies insurance premium on banks
Manages the deposit insurance fund ( that is, generated from those premiums and their reinvestment ),and conduct bank examination. In addition, when an insured bank is closed, the FDIC acts as the receiver and liquidator, although the closure decision it self is technically made by the banks chartering or licensing agency ( see below ). Because of problems in the thrift industry and insolvency of the saving association insurance fund ( FSLIC ) in 1989 ( see chapter 14), the FDIC now manages both the commercial bank insurance fund the saving association insurance fund. The bank insurance funds is called BIF and the saving association fund is called the savings association insurance fund, or S A l F ( see chapter 12). The number of FDIC-BIF insured banks and the division between nationally and state-chartered banks is shown in figure 11-10.

Office of the comptroller of the currency
The office of the comptroller of the currency (OCC) is the oldest U.S. bank regulatory agency. Established in 1863, it is organized as a sub agency of the U.S. treasury its primary function is to charter nation banks as well as to close them. In addition, the OCC examines national banks and has the power to approve or disapprover their merger application instead of seeking a nation charter, however, banks can seek to be chartered by 1 of 50 individual state bank regulator agencies .
Historically, state chartered banks have been subject to fewer regulation and restriction on their activities than nation banks. This lack of regulatory oversight was a major reason many banks chose not to be nationally chartered. Many more recent regulation ( such as the depository institution deregulation and monetary control act 1980 ) attempted to level the restrictions imposed on federal and state chartered banks (see chapter 14 ). Not all discrepancies, however, were changed and state chartered bank are still generally less heavily regulated than nationally chartered banks. The choice of being a nationally chartered of state-chartered bank lies at the foundation of the dual banking system in the united states. Most large banks, such as city bank, choose nation charters, but others have state charters. For example, Morgan guaranty, the money center bank subsidiary of J.P. Morgan chase, is chartered as a state bank under state of New York law. At year-end 2001 2,137 banks were nationally chartered and 5,943 were state chartered, representing 26.4 percent and 73.6 percent, respectively, of all commercial bank assets.

Federal reserve system

In addition to being concerned with the conduct of monetary policy, the federal reserve, as this country’s central bank, also has regulatory power over some bank and where relevant, their holding company parents. All 2,137 nationally chartered banks shown in figure 11-10 are automatically members of the federal reserve system (FRS). In addition, 972 of the state-chartered banks have also chosen to become members. Since 1980, all banks have had to meet the same non interest- bearing reserve requirements whether they are members of the FRS or not. The primary advantage of FRS membership is direct access to the federal funds wire transfer network for nationwide inter bank borrowing and lending of reserves finally, many banks are often owned and controlled by parent holding companies-for example, city group is the parent holding company of city bank ( a nation bank). Because the holding company’s management can influence decision taken by a bank subsidiary and thus influence its risk exposure, the FRS regulates and examines bank holding companies as well as bank themselves .
State authorities
As mentioned above, banks may chose to be state-chartered rather than nationally chartered. State-chartered commercial banks are regulated by state agencies. State authorities perform similar function as the OCC performs for national banks.


9. Global issues
For the reasons discussed in earlier chapters, financial institutions are of central importance to the development and integration of market globally. However, U.S. financial institution must now compete not only with other domestic financial institution for are share of these markets but increasingly with foreign financial institution. Table 11-8 list the 20 largest banks in the world, measured by total asset, as of July 2001. only 3 of the top 20 banks are U.S. banks .the three-way merger between the industrial banks of Japan , Fuji bank, and Dai-Ichi Kangyo bank in 2000created the world’s largest banking group MIZOHU financial group with assets of over $1,29 billion table 11-9 list foreign bank office’ assets and liabilities held in the united state from 1992 through 2001. total foreign bank assets over this period increased from $509.3 billion to $850.9 billion. The world’s most globally active bank, based on the percent of their assets held outside their home countries, are listed in table 11-10. these include the big Swiss banks ( union bank of Switzerland and credit Swiss ) as well as one U.S. bank, American express bank. The two largest U.S. banks, Citigroup and J.P. Morgan chase ranked 28th ( with 36.41 percent of the their business overseas ) and 29th ( with 35.34 percent of their business overseas ), respectively .

Advantages and disadvantages of international expansion
International expansion has six major advantages:

Risk diversification as with domestic geographic expansion and F I’ s international activities potentially an enhance its opportunities to diversify the risk of its earning flows. Often domestic earning flows from financial services strongly linked to the state of the domestic economy. Therefore the last integrated the economies of the world are the greater is the potential for earning diversification through international expansion.

Economies of scale. To the extent that economies of scale exist. An FI can potentially lower is average operating costs by expanding is activities beyond domestic boundaries.

Innovation. An FI can generate extra returns from new product innovation if it can sell such services internationally rather than just domestically. For example, consider complex financial innovations, such as securitization, caps , floors, and options, that FI s have innovated in the united states and sold to new foreign market with few domestic competitors until recently .

Found source . international expansion allows an FI to search of funds. This is extremely important with the very thin profit margins in domestic and international wholesale banking it also reduces the risk of fund shortages ( credit rationing ) in any one market .

Customers relationship . international expansions also allow an FI to maintain contact with and service the needs of domestic multinational corporations. Indeed, one of the fundamental factors determining the growth of FI’ s in foreign countries has been the parallel growth of foreign direct investment and foreign trade by globally oriented multinational corporation from the FI’ s home country.

Regulatory avoidance . to the extent that domestic regulations such as activity restriction and reserve requirements impose constraints or taxes on the operations of an FI, seeking low-tax countries can allow an FI to lower its net regulatory burden and to increase is potential net profitability .