Chapter 3 Depository Institutions: Activities and Characteristics Foundations of Financial Markets and Institutions 4th edition 2009 Frank J. Fabozzi Franco Modigliani Frank J. Jones

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Depository Institutions:
Activities and
Characteristics
Chapter 3

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Asset/Liability Problem
Spread Income
Types of Risk
Credit Risk
Regulatory Risk
Interest Rate Risk

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Liquidity Concerns
Ways to accommodate withdrawals and
loan demand
Attract additional deposits
Use currently-owned securities as collateral
for loans from other institutions
Raise short-term funds in the money market
Sell currently-owned securities

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Depository Institutions
Commercial Banks
Savings and Loan Associations
Savings Banks
Credit Unions

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Commercial Banks
As of Q2 2007, 7350 commercial banks
25% national banks, but holds 65% assets
Bank deposits insured by FDIC

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Asset Size of Banks

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Top 30 Largest Banks

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Top 30 Largest Banks (continued)

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Bank Services
Consumer Banking
Installment loans, residential mortgage loans,
credit card loans, brokerage services, student
loans, etc.
Institutional Banking
Commercial real estate finance, leasing,
factoring
Global Banking
Corporate finance, capital market and foreign
exchange market products and services

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Bank Funding
Deposits
Demand and Time Deposits
Non-Deposit Borrowing
Fed Discount Window and Federal Funds Market
Retained Earnings and Equity Securities
Other Non-deposit Borrowing
Issuance of Debt Securities

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Capital Requirements for Banks
Risk-based capital requirements
Basel 1 Framework
Basel 2 Framework
Three “pillars”
Minimum risk-based capital requirements
Supervisory review of capital adequacy
Market discipline through public disclosure

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Capital Requirements
Risk-Based Capital Guidelines
Tier 1 (Core Capital)
Common stock, certain preferred stock, and
minority interest
Tier 2 (Supplementary Capital)
Loan-loss reserve, certain preferred stock,
perpetual debt, hybrid capital instruments, and
subordinated debt

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Credit Risk Weight Capital Requirement

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Savings and Loan Associations
Principal assets
Mortgages
Mortgage-backed securities
Government securities
Principal sources of funds
Passbook savings accounts
Time deposits
Regulation

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Regulation of S&Ls
Home Owners Loan Act of 1933
Office of Thrift Supervisor
Depository Institutions Deregulation and
Monetary Control Act of 1980
Deregulated interest rates on deposits

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Factors in The S&L Crisis
Borrowing short and lending long
Interest rate ceilings on deposits
Volatile interest rates
Fraudulent management activities
High-risk strategies

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Savings Banks
Mutually owned or stockholder owned
Principal assets
Residential mortgages
Principal source of funds
Deposits

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Credit Unions
Owned by members
Principal assets
Small consumer loans
Residential mortgages
Securities
Principal source of funds
Member deposits

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Types of Credit Unions
National person credit union
Provide services to qualified members of
the general public
Corporate credit union
Provides services to national person credit
unions

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