Industry sign banking missouri pdf later
what we want to do today is start talking about banks what we talked about the last couple of classes with this asymmetric information idea was why banks exist what role do they play in the economy that nobody else really is and the answer is they're dealing with asymmetric information in the case of loans the other thing they did if you'll recall is to reduce transactions cost for both savers and borrowers but anyway so there's this function performed by banks what is the nature of banking if we think about the bank and by the way we could draw a similar picture for all financial institutions but banks bring in deposits and then they make loans now this is what they specialize in and really in terms of a specialty their specialization is demand deposits that is to say bankers have traditionally done this and done it more than other financial institutions and this is just what they are best known for those of us with checking accounts or typically doing business with a commercial bank and then although they make loans and really make other types of investments as well as the commercial loan that are their specialty loans to businesses and that's what we mean by commercial loan okay now there are other places that banks bring dollars in or other ways they bring those dollars in and they send those dollars out for other things but that's their specialty demand deposits in commercial loans out and we're going to talk more about this really in the next chapter of material ok but anyway every financial institution we could draw a boxer and we could show the financial institutions bringing dollars in and sending dollars out but for each financial institution the specialty is a little bit different if we put savings on loans up here their specialty is bringing in savings deposits and their specialty is sending out loans for homes so mortgages if we talked about credit unions their specialty is bringing in savings deposits and making personal loans ok and it's the same thing for every type of financial institution there's some little picture that we could draw and really once you can draw that picture then you kind of think boy I can think my way through this problem here you know it's like I know what institution does but every and I'll put the term up here every one of these financial institutions goes under this general heading of financial intermediary and the idea Bob of the financial intermediary intermediary middleman there is somebody over here with those dollars those deposits and there's somebody over here that needs those funds and the previous chapter previous unit material we talked about savers and borrowers or investors okay so basically financial intermediary they always and perform a function of this nature is they specialize in bringing dollars in one way and specialize and how they put those dollars to use okay so anyway well let's go on I don't want to belabor that too much if we go back to the history of the United States and we're gonna talk a little bit later about the history of banking in the United States but if we go back to the history of banking in the United States you go back to the period and you know 1776 going forward and the very first banks in the United States were basically specialize in it we didn't have demand deposit that at that point what would happen is somebody come in and give gold or silver or foreign currencies or whatever to a bank and the bank would hand them not a checkbook but the bank would hand them currency that that bank issued and so it was a piece of paper that you could spend which is more or less what a checking account is and then those banks would specialize in making business loans so this has been the story of banking in the United States when we use this term bank or banking the official term and here's though the word that gives rise this the official term is these are commercial banks okay their specialty is making commercial loans or business loans sometimes we'll hear these referred to as business loans and sometimes you'll hear these referred to see and eye loans CNI commercial and industrial loans but it always boils down to this same thing this is their specialty now how do banks earn a profit and by the way let me just say for I get into this banks are private companies you can own a bank I can own a bank pretty much anybody in theory could own a bank you cannot be a convicted felon and that would not be smart to give a bank charter to gather deposits up and give those a way to you know convicted felons they would love that anyway the felons would love it I've we depositors wouldn't but so what we have is a private company a bank it's owned by private investors not by the government and many other countries governments do own banks and that has been a problem before those other countries what happens is when the bank is owned by government then what happens is the people who run the Bank tend to get their orders from politicians and very often they make loans that are not gonna be paid back but they make those loans because it's politically popular there's pressure to do that but anyway I don't want to go down that path very far anyway the point is we've got these businesses and they're organized to earn a profit that's what the shareholders want okay now the question is how do they are in a profit here's the first way and the term I always used as they play the yield curve and let me just draw it a little graph here to illustrate what I mean by that not very long ago we were talking about yield curves and we were saying those yield curves normally have this positive slope to him okay well here's what bankers do they take in deposits and I just talked about this a moment ago where bankers are taking in deposits bankers take in deposits that tend to be shorter term checking deposits have no maturity right you can put money into a checking account and go right out and write a check that day so bankers take in shorter term deposits and then what they do is they make loans that have a longer maturity and so if the risk we're exactly the same and I'm not saying it is but if the risk were exactly the same then due to the fact that the you curves got a positive slope means that bankers would be basically paying a low interest rate to depositors and then charging a higher interest rate from lenders simply because the lender has used of that was funds for a longer period of time okay and so banks are basically just taking the money in short term saying hey that's a short term deposit here's a little bit of interest they're lending the money out longer term and saying boy this is for quite a while we're gonna charge you a higher interest rate there's more to the story than that but that is an essential part of what's taking place now I won't spend too long with this but you may want to think about this for a second hey how could a banker take it and there are more than just demand deposits they're checking or savings deposits but how could a bank take in a short term deposit let's say it's a one-month deposit and then turn around and make a loan that's maybe for five years which would be 60 months could you take in a one-month deposit from somebody and then loan that out to somebody for 60 months would you be comfortable doing that cuz that money is gone you know like if you lend money to somebody to buy a car they say okay I'm gonna go buy a car they buy that at the end of the month this depositor says I want my money back then what do you do you go to the car buyer and go and he could could I'd that money back no so here's what the bank does the banker the banker will take your deposit and lend it to somebody for five years by the way 30 years - but they'll lend that money to somebody for four five years 60 months and then here's what the banker is counting on when you come back in and you want your money in one month the bankers gonna get somebody else to give them a one-month deposit or a two-month deposit or where but they're gonna get a deposit from somebody else and when you want your money back they're gonna give you the other depositors money and then after another one or two or three months or whatever would be this next depositor comes it says I want my money back the banker says okay and he's counting on getting another deposit somebody else and paying a second depositor back and so basically if we just think of these as one month deposit each time the banker is thinking I'm gonna get 60 people in a row to come in here and let me had their money and I'm gonna basically use this 60 in the series of 61 month deposits to fund or to finance a 60 month loan a home loans 360 months I'll do it 360 times in a row and by the way that's not the end of it you might deposit $1,000 in the bank and the banker may lend out $20,000 to somebody buy a car and so it's not just a case of I'll do this 60 times but I'll also do it 60 times 20 I need $20,000 to lend out not $1,000 and so partly the banker is being paid for basically playing the yield curve but partly what the banker is being paid for doing is serving as a place to gather up these deposits to make these loans by the way this is exactly what we talked about at the end of that last unit I said oh why do bankers exist to deal with asymmetric information and then at the end I said to lower transactions cost well here's the transaction cost and that's what I'm describing right now if you wanted to buy a car 60 months and there were people out here with some money to lend to you the transactions costs would be very high of finding 20 people to give you $1,000 and then paying each one of those 20 people back at the end of the month and borrowing from another 20 people at the to that month and so forth the banker is lowering your transaction cost by a lot so the banker is doing that okay okay and I'll just write that down lower transaction cost people come to the bank because the banker lowers transaction costs okay a third thing which we already talked about is they deal with asymmetric information and by that another way of describing this is they are specialists at making loans not only making all but getting the loan repaid right they collect information they screen they require collateral after the loan is made they monitor these payments come in make sure that any agreements that are in the loan are adhered to they cease collateral if the loans not paid off and so forth okay they price that credit risk appropriately the other thing they do and this is not dominant yet but it's of increase in importance is they earn money from their off-balance-sheet activities which another way of saying that's just services these things that I was talking about before bringing in deposits and making loans those go on the banks balance sheet the deposits a liability the loan is an asset on the bank's balance sheet but other things happen where banks just charge a fee and some of these you know about and this is an old one but safe deposit boxes if you go to a bank and say hey do you have a safe deposit box they say yes and so then they take you into a room all these metal boxes there they charge you I don't know $30.00 a year or whatever it depends on the size of the box a charge you $30 a year you pay a fee whatever you put in that box does not go into their balance sheet it's yours they are just charging you for safekeeping okay well anyway as that's an old service that banks have offered for a long time but what they're doing is as time goes by finding more and more services that they can sell to the public and then charge a fee for that and so these off-balance sheet activities are of growing importance other things they do would be like charge for checks that you might bounce and things like that these would be off balance sheet activities okay any questions about this for we're going yes sir well how hard if they knew you were putting cash in your safe-deposit box how hard where they didn't try to get you to deposit bankers always want you to make a deposit whether it's in your safe deposit box or wherever it is so that's the constant they do not know what you're putting in your safe deposit box cuz that's a secret you go in that little room and there's nobody going but well you sure have a lot of cash you want to make a deposit they just don't do that so no they can't look it's a secret you know I mean I keep comic books and stuff in mine then I go in during the lunch hour with a sandwich I sit down I get the comic books out I get the sandwich out sit in that little room anyway no they simply don't know what's in there if you would die then there will be somebody go in not the bank anyway some bank officer will go in there with a key and if they've got a key and you're you know whoever's managing your trust or whatever mmm they'll have your key and then the banker will open it and they'll back off so they don't find out even after you die okay and I'm we're assuming that the bank complies with the law there could surely be some dishonest banker that would know but that will be the you know one of the million cases but they just don't know but while you come in they may say hey are you interested in hearing about our super duper savings account for people with red hair or you know or whatever and then because they have got some way of attracting depositors and I mean they are always thinking about what that is and so no doubt they'll use that as an opportunity to market something to you yes sir yeah what I'm saying is this is that if there are no banks and then each one of us has savers are trying to lend money and earn some interest then in that setting borrowers will take that money from you and not pay it back and that is what creates the role for banks and that is what they specialize in is preventing that they collect a lot of information they analyze that information they require collateral and so forth so they know how to deal with that information better than we as individuals do okay anyway so this is a general story of what banks are up to they're bringing in deposits they're making loans they're doing these types of things here to earn a profit okay now that leaves a pretty wide scope you know a pretty wide range for Bank operations there are about 7,000 7,500 banks in the United States these are commercial banks in USA the numbers been declining over the years and so probably closer to 7,000 to 7,500 but anyway someplace in that range there are in addition to that there are other institutions that are not commercial banks but they take in deposits and they make loans of various types and so some people that are discussing banking they will want these other institutions like savings or loans in with banks and credit unions and so forth and I'm not doing this when I say there are 7,000 7,500 banks I mean commercial banks that specialize in demand deposits commercial loans then there are other institutions that do take in deposits and do make loans but that demand deposit commercials are not their specialty there are probably twelve hundred or so savings Alone's and there are probably gosh ten thousand credit unions there are thousands of credit unions and I'm really not focused on them right now we'll be talking about banks unless I say credit unions or savings and loans okay there are types of banks and we'll have three categories here money center banks regional banks and community banks so let's just talk about them in that order money center banks are huge that's the number one rule I don't know if that's number one that is definitely true there are huge institutions with assets sometimes in the trillions of dollars total assets total assets is how much money what's the dollar value of everything that that Bank holds hundreds of billions up to trillions of dollars luau and say trillions in less than two but more than one I printed out a chart that I got from the Federal Reserve let's see JP Morgan Chase this is formed by mergers between several institutions JP Morgan Chase total assets one point seven trillion dollars pretty big huh anyway that would be an example of a money center bank 1.7 trillion dollars now I am not telling you these things so you'll know every possible number but anyway domestic assets 1.1 trillion dollars and so they
ave 600 billion dollars in assets overseas they have foreign branches okay this is a huge institution branches in the United States 3600 so just scattered around here there and elsewhere 3600 branches so anyway there would be an example so they're huge they have many US operations and foreign operations typically not every single time something that makes these money center banks is that they attract many funds from sources other than depositors let me come back over here I don't want to let on like they don't have deposits but this thing the specialty I talked about with banks is that they attract a lot of deposits they do money center banks though they're different than will get to the community banks later on community banks are fairly passive and I don't mean to say lazy but for the most part community banks are sitting back and the dollars are flowing in you know and like you get your paycheck and you have an automatically deposit or you maybe take your paycheck the banking you put it in and a banker says thank you very much I'll see you you know next month and these money center banks they are just not waiting for that to happen those money center banks yes they would love it if you drop some cash off for them but those money center banks then they are calling up all around the United States and overseas and hey do you have any money for me and they are very aggressive and seeking this and so they have lots of sources of funds that are not deposits they are just borrowing that money they borrow the money and then they lend the money I told you every financial institution we can draw a little picture like this where do they get the money and where do they send the money and there will be one called a finance company and what a finance company does is it borrows everything there's no deposits a finance company would be an example of what GMAC that makes loans to people who buy cars but then there are also just finance companies that you know you might see one it's all here's a finance company and then you go down and just borrow money from where do they get that money they go out and borrow it so they borrow from one group of people and they lend it to another so what I'm saying to you is money center banks do quite a bit of that okay but they still bring in hundreds of billions of dollars in deposits it's just that they are more focused on this borrowing and the others because they are more aggressive they wait they go out and bond they get all the deposits they can collect and then they say that's not enough let's go get another 100 billion dollars so anyway and then when they lend the money center banks they don't sit back and weigh and somebody comes in says could I apply for a loan the money center banks got sales man sales women and they are just going around and making calls on big companies calls on governmental units state and local governments and also governments overseas and companies overseas and they're going in saying we want to lend you some money so they are very aggressive at finding dollars and then they're very aggressive of putting those dollars to work those are money center banks ok regional banks and also your textbook uses the term super regional banks and you know what super regional means is regional big ok I'm not too wild about the super regional term it's just one of the bigger of the regional banks anyway what regional banks do is this they are still focused on deposits as their main source of funds more than the borrowing aspect like we just described with money center banks ok and then the super regional bank it is doing business within the United States within us focus on deposits as a source of funds and they tend to be large ok a lot of attention to to retail customers retail customers like you and me now there really are not people like you and me but other people just you know just walk in and say hey I want to open an account and so forth these banks have lots of branches when I said they're within the United States a region or most of the u.s. now I'm going to give you an example of a regional bank Bank of America Bank of America is a huge institution let me look at the same table Bank of America's second largest bank on this same table I site at a moment ago it's got one point five trillion dollars in assets so if we just went by size we'd say gosh it's as big as money center banks but the point is this is that even though it's huge its business is different they are not nearly as focused on going out and borrowing that money they are much more an institution that has branch offices and has a lot of retail customers alright and so people come in they open a checking account small businesses come in and borrow some money from Bank America at the local branch how many branches do you have 6,200 branches over six thousand branches and so Bank of America is an institution that is more of a bank doing business with people and small businesses all around the United States they're not in every state but in 40 some states maybe 42 or something like this where as what I say JPMorgan Chase it's in many fewer states many fewer branches but operations in other countries Bank of America really I don't even know if they have any foreign branches let me look oh here we go 95 percent of bank America's assets are within the United States whereas with JPMorgan Chase was what two thirds wasn't it sixty-seven percent yeah okay by the way I mentioned I'll write a couple days down here JP Morgan Chase another one would be Citibank those would be two money center banks that are very well-known what do we have Citibank has 52 percent of its assets within the United States and it is an excess of a trillion dollars in assets okay but has lots and lots of foreign branches they all have a branch in London a branch in Tokyo and so forth and many other countries and in they're doing business overseas with large corporations here's a couple more Wells Fargo and US Bank would be regionals u.s. Bank Corp anyway those would be regional and each one of them has a hundred percent of their assets here in the United States and each one of them is in the hundreds of billions of dollars of asset but not in the trillions okay what we have here with the money center banks I'll put a number up here it kind of depends on how you define things and so forth but we're talking about five banks five or ten that's kind of about an outer limit and then with the regional banks and by the way these I lists would really be what a super regional they would be large at the upper end of that there's a bank much closer to home that would be what Commerce Bank and that would be a regional bank it's got its headquarters in Kansas City okay but anyway these institutions regional super regionals we have about 400 of these banks and they are defined by as I say this sort of focus on retail banking and then operations in multiple states throughout a region okay but all of them have assets of greater than 1 billion dollars these regional banks if they had assets below a billion dollars we've put them in this next category of community banks so I've kind of run out of places to write here let's talk about the community banks for a minute assets less than 1 billion dollars and to focus in as a local not necessarily just one town but that town and maybe the surrounding County your metropolitan area but they don't get very far away ok and they are much more passive they're doing business with retail customers and they're much more passive about people making deposits without being encouraged too much and without working too hard of getting them and then they're much more passive about waiting for somebody to come in and apply for a loan right without going out and rattling everybody's cage and saying would you like to borrow would you like to borrow and there are about 7,000 of these banks more or less I said commerce I put it in a regional category and there are lots of small banks around town that we would put into this community category see this line right down here there's a where I've connected commerce to that yeah to those other banks anyway okay and as I say I don't even know these guys are aggressive the money center banks and also the regional banks I hate to say the community banks are passive but they are just not as aggressive they are much more of waiting for the customer to come to them and they put some ads in newspapers and things like that I wouldn't want to say they don't anyway questions about this before we go on here's the thing I'll go back to this number seven thousand or more why do we have so many banks and you might just go I don't know why not and if you just take our own I mean throughout my life throughout your life there have been thousands and thousands of banks in the United States but if you compare the United States to the rest of the world we have a huge number of banks there are probably in Texas more banks than there are banking companies than there are throughout Europe hundreds of banks this state has I'm gonna say 300 banks banking companies separately chartered separately licensed banking companies more than 300 in this state that's more than most any country in the world so why do we have so many banks and the answer is well you know it's just like everything else there's not a simple answer there's a complicated answer why so many I'm also in the USA because that's where we are those of you foreign viewers we're just focused on the United States now a lot of this is historic one is that there was a suspicion of concentrated financial power in the United States this is historic it's almost in our genes it's really not people in the United States come from everywhere but this has really been a constant throughout America's history you know the people who came to the United States from Europe very often we're leaving countries where there was a ruling class people who just more or less had their way with everybody else and there was this sort of flight away from that to go for you know this land of freedom and land of opportunity and so forth and so anyway people leaving in these areas where there was concentrated not only financial power but also political power and trying to get away from that and just come to this land where each person would go out and have their own little house and manage your own life and so this was part of the story and then later on and this really never left it still exists but then later on we got this populist movement what in the late 19th century and in the early 20th century I think this became like a political party so I'm saying what started off as a tendency became a political party you know back in late 19th century like 1890s and so forth and so there was just this suspicion like that's bad stuff big big big banking companies got to do with them okay then there was this other tendency that is American in nature and I'll just use the term federalism the idea of federalism is this is that government should be controlled by the people that it is governing and so did the expense extent possible let's have governance of the people at the local level and there are some issues that cannot be handled at the local level so let's have the people being governed at the state level and then if there are a few things that people cannot do it either the local level or the state level by you know getting together and establishing government so forth then we will relegate those other responsibilities to the federal level the national level okay and so this whole idea of keeping control government sort of close at home what happened was government state government started regulating banks and so what they would do is they would say something like a state government okay you can open three branches or ten branches or whatever you can branch into the next County or you can branch statewide but the whole idea of a national banking company is just opening branches everywhere that would be something that a national government would allow and historically we have just not had that in the United States historically there's been this suspicion of a big strong national government and then some of the things that national governments may allow such as national banking companies so anyway this is just sort of the general tendencies of Americans now a little bit more history that'll kind of get us to this we had the first bank of the United States 1791 through 19 or 1811 had a 20-year Charter okay so let me back up we've already got at this point in 1791 we've already some banks that are being chartered by States chartered or licenses from States and then this bank had a national charter there's already the suspicion among these people in the United States living in the early states previously the colonies there was already the suspicion a big strong financial power political power and so forth and so in 1791 not long after the country has been in business the national government issues a charter to this big banking company all the other banks had state charters and so what happens this big banking company it does it takes a series of steps I'm not going to go through all these here but basically to make life difficult for the state chartered smaller banks putting a lot of them out of business competing with them and then making loans at least this is the charge making loans to people and companies that are financially or politically connected to the powers that be in Washington DC and so basically just made a whole bunch of people unhappy and then a political movement got started over this and when its initial charter of 20 years was up it was so unpopular that the government did not issue another charter an out of business that went only to be replaced five years later by that's what I'm gonna tell you next time I'll just keep you hanging on the edge of your seat so long I'll see you next time
