Chapter 12

Question 0

McFadden Act

Answer 0

• of 1927 prohibited interstate banking and otherwise limited branching across state lines to prevent formation of a few large nationwide banks from monopolizing the financial markets
• many states also prevented branching within state boundaries
• there were loopholes that enabled banks to operate loan offices across state borders, NY banks had in most large metropolitan areas
• ## Exception under McFadden Act that said bank holding companies, parent company that own one or more subsidiary banks, can acquire banks across state lines if the state permitted (Maine 1st to permit)

Question 1

** Consolidation

Answer 1

• there were 14,000 banks in 1980 and today there are fewer than 6,000 individual banks

Question 2

Riegle-Neal Act:

Answer 2

• b/c of so many holding companies, congress passed Riegle-Neal Act which says that banks can acquire banks and establish cross-state branches, if the state permits this.

Question 3

** Reasons for Consolidation:

Answer 3

• In 1980 there were 14,404 individual banks, in 2007 there were 7,282
• Many people believe McFadden acts artificial walls created by many banks
• Many say that banks need to offer a wide menu of different products
• Efficient banks acquired non efficient banks with assets > 5 billion
• A lot of inefficient banks b/c of Reg Q and McFadden act protected inefficient banks

Question 4

Off-balance sheet (OBS) activities:

Answer 4

generate income w/o activities that appear on the balance sheet as an asset/liability

Question 5

• • Non-traditional banking
• Trust Services
• Leasing of assets
• **Letters of credit
• Bank issued guarantees
• interest rate swaps

Answer 5

• trust services are a set of professional assurance and advisory services based on a common framework to address the risks and opportunities of IT.
• leasing of assets is buying an asset and leasing it to someone who will use it (3-5 yrs at a time)
• letter of credit is a financial guarantee given by a bank to insure payment by one of its customers to a third party
• make money on buying low and loaning high

Question 6

3 reasons for OBS activities

Answer 6

1. Substitute for corporate lending failing
2. Desire to move to a fee-based system of income generation
3. Reduce capital requirements (not a good one per Kip)