Chapter Eleven

Commercial
Banks: Industry
Overview
Commercial Banks

 Commercial

Commercial banks
banks are
arethe
thelargest
largest group
groupof
of financial
financial
institutions
institutionsininterms
terms ofof the
thedollar
dollarvalue
valueofof assets
assets
 Also

Alsocalled
calleddepository
depositoryinstitutions
institutions because
becauseaasignificant
significant
proportion
proportionof of their
their funds
fundscomecomefrom
from customer
customer deposits
deposits
 Major

Major assets
assetsareareloans
loans (financial
(financialassets),
assets), and
andmajor
major
liabilities
liabilitiesare
aredeposits
deposits
 Perform

Perform services
servicesessential
essentialto toU.S.
U.S. financial
financialmarkets
markets

 Play
Playaakey
keyrole
roleininthe
thetransmission
transmissionof
ofmonetary
monetarypolicy
policy

 Provide
Providepayment
paymentservices
services
 Offer

Offermaturity
maturityintermediation
intermediationservices
services
 Banks

Banksare
areregulated
regulatedto
toprotect
protect against
against aadisruption
disruptionin
in
the
theprovision
provisionof
of these
theseservices
servicesand
andthe
thecost
cost this
thiswould
would
impose
imposeononthe
theeconomy
economyandandsociety
societyat
at large
large
Commercial Banks 11-2
Differences in Balance Sheets of
Commercial Banks and
Nonfinancial Firms

Commercial Banks 11-3

 Commercial Bank Assets

 Majority

Majorityof
of the
theassets
assetsheld
heldby
bycommercial
commercialbanks
banksare
are loans
loans

 In
In2019,
2019,net
netloans
loansand
andleases
leasesamounted
amounted55.7%
55.7%of
oftotal
totalassets
assets
 Bank

Bankpremises
premisesand
andfixed
fixedassets,
assets, other
otherreal
real estate
estate
owned,
owned, intangible
intangibleassets,
assets, and
andall
all other
otherassets
assets amounted
amounted
to
to22.9%
22.9%ofof total
totalassets
assetsin in2019
2019
 Investment

Investmentsecurities
securities generate
generateinterest
interest income
incomeand
and
provide
providebanks
bankswithwithliquidity
liquidity

 Include
Includeinterest-bearing
interest-bearingdeposits
depositspurchased
purchasedfrom
fromother
otherFIs,
FIs,
federal
federalfunds
fundssold
soldto
toother
otherbanks,
banks,repurchase
repurchaseagreements,
agreements,
U.S.
U.S.Treasury
Treasuryand andagency
agencysecurities,
securities,municipal
municipalsecurities
securities
issued
issuedbybystates
statesand
andpolitical
politicalsubdivisions,
subdivisions,mortgage-backed
mortgage-backed
securities,
securities,and
andother
otherdebt
debtand
andequity
equitysecurities
securities
 In

In2019,
2019,the
theinvestment
investmentportfolio
portfoliototaled
totaled21.4%
21.4%of oftotal
totalassets
assets

Commercial Banks 11-4

Distribution of Commercial Bank
Assets, Liabilities, and Equity, 2019

Commercial Banks 11-5

 Commercial Bank Assets
(Continued)

 Commercial

Commercial banks
banks face
face unique
unique risks
risks because
because of
of their
their
asset
asset structure:
structure:

 Credit
Credit(i.e.,
(i.e.,default)
default)risk riskisisthe
therisk
riskthat
thatpromised
promisedcash cashflows
flows
from
fromloans
loansand andsecurities
securitiesheld heldby byFIsFIsmay
maynot notbebepaid
paidin infull
full
 Liquidity

Liquidityriskriskisisthe
therisk
riskthat
thataasudden
suddenand andunexpected
unexpected
increase
increasein inliability
liabilitywithdrawals
withdrawalsmay mayrequire
requirean anFIFIto
toliquidate
liquidate
assets
assetsininaavery
veryshort
shortperiod
periodof oftime
timeand andat atlow
lowprices
prices
 Interest

Interestrate
raterisk
riskisisthe
therisk
riskincurred
incurredby byananFIFIwhen
whenthe the
maturities
maturitiesof ofits
itsassets
assetsand andliabilities
liabilitiesarearemismatched
mismatchedand and
interest
interestrates
ratesarearevolatile
volatile
 Credit,

Credit,liquidity,
liquidity,andandinterest
interestrateraterisk
riskall
allcontribute
contributeto toaa
commercial
commercialbank’sbank’slevel
levelofofinsolvency
insolvencyrisk, risk,the
therisk
riskthat
thatananFIFI
may
maynot
nothave
haveenough
enoughcapital
capitalto tooffset
offsetaasudden
suddendecline
declinein inthe
the
value
valueofofits
itsassets
assetsrelative
relativeto toits
itsliabilities
liabilities
Commercial Banks 11-6
 Commercial Bank Assets
(Concluded)

 Loans

Loans and
and investment
investment securities
securities continue
continue to
to be
be the
the
primary
primary assets
assets of
of the
the banking
banking industry
industry
 Loans

Loans secured
secured by by real
real estate
estate have
have consistently
consistently been
been the
the
largest
largest asset
asset class
class for
for commercial
commercial banks
banks over
over the
the 1992–
1992–
2019
2019 period,
period, but
but real
real estate
estate loans
loans have
have been
been shrinking
shrinking
steadily
steadily from
from 2007
2007 to to 2014
2014
 In

In 2016,
2016, the
the volume
volume of of 1–4
1–4 family
family mortgages
mortgages originated
originated by
by
nonbanks
nonbanks surpassed
surpassed the the volume
volume originated
originated by
by banks
banks

 Nonbanks
Nonbanksaccounted
accountedfor for52.5
52.5percent
percentof
ofthe
thevolume
volumeof of1–4
1–4
family
familymortgages
mortgagesoriginated
originatedinin2017,
2017,up
upsignificantly
significantlyfrom
fromthe
the
financial
financialcrisis-era
crisis-eralow
lowofof23.5
23.5percent
percentin
in2007
2007
 Proportion

Proportion of
of commercial
commercial and
and industrial
industrial loans
loans have
have been
been
declining
declining since
since 2000
2000
Commercial Banks 11-7
Portfolio Shift: U.S. Commercial
Banks’ Financial Assets

Commercial Banks 11-8

 Commercial Bank Liabilities:
Deposits
1.1. Transaction
Transaction accounts
accounts are
are checkable
checkable deposits
deposits that
that are
are
either
either demand
demand deposits
deposits or
or NOW
NOW accounts
accounts

 Transaction
Transactionaccounts
accountsare
areabout
about21.7%
21.7%ofoftotal
totaldeposits
deposits

 Interest-bearing
Interest-bearingchecking
checkingaccounts
accountsare
arecalled
called negotiable
negotiable
order
orderofofwithdrawal
withdrawal(NOW)
(NOW)accounts
accounts
2.2. Household
Household savings
savings and
and time
time deposits
deposits (normally
(normally individual
individual
account
account holdings
holdings of
of less
less than
than $100,000)
$100,000)

 Important
Importantcomponents
componentsofofbank
bankretail
retailsavings
savingsaccounts
accountsare
are
small
smallnontransaction
nontransactionaccounts,
accounts,which
whichinclude
includepassbook
passbook
savings
savingsaccounts
accountsand
andretail
retailtime
timedeposits
deposits
3.3. Large
Large time
time deposits
deposits ($100,000
($100,000 or
or more)
more)

 Primarily
Primarilymade
madeup upof
ofnegotiable
negotiableCDs,
CDs,fixed-maturity
fixed-maturityinterest-
interest-
bearing
bearingdeposits
depositswith
withface
facevalues
valuesof
of$100,000
$100,000or
ormore
morethat
thatcan
can
be
beresold
resoldin
inthe
thesecondary
secondarymarket
market
Commercial Banks 1-9
 Commercial Bank Liabilities:
Borrowed or Other Liability Funds
 Nondeposit

Nondeposit liabilities
liabilities include
include aa broad
broad array
array of
of instruments:
instruments:

 Shorter
Shortermaturity
maturityinstruments
instruments
 Purchase

Purchaseof
offederal
federalfunds
funds(bank
(bankreserves)
reserves)on
onthe
theinterbank
interbankmarket
market
 Repurchase agreements (temporary swaps of securities for federal

Repurchase agreements (temporary swaps of securities for federal
funds)
funds)

 Longer
Longermaturity
maturityinstruments
instruments
 Issuance

Issuanceof
ofnotes
notesand
andbonds
bonds
 Liability

Liability structure
structure of
of banks’
banks’balance
balance sheets
sheets tends
tends to
to reflect
reflect
shorter
shorter maturity
maturity structure
structure than
than that
that of
of their
their asset
asset portfolio
portfolio
 Relatively

Relatively more
more liquid
liquid instruments,
instruments, such
such asas deposits
deposits and
and
interbank
interbank borrowings,
borrowings, areare used
used to
to fund
fund relatively
relatively less
less
liquid
liquid assets,
assets, such
such asas loans
loans

 Interest
Interestrate
raterisk—or
risk—ormaturity
maturitymismatch
mismatchrisk—and
risk—andliquidity
liquidityrisk
riskare
are
key
keyexposure
exposureconcerns
concernsfor
forbank
bankmanagers
managers
Commercial Banks 1-10
Balance Sheet of U.S. Commercial Banks
($ millions)

Commercial Banks 11-11

 Commercial Bank Liabilities:
Equity
 Commercial

Commercial bank
bank equity
equity capital
capital consists
consists mainly
mainly of
of
common
common andand preferred
preferred stock
stock (listed
(listed at
at par
par value),
value), surplus
surplus
or
or additional
additional paid-in
paid-in capital,
capital, and
and retained
retained earnings
earnings

 Commercial
Commercialbank
bankequity
equitycapital
capitalwas
was11.3%
11.3%of
oftotal
totalliabilities
liabilities
and
andequity
equityin
in2019
2019
 Capital

Capital Purchase
Purchase Program,
Program, part
part of
ofTroubled
TroubledAssets
Assets Relief
Relief
Program
Program (TARP),
(TARP), waswas intended
intended to to encourage
encourage U.S.
U.S. FIs
FIs to
to
build
build capital
capital and
and increase
increase flow
flow ofof financing
financing toto U.S.
U.S.
businesses
businesses andand consumers
consumers to to support
support thethe U.S.
U.S. economy
economy
 Largest

Largest banks
banks subject
subject to
to annual
annual stress
stress tests,
tests, designed
designed toto
ensure
ensure that
that the
the banks
banks are
are properly
properly capitalized
capitalized

 2010
2010Wall
WallStreet
StreetReform
Reformand
andConsumer
ConsumerProtection
ProtectionAct
Act
Commercial Banks 11-12
Off-Balance-Sheet (OBS) Activities

 Banks

Banks engage
engage in
in many
many fee-related
fee-related activities
activities off
off the
the
balance
balance sheet,
sheet, such
such as
as the
the following:
following:

 Issuing
Issuingvarious
varioustypes
typesofofguarantees
guarantees(e.g.,
(e.g.,letters
lettersof
ofcredit)
credit)

 Making
Makingfuture
futurecommitments
commitmentsto tolend
lend
 Engaging

Engagingin inderivative
derivativetransactions
transactions––futures,
futures,forwards,
forwards,options,
options,
and
andswaps
swaps
 Off-balance-sheet

Off-balance-sheet (OBS)
(OBS) assets
assets

 When
Whenananevent
eventoccurs,
occurs,this
thisitem
itemmoves
movesonto
ontoasset
assetside
sideof
of
balance sheet or income is realized on income statement
balance sheet or income is realized on income statement
 Off-balance-sheet

Off-balance-sheet (OBS)
(OBS) liabilities
liabilities

 When
Whenananevent
eventoccurs,
occurs,this
thisitem
itemmoves
movesonto
ontoliability
liabilityside
sideof
of
balance sheet or an expense is realized on income statement
balance sheet or an expense is realized on income statement
 Banks

Banks have
have both
both earnings
earnings and
and regulatory
regulatory “tax-avoidance”
“tax-avoidance”
incentives
incentives to
to undertake
undertake OBS
OBS activities
activities
Commercial Banks 11-13
 Off-Balance-Sheet (OBS) Activities
(Continued)

 Use

Use of
of derivative
derivative contracts
contracts accelerated
accelerated during
during 1992–2010
1992–2010
period;
period; accounted
accounted for
for much
much of
of the
the growth
growth in
in OBS
OBS activity
activity

 Notional
Notionalvalue
valueof ofOBS
OBSactivities
activitiesatatcommercial
commercialbanks
bankswas
was
$10,252.8b
$10,252.8bin in1992
1992compared
comparedto to$4,593.0b
$4,593.0bof
ofon-balance-
on-balance-
sheet
sheetactivities
activities
 By

By2010,
2010,the
thenotional
notionalvalue
valueofofOBS
OBSbank
bankactivities
activitieswas
was
$254,731.5b
$254,731.5b(compared
(comparedto tothe
the$13,254.2b
$13,254.2bvalue
valueof ofon-balance-
on-balance-
sheet
sheetactivities)
activities)before
beforefalling
fallingtoto$180,421.6b
$180,421.6binin2019
2019
 At

At the
the heart
heart of
of the
the financial
financial crisis
crisis were
were losses
losses from
from OBS
OBS
mortgage-backed
mortgage-backed securities,
securities, created
created and
and held
held by
by FIs
FIs

 Losses
Lossesfromfromthe
thefalling
fallingvalue
valueof
ofOBS
OBSsecurities
securitiesreached
reachedover
over
$1
$1trillion
trillionworldwide
worldwidethrough
through2009
2009
 TARP

TARPgave gaveU.S.
U.S.Treasury
Treasuryfunds
fundsto
tobuy
buy“toxic”
“toxic”mortgages
mortgagesand
and
other
othersecurities
securitiesfrom
fromFIsFIs
Commercial Banks 11-14
Other Fee-Generating Activities

 Trust

Trust services
services are
are offered
offered by
by only
only the
the largest
largest banks
banks

 Trust
Trustdepartment
departmentof ofaacommercial
commercialbank
bankholds
holdsand
andmanages
manages
assets
assetsfor
forindividuals
individualsor
orcorporations
corporationsare
areoffered
offeredby
byonly
onlythe
the
largest
largestbanks
banks
 Individual

Individualtrusts
trustsrepresent
representabout
aboutone-half
one-halfof
ofall
alltrust
trustassets
assets
managed
managedby bycommercial
commercialbanks
banks
 Pension

Pensionfund
fundassets
assetsare
arethe
thesecond
secondlargest
largestgroup
groupof
ofassets
assets
managed
managedby bytrust
trustdepartments
departmentsof
ofcommercial
commercialbanks
banks
 Correspondent

Correspondent banking
banking isis the
the provision
provision of
of banking
banking
services
services to
to other
other banks
banks that
that do
do not
not have
have the
the staff
staff
resources
resources toto perform
perform the
the services
services themselves
themselves

 Services
Servicesinclude
includecheck
checkclearing
clearingand
andcollection,
collection,foreign
foreign
exchange
exchangetrading,
trading,hedging
hedgingservices,
services,and
andparticipation
participationin
inlarge
large
loan
loanand
andsecurity
securityissuances
issuances
Commercial Banks 11-15
Size, Structure, and Composition
of the Industry
 Number

Number of
of commercial
commercial banks
banks in
in U.S.
U.S. has
has been
been declining,
declining,
though
though much
much of
of this
this isis due
due to
to mergers
mergers and
and acquisitions
acquisitions

 2019
2019––5,177
5,177banks
banks

 1984
1984––14,483
14,483banks
banks
 ItIt was

was not
not until
until the
the 1980s
1980s and
and 1990s
1990s that
that regulators
regulators
allowed
allowed banks
banks to to merge
merge with
with other
other banks
banks across
across state
state
lines
lines (i.e.,
(i.e., interstate
interstate mergers)
mergers)

 In
In1994,
1994,Congress
Congresspassed
passedlegislation
legislation(the
(theReigle-Neal
Reigle-NealAct)
Act)
easing
easingbranching
branchingby
bybanks
banksacross
acrossstate
statelines
lines
 ItIt has

has only
only been
been since
since 1987
1987 that
that banks
banks have
have possessed
possessed
powers
powers to
to underwrite
underwrite corporate
corporate securities
securities

 Full
Fullauthority
authorityto
toenter
enterthe
theinvestment
investmentbanking
banking(and
(andinsurance)
insurance)
business
businesswas
wasreceived
receivedonly
onlywith
withthe
thepassage
passageof
ofthe
theFinancial
Financial
Services
ServicesModernization
ModernizationAct Actinin1999
1999
Commercial Banks 11-16
Shadow Banking

 Activities

Activities of
of nonfinancial
nonfinancial service
service firms
firms that
that perform
perform
banking
banking services
services have
have been
been termed
termed shadow
shadow banking
banking

 Shadow
Shadowbanking
bankingsystem
systemintermediates
intermediatesthetheflow
flowofoffunds
funds
between
betweennet netsavers
saversandandnetnetborrowers
borrowers
 Credit

Creditintermediation
intermediationisisperformed
performedthrough
throughaaseries
seriesofofsteps
steps
involving
involvingmany
manynonbank
nonbankfinancial
financialservice
servicefirms
firms
 Face

Facesignificantly
significantlyreduced
reducedregulation
regulationthan
thantraditional
traditionalbanks
banks
 Can

Canoften
oftenperform
performcredit
creditintermediation
intermediationprocess
processmore
morecost
cost
efficiently
efficientlythan
thantraditional
traditionalbanks
banks
 2010

2010 Wall
Wall Street
Street Reform
Reform and
and Consumer
Consumer Protection
ProtectionAct
Act
called
called for
for regulators
regulators to
to be
be given
given broad
broad authority
authority to
to monitor
monitor
and
and regulate
regulate nonbank
nonbank financial
financial firms
firms that
that pose
pose risks
risks to
to the
the
financial
financial system
system
Commercial Banks 11-17
Bank Size and Concentration

 Community

Communitybanks
banks have
haveless
lessthan
than$1
$1billion
billionin
inasset
asset size
size
and
andtend
tendto
tospecialize
specializein
in retail
retail banking
banking

 Retail
Retailbanking
bankingisisconsumer-oriented
consumer-orientedbanking,
banking,such
suchas
asproviding
providing
residential
residentialand
andconsumer
consumerloans
loansand
andaccepting
acceptingsmaller
smallerdeposits
deposits

 Decreasing
Decreasingboth
bothininnumber
numberand
andimportance,
importance,asasasset
assetshare
sharehas
has
dropped
droppedfrom
from36.6%
36.6%inin1984
1984to
to6.2%
6.2%inin2019
2019
 Relative

Relativeasset
asset share
shareof
of largest
largest banks
banks(over
(over $1
$1billion
billionin
insize)
size)
increased
increasedfrom
from 63.4
63.4percent
percent in
in1984
1984to
to93.8
93.8percent
percent in
in2019
2019

 Regional
Regionalororsuperregional
superregionalbanks
banksengage
engagein
inaacomplete
complete
array
arrayof
ofwholesale
wholesalebanking,
banking,or
orcommercial-oriented,
commercial-oriented,activities
activities
 Have

Haveaccess
accessto
tothe
themarkets
marketsfor
forpurchased
purchasedfunds
funds(e.g.,
(e.g.,interbank
interbankor
or
federal
federalfunds
fundsmarket),
market),to
tofinance
financelending
lendingand
andinvestment
investmentactivities
activities

 Money
Moneycenter
centerbanks
banksengage
engageheavily
heavilyininwholesale
wholesaleactivity
activityin
in
money
moneymarkets,
markets,with
withretail
retailbanks
banksand
andlarge
largefirms
firmsas
asclients
clients
Commercial Banks 11-18
U.S. Bank Asset Concentration,
1984 versus 2019

Commercial Banks 11-19

Top Ten U.S. Banks Listed by
Total Assets, 2019
(in billions of dollars)

Commercial Banks 11-20

 Bank Size and Activities

 Size

Sizehas
hastraditionally
traditionally affected
affectedthe
thetypes
typesof
of activities
activitiesand
and
financial
financialperformance
performanceof
of commercial
commercialbanks
banks

 Small

Smallbanks
bankstypically
typicallyfocus
focuson
onthe
theretail
retailside
side

 Generally
Generallyhold
holdfewer
fewerOBS
OBSassets
assetsand
andliabilities
liabilitiesthan
thanlarge
largebanks
banks

 Rarely
Rarelyhold
holdderivative
derivativesecurities
securities

 More
Moresheltered
shelteredfrom
fromcompetition
competitionininhighly
highlylocalized
localizedmarkets
markets

 Lend
Lendto
tosmaller,
smaller,less
lesssophisticated
sophisticatedcustomers
customersthan thando
dolarge
largebanks
banks

Commercial Banks 11-21

 Bank Size and Activities
(Continued)

 Large

Largebanks
banksusually
usuallyengage
engagein
inboth
bothretail
retailand
andwholesale
wholesale
banking,
banking, but
but focus
focuson
onthe
thewholesale
wholesaleside
sideof
of the
thebusiness
business

 Operate
Operatewith
withlower
loweramounts
amountsof ofequity
equitycapital
capitalthan
thandodosmall
smallbanks
banks

 Tend
Tendto
touse
usemore
morepurchased
purchasedfundsfundsand
andhave
havefewer
fewercore
coredeposits
deposits

 Lend
Lendto
tolarger
largercorporations,
corporations,which
whichmeans
meanstheir
theirinterest
interestrate
rate
spreads
spreads(i.e.,
(i.e.,the
thedifference
differencebetween
betweentheir
theirlending
lendingrates
ratesand
and
deposit
depositrates)
rates)andandnet
netinterest
interestmargins
margins(i.e.,
(i.e.,interest
interestincome
income
minus
minusinterest
interestexpense
expensedivided
dividedby byearning
earningassets)
assets)have
haveusually
usually
been
beennarrower
narrowerthan thanthose
thoseof ofsmaller
smallerregional
regionalbanks
banks

 Pay
Payhigher
highersalaries
salariesand
andinvest
investmore
moreininbuildings
buildingsand andpremises
premises

 Diversity
Diversitytheir
theiroperations
operationsand andservices
servicesmore
morethan
thansmall
smallbanks
banks

 Generate
Generatemoremorenoninterest
noninterestincome
incomethan
thansmall
smallbanks
banks

Commercial Banks 11-22

 Industry Performance

 Strong

Strongperformance
performanceof
of commercial
commercialbanks
banksduring
duringearly
early2000s
2000s

 Federal
FederalReserve
Reservecutcutinterest
interestrates
rates1313times
timesduring
duringthis
thisperiod
period

 Lower
Lowerinterest
interestrates
ratesmade
madehome
homepurchasing
purchasingmore moreaffordable
affordable

 Development
Developmentof ofnew
newfinancial
financialinstruments
instrumentshelped
helpedbanks
banksshift
shift
credit
creditrisk
riskfrom
fromtheir
theirbalance
balancesheets
sheetsto tofinancial
financialmarkets
marketsandandother
other
FIs,
FIs,such
suchas asinsurance
insurancecompanies
companies

 Improved
ImprovedIT IThelped
helpedbanks
banksmanage
managetheir
theirrisk
riskbetter
better
 Rising

Risinginterest
interest rates
ratesin
inmid-2000s
mid-2000scaused
causedperformance
performanceto
to
decline,
decline, but
but not
not significantly
significantly

 Third
Thirdquarter
quarter2006
2006earnings
earningsrepresented
representedthethesecond
secondhighest
highest
quarterly
quarterlytotal
totalever
everreported
reportedby bythe
theindustry
industry

 Industry’s
Industry’score
corecapital
capitalratio
ratioincreased
increasedtoto10.36%,
10.36%,the
thehighest
highestlevel
level
since
sincenew,
new,risk-based
risk-basedcapital
capitalratios
ratioswere
wereimplemented
implementedinin1993
1993

 No
NoFDIC-insured
FDIC-insuredbanks
banksfailed
failedduring
during2005
2005or or2006
2006
Commercial Banks 11-23
 Industry Performance
(Continued)

 Performance

Performancedeteriorated
deterioratedin
inlate
late2000s
2000sas
asU.S.
U.S. economy
economy
experienced
experiencedits
itsstrongest
strongest recession
recessionsince
sinceGreat
Great Depression
Depression

 For
Forallallof
of2007,
2007,net
netincome
incomewas was$99.94
$99.94billion,
billion,aadecline
declineofof$45.28
$45.28
billion
billion(31.1
(31.1percent)
percent)from
from2006
2006

 Average
AverageROA ROAforfor2007
2007was was0.81
0.81percent,
percent,thethelowest
lowestyearly
yearly
average
averagesincesince1991
1991and andthethefirst
firsttime
timeinin15
15years
yearsthat
thatthe
the
industry’s
industry’sannual
annualROA
ROAhad hadbeen
beenbelow
below11percent
percent

 ROA
ROAfor for2008
2008was
was0.03
0.03percent,
percent,thethelowest
lowestsince
since1987
1987

 One
Oneininfour
fourinstitutions
institutions(25.0
(25.0percent)
percent)waswasunprofitable
unprofitableinin2008
2008
 Bank

Bank performance
performance slowly
slowly recovered
recovered in
in 2010
2010 –– 2016
2016

 2010
2010industry
industryROA
ROAand
andROE
ROEincreased
increasedto
to0.65%
0.65%and
and5.85%,
5.85%,
respectively;
respectively;by
by2016,
2016,industry
industryROA
ROAand
andROE
ROEincreased
increasedto to1.04%
1.04%
and
and9.27%,
9.27%,respectively
respectively

 By
Bythe
theend
endofof2019,
2019,96.4
96.4percent
percentof
ofbanks
bankswere
wereprofitable
profitable
Commercial Banks 11-24
Selected Indicators for U.S.
Commercial Banks:
1989 through 2019

Commercial Banks 11-25

 Regulators

 U.S.

U.S. banks
banksmay
may be
besubject
subject to
tothe
thesupervision
supervisionand
and
regulations
regulationsof
of as
asmany
many as
asfour
fourseparate
separateregulators:
regulators:
1.1. Federal
FederalDeposit
DepositInsurance
InsuranceCorporation
Corporation(FDIC)
(FDIC) was
was
established
establishedin
in1933
1933and
andinsures
insuresdeposits
depositsofofcommercial
commercialbanks
banks

 Acts
Actsas
asreceiver
receiverand
andliquidator
liquidatorwhen
wheninsured
insuredbank
bankisisclosed
closed

 Manages
ManagesthetheDepositors
DepositorsInsurance
InsuranceFund,
Fund,or
orDIF
DIF
2.2. Office
Officeof
ofthe
theComptroller
Comptrollerof
ofthe
theCurrency
Currency(OCC)
(OCC) isisthe
theoldest
oldest
U.S.
U.S.bank
bankregulatory
regulatoryagency,
agency,established
establishedin
in1863
1863

 Primary
Primaryfunction
functionisisto
tocharter
charter(and
(andclose)
close)national
nationalbanks
banks
3.3. Federal
FederalReserve
ReserveSystem
System(FRS)
(FRS)serves
servesas
asthe
thecountry’s
country’s
central
centralbank,
bank,has
hasregulatory
regulatorypower
powerover
oversome
somebanks,
banks,and
and
where
whererelevant,
relevant,their
theirholding
holdingcompany
companyparents
parents
4.4. State
Statebank
bankregulators
regulatorsperform
performfunction
functionsimilar
similarto
tothose
thosethe
the
OCC
OCCperforms,
performs,butbutonly
onlyfor
forstate-chartered
state-charteredcommercial
commercialbanks
banks
Commercial Banks 11-26
Bank Regulators

Commercial Banks 11-27

The 20 Largest (in Total Assets)
Banks in the World, 2019

Commercial Banks 11-28

 Global Issues

 Advantages

Advantagesof
of  Disadvantages

Disadvantagesof
of
international
international expansion
expansion international
international expansion
expansion
1.1. Risk
Riskdiversification
diversification 1.1. Information/monitoring
Information/monitoringcosts
costs
2.2. Economies
Economiesof ofscale
scale 2.2. Nationalization/expropriation
Nationalization/expropriation
3.3. Innovations
Innovations 3.3. Fixed
Fixedcosts
costs
4.4. Funds
Fundssource
source
5.5. Customer
Customerrelationships
relationships
6.6. Regulatory
Regulatoryavoidance
avoidance

Commercial Banks 11-29

 Global Banking Performance

 The

Thefinancial
financialcrisis
crisisof
of 2008-2009
2008-2009spread
spreadworldwide
worldwideand
and
banks
bankssaw
sawlosses
lossesthat
that were
weremagnified
magnifiedby
byilliquid
illiquidmarkets
markets

 Largest
Largestbanks
banksininthe
theNetherlands,
Netherlands,Switzerland,
Switzerland,and
andthe
theU.K.
U.K.had
had
net
netlosses
lossesinin2008
2008

 Banks
BanksininIreland,
Ireland,Spain,
Spain,and
andthe
theU.K.
U.K.were
wereespecially
especiallyhard
hardhit
hit
because
becausethey
theyhad
hadlarge
largeinvestments
investmentsininmortgages
mortgagesand
andmortgage-
mortgage-
backed
backedsecurities,
securities,both
bothU.S.
U.S.and
anddomestic
domestic

 Many

ManyEuropean
Europeanbanks
banksaverted
avertedoutright
outright bankruptcy
bankruptcythanks
thanks
to
todirect
direct support
support from
from their
theircentral
centralbanks
banksand
andnational
national
governments
governments

Commercial Banks 11-30

 Global Banking Performance
(Continued)

 Greece

Greecesuffered
sufferedaasevere
severedebt
debt crisis
crisisin
inthe
thespring
springof
of 2010
2010

 Problems
Problemsfromfromthe
theGreek
Greekbanking
bankingsystem
systemthen
thenspread
spreadtotoother
other
European
Europeannations,
nations,such
suchasasPortugal,
Portugal,Spain
Spainand
andItaly
Italy
 The

Thesituation
situationstabilized
stabilizedafter
after2012,
2012,but
butaamajor
majordebt
debtpayment
payment
was
wasdue
duefrom
fromGreece
Greecetotocreditors
creditorson
onJune
June30,
30,2015
2015
 Deal

Dealwas
wasreached
reachedthat
thatrequired
requiredGreece
Greeceto
tosurrender
surrenderto
toall
allits
its
creditors’
creditors’demands,
demands,including
includingtax
taxincreases,
increases,pension
pensionreform,
reform,and
and
the
thecreation
creationof
ofaafund
fund(under
(underEuropean
Europeansupervision)
supervision)with
withstate-
state-
owned
ownedassets
assetsearmarked
earmarkedto tobe
beprivatized
privatizedor
orliquidated
liquidated
 European

Europeanbanking
bankingsystem
system was
wasrocked
rockedagain
againin
inJune
June2016
2016
with
with“Brexit”
“Brexit”

 IfIfaatrade
tradedeal
dealisisnot
notininplace
placeby
byDecember
December31,
31,2020,
2020,then
then
Britain
Britainwill
willfall
fallback
backononto
tobasic
basicWorld
WorldTrade
TradeOrganization
Organizationterms
terms
Commercial Banks 11-31
Commercial Banks in the
Philippines

11-32
Commercial Banks in the
Philippines
Introduction

Definition of Commercial Banks

• Financial institutions that accept deposits, offer
checking and savings accounts, and provide loans to
individuals and businesses.

Role in the Economy

• Mobilize savings
• Facilitate payments
• Extend credit
• Support economic development

11-33
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

• Universal and Commercial Banks

• Thrift Banks

• Rural and Cooperative Banks

• Digital Banks

11-34
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

1. Commercial Bank:

A commercial bank is a financial institution that offers basic banking

services primarily to individuals and businesses.

Key Functions:
• Accepting deposits (savings and checking)
• Providing loans (personal, business, mortgages)
• Offering basic investment products (e.g., time deposits)
• Facilitating payment systems (e.g., wire transfers, debit cards)
Focus:
• Traditional banking activities
• Serves individuals, small and medium businesses
• Profit-oriented through interest rate spreads (difference between
deposit and loan interest) 11-35
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

2. Universal Bank:

A universal bank is a financial institution that combines the services of a

commercial bank and an investment bank, and may also engage in non-
bank financial services.

Key Functions:
• All services of a commercial bank, plus:
• Investment banking (underwriting stocks/bonds, IPOs)
• Wealth management and insurance services
• Securities trading
• Merchant banking
• Trust and fiduciary services

11-36
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Top Commercial Banks (by Assets)

1.BDO Unibank, Inc.

• Largest bank in terms of assets
• Extensive branch and ATM network

2.Land Bank of the Philippines (LandBank)

• Government-owned
• Supports agriculture and rural development

11-37
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Top Commercial Banks (by Assets)

3. Metropolitan Bank & Trust Company (Metrobank)

• Wide range of financial services

4. Bank of the Philippine Islands (BPI)

• Oldest bank in Southeast Asia
• Known for digital banking innovations

5. Philippine National Bank (PNB)

• Strong overseas presence

11-38
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Other Notable Commercial Banks

• China Banking Corporation (Chinabank)

• Rizal Commercial Banking Corporation (RCBC)

• Union Bank of the Philippines (UnionBank)

• Security Bank Corporation

• Development Bank of the Philippines (DBP)

11-39
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Services Offered by Commercial Banks

• Deposit Accounts (Savings, Checking, Time Deposits)
• Loans (Personal, Business, Housing, Auto)
• Investment and Trust Services
• Foreign Exchange and Remittances
• Online and Mobile Banking

11-40
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Importance of Commercial Banks

• Economic Growth Driver
• Financial Inclusion
• Business Development Support
• Infrastructure and Government Financing

11-41
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

Challenges and Trends

• Digital Transformation
• Cybersecurity Risks
• Regulatory Compliance
• Competition with Digital Banks
• Focus on ESG (Environmental, Social, Governance)

11-42
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

3. Thrift Bank:

A thrift bank, also known as a savings and loan association

or savings bank, is a type of financial institution that primarily
focuses on accepting savings deposits and providing loans,
especially home mortgages and consumer loans.

11-43
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

3. Thrift Bank:
Feature Description

Encouraging savings and providing credit for

Primary Focus
personal needs (especially housing)

Savings accounts, time deposits, home loans,

Main Services
auto loans, small business loans

Target Clients Individuals, households, and small businesses

Consumer loans (housing, auto, personal),

Loan Focus
sometimes microloans

Regulated by the central bank (e.g., Bangko

Regulation
Sentral ng Pilipinas in the Philippines)

Often offer higher interest rates on savings

Interest Rates
than commercial banks to attract depositors
11-44
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

3. Thrift Bank:

🏦 Types of Thrift Banks:

1.Savings and Loan Associations

2.Private Development Banks

3.Microfinance-oriented Thrift Banks

11-45
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

3. Thrift Bank:
Feature Thrift Bank Commercial Bank
Individuals, SMEs, large
Main Clients Individuals & households
businesses
Consumer and housing Wide range (including
Loan Types
loans corporate loans)
Focus on savings and Offers savings, checking,
Deposits
time deposits and more
Broader (may include
Business Scope More limited
investment services)

11-46
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

3. Thrift Bank:

Example (Philippines):

• RCBC Savings Bank (now merged with RCBC)

• Philippine Business Bank (PBB)

• CitySavings Bank (a thrift bank under UnionBank)

11-47
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🏦 Rural Bank

✅ Definition:
A rural bank is a financial institution established specifically
to provide banking services in rural areas, aiming to support
farmers, fishermen, rural workers, and small businesses.

11-48
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🏦 Rural Bank

🔑 Key Features:
• Focuses on agricultural and rural development
• Offers small loans to farmers, fisherfolk, small
entrepreneurs
• Accepts deposits and provides basic financial services
• Often backed by government programs (e.g., agricultural
credit initiatives)
• Regulated by the central bank (e.g., Bangko Sentral ng
Pilipinas in the Philippines) 11-49
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🤝 Cooperative Bank

✅ Definition:
A cooperative bank is a member-owned financial institution
formed by a cooperative of individuals or groups. It operates
under cooperative principles to provide credit and banking
services to its members, who are also the owners.

11-50
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🤝 Cooperative Bank

🔑 Key Features:
• Owned and controlled by cooperative members
• Members share in profits and decision-making
• Focused on mutual help and community development
• Offers banking services like loans, savings, and checking
accounts
• Also regulated by the central bank, and by cooperative
development agencies
11-51
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🤝 Cooperative Bank

📌 Typical Services:
• Loans to members (often lower interest rates)
• Savings and time deposits
• Microfinance and small business support
• Dividends for members from profits

11-52
Commercial Banks in the
Philippines
Categories of Banks in the Philippines
4. Rural and Cooperative Bank:
Feature Rural Bank Cooperative Bank
Privately owned (can be Owned by cooperative
Ownership
family or corporate) members
Members of the cooperative
Rural population: farmers,
Target Clients (can be individuals or
fisherfolk, small traders
groups)
Member benefit (not purely
Profit Orientation For profit
profit-driven)

Central bank + Cooperative

Regulation Central bank (e.g., BSP)
authority (e.g., CDA)

Democratic (one member,

Decision Making Centralized (board/owners)
one vote)
Promote rural economic Mutual support among
Main Purpose
development members
11-53
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Rural and Cooperative Bank:

🏦 Examples (Philippines):
• Rural Bank of the Philippines

• One Network Bank (now part of BDO, originally a

rural bank)

• Coop Bank of Mindanao

• Bangko Kabayan (a rural and cooperative bank)

11-54
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Digital Bank:

(also known as a Neobank or Virtual Bank)

✅ Definition:
A digital bank is a fully online financial institution that
offers banking services without physical branches. All
services—such as opening accounts, deposits, transfers, and
loans—are done through mobile apps or web platforms.

11-55
Commercial Banks in the Philippines
🔑 Key Features:
Categories of Banks in the Feature Description

Philippines 100% Online

No physical branches; operations
are purely digital

Services are accessed via

Mobile-first Experience
smartphone or web apps

4. Digital Bank: Uses AI and digital platforms for

Automated Services
customer service, credit scoring, etc.

No branches = lower overhead =

Lower Operational Costs often better interest rates or fewer
fees

Customers can access banking

24/7 Accessibility
services anytime, anywhere

Must be licensed and supervised by

Regulated the central bank (e.g., BSP in the
Philippines)

1-56
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Digital Bank:

💳 Typical Services Offered:

• Opening a savings or checking account
• Fund transfers and bills payment
• Virtual debit or prepaid cards
• Personal loans or credit products
• Budgeting tools and financial tracking
• Investment or insurance (in some advanced digital
banks)
.

11-57
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Digital Bank:

📌 Digital Bank vs. Traditional Bank.

Feature Digital Bank Traditional Bank
Physical Branches None Yes
Access Online/mobile only Online and in-person
Higher (branches, staff,
Cost to Operate Low
utilities)
Chatbots, email, online
Customer Support In-branch and call center
agents
Digital-savvy users,
Target Market General public
younger population
11-58
Commercial Banks in the
Philippines
Categories of Banks in the Philippines

4. Digital Bank:
⚠️Things to Consider When Using a Digital Bank:
• Strong internet connection is needed

• Cybersecurity is critical—use strong passwords and multi-

factor authentication

• Limited or no in-person support for complex issues

11-59