MONASH

BUSINESS
Question 1
SCHOOL

Examine Exhibit 3-2 to approximate the

change market shares over 1985, 1990,
Tutorial 1995, 2000, 2005, and 2010 for small,

solutions
medium, and large banks. What trends can
you identify? What three factors may have
Week 3 contributed toward these changes?

BFC5916 Intl. Banking

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Exhibit 3-2 Question 1 - solution

 The exhibit shows that the smaller banks’ share
continue to shrink and the biggest banks gain
greater market share each year, but the trend
maybe slowing.
 The 100 large U.S. banking organizations hold
more than three-quarters of banking assets and
their market share has also risen recently. They
held only about half in 1980, but had 90% plus by
2010

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Question 1 – solution cont’d Question 1 – solution cont’d

 The most dramatic changes in US banking has
 Large banks have moved toward the profit- been the spread of interstate banking. New state
centre approach, in which each major and federal laws allow banks to purchase or start
department strives to maximize its branch offices in different states, making
contribution to profitability. nationwide banking finally possible in U.S.
history.
 Also large banks serve many different
 This trend reflects the need for banking firms to
markets with many different services, they
diversify into different geographic markets and
are better diversified—both geographically
the demands of the public for financial firms to
and by product line—to withstand the risks follow them and their businesses as they move
of a fluctuating economy. across the country and the world.

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 Question 1 – solution cont’d Question 2
 The Gramm-Leach-Bliley (Financial Services Classify China’s financial sector and
Modernization) Act of 1999 allowed the of compare it with that of the USA.
financial holding companies (FHCs). This
allowed banks to offer securities and
insurance underwriting services and so
create using these holding companies, one
stop financial-service providers.
 These are the few sweeping factors
contributing to fundamental changes in the
banking sector in the past two decades.

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Question 2 - solution Question 3

Separation of banking and commerce
China does not limit commercial owners, but the US does What trends are affecting the way
Separation of different financial services
Both countries separate banking from insurance and securities
banks and their competitors are
business, but the USA allows it via FHCs. organised today?
Separation of regulation
Both country still utilize functional regulation.
Separation of central bank access
Both countries limit central bank support to major banks
Government versus private ownership
Most Chinese banks are government or state enterprise owned.
Bank versus market lead financial sectors
China is a banking market where USA is a financial market
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Question 3 – solution Question 4

 In general, banks are becoming larger and more
complex organizations with more departments What advantages might a unit bank
and services and greater specialization. have over branch banking? What
 Deregulation and service innovation have disadvantages?
accelerated this trend as intense competition at
home and abroad has encouraged banks to
become larger organizations, serving broader
and more diversified market areas.
 Even small banks are reorganizing to meet these
challenges by being more efficient in meeting
their broader-based customer needs.
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 Question 4 - solution Question 4 – solution cont’d
A. What advantage might a unit bank over  A branch banking organization operates through
branch banking? several locations, including a head office and one
 Unit banks offer their services from only one or more full-service branch offices.
office. Although, they may use technology to  Regardless of its number of offices, it is one
corporation with one board of directors.
serve a much larger market. These
organizations are still common today.  However, each office has its own management
team with some very limited authority to make
decisions on customer loan applications and other
facts of daily operation. This authority is shrinking
due credit scoring and other technology that allows
for centralised processing.
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Question 4 – solution cont’d Question 4 – solution cont’d

B. What disadvantages?  Branch offices have high fixed costs and so
 Branch banking has the advantage of serving branches must work harder simply to break-
different areas and so may achieve more stable
even.
earnings and revenue flows.
 Poorly situated branches may also generate
 They may be able to grow faster because the
more costs than revenues and saddle the
additional offices can help raise deposits with
which to grow. bank with persistent net losses.

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 Question 5
Are there any significant advantages
or disadvantages for holding
companies acquiring other banks or
nonbank business ventures?

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Question 5 - solution Question 5 – solution cont’d

 The ability of holding companies to acquire
 The public may gain if holding companies are
nonbank businesses has given them the capacity
to cross state lines even where state law prohibited less subject to failure than other types of
entry by out-of-state banking firms. financial service firms and are more efficient
 It also allows a holding company to diversify across to operate.
many different product lines to help stabilize the  However, the public may lose if the
company's net earnings. concentration of services in bank holding
 However, launching nonbank businesses can companies causes the prices of those
stretch holding-company management too far and services to rise or if resources are drained
make it ineffective, resulting in damage to the away from local communities causing slower
performance of banks belonging to the same growth of those communities.
holding company.
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Question 6 Question 6 – solution

 Interstate bank can bring new capital into states that
Discuss the pros and cons to are rapidly growing and short of investment capital,
allowing interstate or cross border then result in greater convenience for customers
traveling or moving to another state, and stimulate
banking? competitive rivalry that will promote greater efficiency
and lower prices for services
 It may also bring greater stability by allowing individual
banking organisations to further diversify their
operations across different markets, offsetting losses
that may arise in one market with the gains in others.
 These same comments can be made to branching
across national borders, too.
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 Question 6 – solution cont’d Question 7
How do the organisational and
 Some think that interstate banking may lead
structural changes occurring today
to increases in market concentration as
smaller banks are merged into larger
among nonbank financial-service firms
interstate organisations, possibly leading to parallel those experienced by the
less competition, higher prices, and the banking industry?
draining of funds from local areas into distant
financial centres

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Question 7 – solution
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