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81-5 c0> E E o u -o cro z > QJ u k_ o reference library federal reserve bank c OF CHICAGO E k. CO o. u if o JZ u hCO 0> JZ 4-* A Series of Occasional Papers in Draft Form Prepared by Members o BANKING AS A LINE OF COMMERCE: THE CHANGING COMPETITIVE ENVIRONMENT George G. Kaufman m O > r~ 73 m <y> m 73 < rn 00 > Z 7. o *n n x n > o o Banking As A Line Of Commerce: The Changing Competitive Environment by George (John Smith Loyola Consultant, For The G. Professor Finance University Federal of the of Reserve Presentation Future Kaufman* of at Federal Reserve Atlanta, June Bank of *1 am of Chicago the indebted paper. for Chicago Bank and of by Bank Services Chicago) on Industry the of Atlanta Georgia 3-4, 1981 to L a r r y M o t e and their comments helpful Economics Conference Financial Sponsored and Harvey Rosenblum and of suggestions the in Federal the Reserve development Banking As A Line of Commerce: The and I banking wish the to new tion, the major theme as a touch line. not ballot The shock. of line legal death this on what box, All line By the of the of paper is commerce killed of are the commerce, the m a r k e t follows old line m ay have their technology, of outmoded participants rates generated the v i r t u a l market did funds. not wait developing a A changes New for SLAs changes legal have and the occurred the lines defini follows almost such predicted age traditional of reaching by high the is old a new and in full grown birth by new its in resourcefulness order the of unpredicted volatile that of twentieth end old speed to advancement and and and bundle the the predictable the Nor Court to creativeness with deregulation. along the left shaping shambles, of market line interest of e.g. money deregulation commerce knowledgeable analysts just ago. legal Bank-Thrift recent studies Bank D.C.; Will (Federal Reserve Holding 1980); Competition," 1981. have definition. Competition: Review of (Washington, the inflation of March/April and the The the in Banking years recent by on sociation in financial markets, number Analysis?" was the of both separate, in totally few years attributed Combined with are line." place.^ beginning regulation, bankruptcy Supreme the hastened new economic since or inflation. the the the not virile only commerce the forces and or — as what of live spans whether event and line life century, was just be banks unique dead, line law commercial death long for, by its both I consider offered But old old products life. "banking's definition, the products The Changing Competitive Environment focused See, for It A f f e c t Bank of on St. Commercial and Walter A. Review implications Michael F. Bank Acquisition Companies, Economic the example, Varnel Louis), and (Federal as Henry Reserve a recent "The and Merger February Banking of Trebing, 1981; Line Wallich, Bank of of As Commerce "Evolution Richmond), - 2 - For a published starter, in Business focused on article had banks article emphasized Chicago banks. banking and conservative the plight significant however, lines the of the field and by than article be the of biggest has the primary needs to of the customers. financial percent of the similar proportions economic regulation and financial the or regulatory sector. in At old to only 5 recent and appear of to The to in year be later in 1976, corporations banks were these articles to offer full emphasize observation. framework players both turf that by its produces labor countries.^- It innovations inflation, the designated "tilting" became service the industry increase that) the m o s t suited 15 and been to government productivity — the brain heavily have poor to of about force, is stronger industry importance the and "far m o r e too m u c h of York electronic better of "Con d e c a d e . . . (and may to 1978 New from y e a r ’s funds institutions percent harm of last entitled smaller financial The developed the a the w i n n e r ’s the was one the different that m a n y offset Only is that source borrowers structural of recall retreat articles y e a r ’s a r t i c l e relative than minimum, invade this resulting commercial emphasize other policies "it survey Business." the in m o r e industry. extent to if may banks decade." instruments n a t i o n ’s GNP w i t h -^-Ironically, t o circumvent to the general that that article frustrated resource service of the m o s t the I cannot exist seen field unleashing design new in banks. playing 1979 discussed next apart the bank the m a j o r regional beneficiary incentives to of from as a Piece concluded the — that has the that brainpower the of wrenched the Fewer below) as m e r c h a n t of banking. banking and extrapolating areas so for anyone annual financing" particular power retreat (middle-grade Inflation new a future annual recall bond market recall the you may seventy-seven story pitfalls the rosy economic the that w o u l d the banking of of Everybody Wants Nineteen 1975, reviewed of w h o l e s a l e fewer may Why and Many replacing Still Banking: back Week. the virtues businesses. sumer I went of - 3 - capital human intensive capital greater to the sustain industry My environment the in this that an structure tant way Thus, might its be from which finance pected invaded. a in its the plant intensive. lifeline. faster for the not too distant And Rather the faster it new ideas be for the great emphasis tremendous changes is and must both and all of developed that not franchised when these have different supermarkets convenience shops. institution it w i s h e s to institutions do be in from to the we are be like free to v e r y Which a does single this In o n e impor own turf in the grocery and Pa in change of small, having How firms to I envision literally Ma or its that stores, alike it. those chosen barriers the wayside. structure? compete so. and, will large from Also, will by specialists. y e s t e r d a y ’s much ethnic Far offices narrow legal fallen from very institution will national or turf. branch from have most institutions the to future will ranging nationwide t o d a y ’s o r financial of areas supermarkets giant turf financial institutions freely. side-by-side groceries, the the grocery number and t o d a y ’s p l a y e r s particular, where will the be? commercial as of accounts all structure offering that that gourmet banks Because the individual services commercial of of nationally specialized of say broad each each This numerous in w h i c h small changes, in operate differ industry, mix to from -- are i n s t i t u t i o n ’s s p e c i a l I envision industry with that having and Ideas education specturm those office, and an equipment industry. is they will from on is n o t entire not lifeline. the guess designating But but intensive. places observing — the the banks widest environment Particularly have traditionally range of changed vulnerable was services, their the turf area been the it could would over be which department have the been first they had stores ex to be a vitual - 4 - monopoly of a for separate protective era so m a n y and cally blow to one number the that level. enjoy one, created services Thus, savings by and not a same the previously and credit turf, security dealers their business cash management strike in greatly Sears the funds of firms, with little more line has of of to as firms, than one whom man and intensified — legal different both the And, was the 800 at could in ironi final telephone the retail economically even associations, their financial transactions consumer institutions nonfinancial additional of these Lynch, such industrial as an 800 number. the are invading poised banks vary and or m o n e y number increase for in to Express telephone competition account lending invaders American The mutual institutions invaders Merrill greatly a the loan invade 800 for that household office, the many as network firms The increased. change characteristics such office players traditional The single most their and Moreover, jure, c o u r t s ’ finding customers. savings invade turf, to employees, seen de telephone miscellaneous future. then erected circumvent larger the balances. were business to for modification threatening there. from nationwide dozen number and near Roebuck, market a here small unions and to simple have institutions and nationwide the areas facto limited banks basis technological a and the service ability turf, vading this de but households was transactions a major nfree" commercial banks, — first structure, Distant which surrounding it w a s old and commerce circumvent enough, to of barriers fell centive line years the in and the banks’ commerce. * But they have the banks launched have a been far from counterattack passive which, or while idle spectators. considerably more Indeed, silent - 5 - and less publicly siderable promises inroads to into proceed counterattack 1. visible are the the even often Interstate than the truf both further. of of other Three their banks barriers turf, and to has made nonbanks the con and success of this cited: branching Douglas invasion restrictions Amendment to the (McFadden Act Bank Holding of Company 1927 Act and of 1960), 2. 3. In the banking The Glass-Steagall and "investment" banking, The Bank Company Act to those by the remainder of now exists Commercial II p e r i o d 1. from The more should bank less paper, in form not 1933 be of I will than of 1960 "commercial” which in that substance to activities commercial banking the barrier and that to interstate modifications lightly. expanded 1950 to limits Governors. argue undertaken in separates related" Board offices 5,000 which and "closely Reserve branch than shift in p o p u l a t i o n lightly Advances that 3. the of rapidly almost in 40,000 the in post 1980 World for War three reasons: to 2. considered Federal of G l a s s - S t e a g a l l primary Holding Act in banked efficient Q deposit through "convenience" cost household of banked central cities suburbs, communications, permitted Regulation from heavily data processing, management ceilings that branching deposits. and of both branch and fund systems, encouraged periodically transfers and competition reduced the - 6 - But the failure duction at a The of the distance invaders they had of 800 of not. is in Chicago, branch or which gifts, conversion to in bad of the deposit branching less transfers desirable.^ successful financial intro because institutions years Business Week article refer r e c j to case some savings and association for to do themselves so. easily is n o Unlike cut longer experience on back now wish that recent be stations cost and loan unit cash interest when conditions change. Thus, some of for long time books to had from feasible. their they a city-wide payments the come. This tail is n o t branches a number of in place. out the Loeb to if argue Merrill United Rhoades, There Lynch States, and almost operates 850 retail firms need •*-Point o f whenever they sale come some all its charge in-home line. income these But with real Hutton, to they Paine systems will have Roebuck, Allstate the m a r g i n a l in which 1980, Savings California. costs a through Shearson activities throughout into already offices Sears re bump Webber, including branches via will branches financial not expand estate offices. from offices banking and 200 U.S., 100 choose nonbanks E.F. over the not permitted. broker have net may of Witter, operates to is 700 through which and on banks a number Dean of stores only are Jones one-half some branching has and E.D. Loan Association, These that interstate forces. received and cannot the many transformed permitted gas carry the rates necessarily Indeed, be quickly branches institutions will not 1981 when into were of to the and mortar expansion the interest reduce branch also had institutions noncash Even appears in to brick systems. theme rise number retail retail the the b a n k s ’ turf branch rapid and made the emphasized earlier, to m a t c h telephone have larger This Q of similar any impact 7 additional and makes services they interstate offer branching out of them. through This merger gives rather them than a big de n o v o leg up more promising. If , it is nevertheless, unlikely machines sonal and are to even like efficient bank construct likely contact, a one to be them choose branches the person does major separate located in as facility in except for service we de know feature. locations center other novo them For structures, shopping branch the retail branch today. Automatic households much like parking than who the central teller perfer Fotomat lots, may the approach, be per huts the m o s t core of major cities. But, offer almost Holding all services Company Act discover means Citicorp and Citicorp operates of in 35 in 23 more The states and stitutions provides "'‘T h i s 61 point is 39 charge also (Washington, D.C.; card and on in 400 Canada, in in of financing 18 its Department, and to in 1981). the The one the personal operate in Utah. 33 11 offices in states. company, industrial President United District Services loan or to systems. financial in Bank banking.^ which Retail consumer thrift and through offices the banking its m a j o r other Citicorp Report Banking to or service states of can n o w beginning Homeowners, including The 40 part from office full Colorado and services even nationwide services states, Commercial Treasury bank commercial 17 of Citicorp provides emphasized Restrictions U.S. in operates states and are almost are banks Glass-Steagall and offices 250, industrial provides in examples about commercial either participate " n o n b a n k 11 4 0 0 one Geographical and excellent offices label in abroad, Associates Corporation Finance America states number, Credit banking, by Person-To-Person Citicorp private BankAmerica than retail prohibited can are include through 50 they largest Industrial states, not all by w h i c h affiliates, Citicorp in BankAmerica Columbia. finance full on States - 8 - banks in California, deposits; banking tion, a firm, which facturers a computer sells A recent finance, commercial processing, and Chicago nine activities, Expansion not rare, the F e d e r a l de novo These or and into of acquire an 1,100 600 services, the affiliates of bank the were these largest numbers ^Board of with are have 1978: banks, some to 450 today. the A in 4,000 or in active the the in Board Federal age Reserve C o m p e n d i u m , pp . of these either 1977.1 System, form finance economic activities, example, finance is The and these For national 228-241, of 100 It of activities. some largest of to financial In avenue Governors 200 the market. the of company consumer of Thus, investment 650 shares in consumer eight holding on. companies in permitted firms, the out- competition applications brokers, of in checks, so 25 that operations, and and and seven. 1977, engage banks, banks was showed area Manu Finance, Oregon, Act time Corpora day, Public travelers Chicago leasing significant of and Checque minimum, Edge and a mortgage other of at throughout agencies bank holding larger to firm industrial Governors Company Movement 80 1971 approved insurance of Corporation Between the Business engaged, the BA California, Citicorp activities 100 mortgage affiliated 1). and purchase leasing, in savings affiliate; Just in selling products existing mortgage advisory commercial (Figure System the affiliates offer states; C r a i n 1s C h i c a g o BankAmerica course. 5 offices banking, nonbank Reserve include affiliates, banks in worldwide. 67 by which processing announced with card Utah, data checks lending, mortgage and offices company credit local 16 survey holding with is with company bank counseling, and Corporation of-state data leasing travelers finance Washington. Iowa Bamirco Hanover consumer Kansas, likely companies that interstate Bank 255-261. 44 banking Holding 9 is not is no tomorrow, longer It m a y banking any from informative the which far offering the next is twice the f,p r e s t i g e n a n d and capital of M e r r i l l and with capital. with 10 266 offices, E.F. with and 285 number of offices, Edward D. Jones. or about way ment 300 banking Thus, and not as the very Hutton Bache It has stores well as either McFadden different industries. ing m a y be expected well retail 275, or Douglas manned develop 19 3 . small by Jones 378 The both are have Yet far fewer the Salomon with 10, Loeb Rhoades Dean Witter second largest firm registered the firm. Loeb 237, regional offices twice include Shearson resembles But as one-tenth Kuhn with pro an m a n y and by today. that firms Lehman Webber in St. Louis, representatives, Morgan Stanley profitable in the invest retailing. investment that office wholesale a being other firms Paine Safeway! from with any or being twice as include by than representatives, eight with branching industry firms resemble grocery the It h a s 15, investment is v i e w e d as m u c h with Stuart operated the in Lynch. known Sachs offices Different to firms but the other which registered has of interstate profitability with is in and Edward of structure barriers offices. in structure of Halsey 304 500 Stanly Large however, service of underwrites Goldman 13. one-person Seven-Eleven and Other offices, with some relative Lynch. Boston services, is M e r r i l l Morgan First Reynolds regulatory number capital the constrained are the it offices or firm twice Brothers not There largest firm, examine deposit revenues, shares Liberalization to chartering competitive. By as be industry, hibited today! a prerequisite. significant highly but of the shapes along banking grocery for of different similar lines industry many is other tastes. once it heterogeneous nonregulated Commercial is bank deregulated. 10 After days ones all, financial when regulation was What additional services are m o n e y m a r k e t completely porate present integral part services. problems. number observation during underwriting account exists trading fiduciary in a and is the m a j o r involving its and if for other in the this mission In has own and merce all of and in after the a high upon the the their philosophy. banks A is for level potential aside Both I would walls for can issue new pre-1930 be expanding and This the policy for of the security o n e ’s o w n still recent merger Bache-Prudential American subsidiary, are major commercial recommend banks that government abuse for on between potential some in or it we re business based either cor and banking reason, is are and and Express, investors, exists move also cautiously independent com t o d a y ’s e n v i r o n m e n t . breached. bank underwriting of commerce capital, cluster unlikely. activities Q in Prudential line location, trading conflict with such of bank single for obvious after potential One particular Company and investing, me Two investment other. for exists industry. and others. the concern Insurance the these household present potential on of rapidly of they than banks, in want? these are package combinations. I see commercial Both hand capacity, Chinese leaving depending importantly, for only that one banks of commercial the conflict the securities, choosing most for of act suggest was alike underwriting Both least, valid the area investigated summary, additional on F i r e m a n ’s F u n d area Experience more investment potential at exactly profitability and complete separates Express segments a 1920s, and Shearson-American through the the securities. to m e some or activity of all commercial Galss-Steagall. But, reasons, some questionable, Glass-Steagall of do not less. although revenue by an financial is prohibited were considerably funds, phased-out and municipal presently a institutions of as and trading one of management products Competition for or their skills, line almost of of all and, com and - 11 - any of b a n k i n g ’s p r o d u c t s and even financial separate The is courts not will may services offered novo ago, mergers likely this be retail and the total The the w e l l m a n a g e d do not be greatly the of Scandal" in stock the mergers the among 1960s and invesment analysis New Financial had of nonbank Groups nonbapk financial lines of the becomes the of purchase firm of implications financial Overwhelm the they the as were be line a be large few years are more reduced.^* of But competition thus of those Department of it future. Although important. the for If Justice by should beneficial recent post Donaldson appears American both in banks II a the of Phillip Banker, May era. 15, Oil loss of 1970s. the may slowest "Salad at activity success the War the sale in merger their have World Lufkin commercial of one, including subsequent institutions Banks" area. the more in the failures for narrow likelihood companies, and in now, large. the in so will degree involved and and should at before institutions institutions and appropriate as than financial agencies institution share or market likely public insurance its less commerce records banking the less institutions Life even particular institutions, track be The institutions a unique valid services be If ever financial the financial was scratch. may to all firms. will environment financial has and regulatory and nonbank any Express excellent bank overrated. rate in new exceptional American the and from in of any commerce now other individual increased. have all competitive the ^"Some o f number of of almost networks role a line banks or from nonfinancial useful as banks to growth the come of start broad by the strengthening be as or to branch in m aintaining also valid among occurs, banking have commerce de affiliates commercial certainly will An recent Zweig, 1981, p. "Will 1. FIGURE 1 Where big outside banks tap Chicago m arkets Rep. o ffice Edge A ct C o m m ’l lending C o m m ’l le a sin g Citicorp U.S.A. New York City B an k of A m e r ic a San Francisco Chase Manhattan Bank New York City Security Pacific Bank Los Angeles Chemical Bank New York City Manufacturers Hanover New York City Bankers Trust New York City Wells Fargo Bank San Francisco C r o c k e r N ational B a n k San Francisco Irving T ru st New York City U nited C a lifo rn ia B a n k Los Angeles Source: CrainTs Chicago Business, March 23, 1981 C o n su m er fin a n c e C o m p u te r M ortgage/ re a lty T r a v e lle r s checks C ard p ro d u cts
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