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83-5

A Series of Occasional Papers in Draft Form Prepared by Members

of the Research Department for Review and Comment.

FRS
Chicago
83-5

THE FUTURE OF COM M ERCIAL BANKS
IN THE FINANCIAL SERVICES INDUSTRY
George Kaufman, Larry R. Mote,
and Harvey Rosenblum

83-5

The Future of Commercial Banks
in the Financial Services Industry

George
Loyola

University

and

Larry
Federal

Reserve

Harvey
Federal

Kaufman*

Federal

Reserve

Bank

Chicago

Mote*
Bank

Chicago

Rosenblum*

Reserve

Bank

Chicago

A revised and expanded
version of a paper prepared for
the 64th American Assembly,
nThe Future of American Financial Institutions,11
Harriman, New York, April 7 - 1 0 , 1983.

*The views expressed in this paper are the authors’ and do not
necessarily represent the views of the Federal Reserve Bank of Chicago.

£.

The Future of Commercial Banks in the Financial
Services Industry*

INTRODUCTION

This paper is concerned with the future of commercial banking.
legitimate to ask why this is an important subject.

It is

Most of the population

could care less what happens to commercial banks— or savings and loans or
stockbrokers, for that matter— as long as their deposits are safe. They view
the ongoing battle over turf between these institutions much as they view an
unfriendly corporate takeover— an interesting conflict having little or no
significance for anyone outside the companies involved.

Many, if not most of

the legislative skirmishes now being fought concern parochial, intramural
issues having little to do with any broader public interest.

Nevertheless, we

will argue that* the customers of financial institutions and the general public
have a major stake in the nature of the financial system that eventually will
emerge from the current period of flux, if not in the specific identities of
the winners and losers.
Why the Future of Banking Matters
P

Clearly, owners, managers, and employees of commercial banks have
important and well-defined interests in the future success of their particular
banks.

But there is no reason why, in the longer run, even they could not

make the transition to other banks or even other types of financial business.

Thus, it is not the particular institutions that we call commercial banks
whose future concerns us, but the terms on which the vital services now
provided primarily by commercial banks are made available in the future.
*

The authors wish to thank George J. Benston and Robert A. Eisenbeis for
their helpful comments.

Customers stand to gain if these services are offered efficiently, on
competitive terms, and at convenient locations, regardless of who provides
them.

They will lose if regulations evolve in such a way as to maintain

arbitrary pricing restrictions and entry barriers that protect existing banks
from competition, prevent banks and other institutions from taking full
advantage of the most efficient organizational options, and discourage full
use of available financial technology.
Why Regulation Before and Deregulation Now?
Although the commercial banking industry has been extensively regulated
for the past half century, we will argue that much of the existing structure
of regulation never made any sense and that some other parts of it have been
rendered ineffective— and, in some cases, counterproductive— by recent
developments in financial markets.

One has to be very discriminating in

judging individual regulations because some make much more sense than others.
However, a charitable appraisal of restrictions on chartering, branching, and
pricing— most, but not all of which were introduced during the early
1930s— would be that they were adopted for reasons that were misguided from
the start; that they achieved their intended goals, if at all, only
temporarily; and that they have resulted in a great deal of inefficiency
through the years.

As is discussed later, much of this inefficiency has

consisted of higher prices and poorer services to consumers of financial
services and the expenditure of real resources on innovations designed to
escape regulation.
A few types of regulation— in particular, regulations limiting risk
taking by banks, restrictions on certain combinations of activities, and the
requirement for prior approval of proposed bank mergers and bank holding
company acquisitions—

are easier to justify and may even produce benefits

that exceed their costs.

If, as many students of banking maintain, the costs

of a massive collapse of the banking system, such as occurred in the 1930s, or
even near-collapses clearly outweigh the cost of limiting the risks taken by
banks, it makes sense to retain capital and portfolio restrictions.

Insofar

as it is federal deposit insurance or an effective central bank that prevents
such a calamity, rather than regulation per se, the regulations might seem
superfluous.

However, given the failure of regulators either to close

institutions as soon as net worth becomes zero or to price deposit insurance
to reflect the riskiness of individual banks’ portfolios, regulation is needed
to offset the resulting incentive of risk-taking, with its attendant dangers
to the solvency of the institution.

This is not to say that all existing

safety and soundness restrictions are optimally designed to achieve their
purposes.
The contribution to the safety of the banking system of the separation of
commercial and investment banking introduced by the Banking Act of 1933 is
more problematical.

To this day it has not been rigorously demonstrated

whether the securities market abuses engaged in by several large money market
banks during the 1920s were a major contributor to the banking debacle or
merely a sideshow and whether they could be prevented by means short of
divorcement.

On the other hand, the benefits to be gained by repealing the

restrictions have probably been exaggerated.
In the case of prior approval of mergers and acquisitions, the focus has
been on preventing transactions that would substantially lessen competition, a
clearly desirable end.

However, it has been variously argued that the

stringent criteria applied under the Bank Merger Act and the Bank Holding
Company Act prevent some mergers that would enhance efficiency, that the
existence of close substitutes for most bank services makes the exercise of

monopoly power in banking a trivial consideration, and that whatever monopoly
power does exist is due largely to entry restrictions.

The truth and

relevance of these contentions have not been clearly demonstrated.

The

banking agencies may reasonably relax their concern over the competitive
effects of mergers and acquisitions as deregulation progresses, entry barriers
are eliminated, and markets are broadened by the erosion of geographic and
product restrictions.

But the case for doing so at this time is probably not

strong.
Whether or not the regulations affecting banking ever made much sense,
what has happened to make it important that they be eased or eliminated at
this particular time?

The basic reason is that, until recently, many of the

restrictions were essentially nonbinding.

Interest rate ceilings on deposits,

for example, were of little consequence during the two decades when market
rates were well below the ceilings.

When rates began torise in the late

1950s and early 1960s, the ceilings were raised to allow competitive rates
be paid.
mid-1960s.

They have generally been binding only for some years after the
It took the sharp rises in rates of the late 1960s and early 1970s

to evoke the institutional innovations that have rendered the ceilings
ineffectual and destroyed the protection that they once afforded some
institutions.
Similarly, the restrictions on banks1 portfolios and securities
activities meant little so long as banks held enormous reserves of excess
liquidity and were more concerned with survival than with aggressive
expansion.

But that has all changed as memories of the depression have

gradually faded, liquidity and capital ratios have declined, and "unregulated”
competitors have made inroads into activities long considered the exclusive
preserve of commercial banks.

These developments have served to expose

deficiencies
earlier
fits
has

regulation

years.

have

proven

gained

RECENT

that,

r e g u l a t i o n ’s

increasing

DEVELOPMENTS

ever more

though
costs

always

have

illusory,

there,

become

were

the m o v e m e n t

not

evident
toward

as
and

apparent
its

bene

deregulation

momentum.

BANKING

For many years banks were unique among financial institutions because of
their power both to issue demand deposits and to make commercial loans.

Many

other lenders, such as independent or captive commercial finance companies,
could and did make a wide variety of commercial loans, but only banks issued
demand deposits.

Furthermore, banks could make a number of other types of

loans such as home mortgages, consumer loans, farm loans, and loans to other
financial institutions (including securities brokers and dealers).

Banks

competed in their lending with other depository institutions such as credit
unions, savings and loan associations, and mutual savings banks, none of which
could issue demand deposits, and with nondepository institutions like
insurance companies, finance companies, cooperative lenders, and government
and quasi-government agencies.

Each of the nonbank lenders tended to

specialize, primarily by law, in a single type of lending or a narrow range of
lending products.
What

Banks
The

Can

business

Now
of

banking

today

still

centers

the

lending

function.

Banks can make loans to just about any individual, partnership, corporation,
government entity, or group of individuals for virtually any purpose.

The

only regulatory restrictions are those of prudence; banks must limit their
exposure to individual borrowers (loans to any single borrower may not exceed
some legally set proportion of a bank’s capital, now 15 percent for national

banks) and are under subtle regulatory pressure through the bank examination
process to lend to credit worthy customers.
Sources of Funds— To fund the wide variety of loans that they make, banks
rely on an equally wide variety of sources of funds.

No longer do

noninterest-bearing demand deposits constitute the dominant or even leading
source of funding.

In 1950, the ratio of demand deposits to assets stood at

70 percent; at year-end 1981 it had fallen to 19 percent; and it may be
expected to fall even further with the growth of money market deposit accounts
and super NOW accounts.

Now the most important source of funding for banks is

time deposits, including those available for third-party transactions
purposes.

As of year-end 1981 they were equal to 52 percent of assets.

Within this broad category are several dissimilar instruments differing in
denomination, maturity, negotiability, transactions capability, interest
sensitivity, holder, and issuer.
sources of funds.

In addition to deposits, banks utilize other

These include federal funds, repurchase agreements,

commercial paper downstreamed from the parent bank holding company, capital
notes, and equity.

The most noticeable feature about the sources of bank

funds today vs., say, 1950, is the substantially higher proportion of
interest-sensitive funds— i.e., liabilities offering market-related rates of
return.
This last point is worthy of additional emphasis because it marks a
fundamental turning point in the underlying nature and economics of the
banking business.

Banks’ established position as the most important and

diversified lenders in the United States was fortified in the 1930s by the
monopoly power created by federal deposit insurance and interest rate ceilings
on deposits, which, when combined with banks’ exclusive franchise to offer
demand deposits, gave them advantages over their competitors.

However, no

monopoly lasts forever, and banks1 local monopolies in the provision of demand
deposits were no exception.

They were eroded eventually by the incentive they

created for customers and potential competitors to develop substitute
products, by technological developments that reduced customers1 dependence on
the monopolized product, and by the natural inefficiency that eventually
afflicts any monopoly not subject to direct competitive pressures.
The erosion of their monopoly positions has forced banks to change.
Although they still have a large clientele for loans, banks have to be more
innovative in the new environment than they were and work harder to find
sources to fund the loans.

Wholesale banks have been faced with this reality

for a long time; retail-oriented banks have only begun to face this situation
in the last few years.

Large money center banks were the first to make this

transition because their customers were big enough both to be attractive to
the nonbank competition and to raise funds on their own without going through
the banks— e.g., by selling commercial paper.

Demand deposits haved declined

sharply in importance at all banks because of reduced transactions costs and a
growing number of highly liquid (though imperfect) substitutes that can easily
and cheaply be converted into commercial bank demand deposits just long enough
to effectuate a transaction.

As a consequence of these developments,

the deposit relationships between banks and their business customers are less
important now than in the past.
Diversification— In part because of increased competition and reduced
margins in lending, banks began to diversify into other lines of activity.
However, banks have not taken such diversification very far, at least as
measured by the ratio of noninterest revenue to net interest income, which
averaged about 40 percent for the 15 largest banks in 1981.

However, this was

still a substantial increase over the 28 percent in 1977 (see table 1).

Because interest rate ceilings on deposits encourage bundling of services and
payment for services with deposit balances, rather than explicit fees, nonin
terest income relative to interest income may understate the importance of
nonlending output.

Nevertheless, even after allowing for this factor, it is

clear that intermediation between borrowers and ultimate lenders is still
banks1 primary activity.

Diversification by banks and bank holding companies

into nonlending activities is constrained by various laws and regulations to
such bank-related activities as trust services, data processing, money orders
and travelers checks, management consulting to depository institutions, and
providing courier services, among other things.
permissible activities, see table 2.)

(For a complete list of

The extent to which banks and bank

holding companies have taken advantage of individual diversification
possibilities is difficult to quantify because they are not required to report
income by product line.
Citicorpys Activities— One of the most aggressive bank holding companies
in entering new activities and seeking new clientele has been Citicorp.
Although, as can be seen in table 3, most of its activities still center on
the lending and deposit-taking functions, other activities have been a rapidly
growing source of its revenue.

In 1977 fees, commissions, and other revenues

were equal to 23.1 percent of Citicorpfs net interest revenue (interest income
less interest expense); by 1981 this ratio had grown to 65.2 percent.
Recent Legal and Economic Changes
In recent years banks have begun to offer both new and old services over
greatly expanded geographic areas.

They have accomplished this expansion by

taking advantage of "loopholes” in the existing legal structure.

Much of this

structure was outmoded by changes that have taken place in technology and in
the level of interest rates relative to the interest rate stru c t u r e that ha d

been in effect at the time the statutes, regulations, and interpretations were
written.
Product Market Expansion— Banks, either themselves or through their
holding companies, have entered a number of new product lines in recent years.
Among the new product lines entered since 1975 are management consulting for
unaffiliated banks, retail sales of money orders, real estate appraisal,
issuance of small-denomination debt instruments, and check verification.
These (and other activities) are noted in footnote 1 of table 2.
the Federal Reserve Board added four new activities:

Recently,

1) acting as a futures

commission merchant, 2) performing an expanded range of data processing
services, 3) purchasing a financially troubled savings and loan association,
and 4) discount brokerage (an activity previously approved by the Comptroller
of the Currency for national banks and by the FDIC for nonmember insured
banks).

Except for the expanded data processing services, which have now been

incorporated into Regulation Y, each of these was permitted by order to
particular individual institutions rather than by regulation to all
institutions.

With the passage of the Garn-St Germain Depository Institutions

Act of 1982 (DIA) , the Congress sanctioned bank holding company acquisitions
of weak or failing S&Ls when alternatives are scarce.

The DIA also allowed

banks to offer deposits competitive with money market funds, an activity some
larger banks had been attempting to enter in numerous innovative ways, only to
run into a regulatory stone wall.
Geographical Expansion— On the surface, the barriers to geographic
expansion in banking seem to be quite severe, particularly in comparison with
the freedom enjoyed by nondepository financial institutions and nonfinancial
firms.

Nevertheless, Citicorp, according to its 1981 Annual Report, had 2,265

offices worldwide.

In the United States alone it operated 848 offices in 40

states and the District of Columbia.

Yet, roughly half the banks in the

United States operated either a single office or one head office and at most

two or three additional limited facilities, usually within a mile or two of the main
office.

This paradox results from the interaction of several types of legal

restrictions:

1) state laws that limit the freedom of state-chartered banks

to expand geographically; 2) the McFadden Act of 1927, as amended by the
Banking Act of 1933, which subjects national banks to the branching laws of
the states in which they are domiciled; 3) the Douglas amendment to the Bank
Holding Company Act, which prevents bank holding companies from acquiring
out-of-state banks except with the express authorization of state law; and 4)
the absence of geographic restrictions on nonbank subsidiaries of bank holding
companies.

A bank in Illinois, for example, can establish one branch within a

mile of its head office and another within two miles.
1967, Illinois banks were only allowed the head office.

Until as recently as
Yet, Illinois bank

holding companies can— and do— establish nonbank offices throughout the
country.

Numerous other states such as Texas, Nebraska, and Oklahoma also

have unit banking laws.

In these states a large number of independently

chartered banks are needed to meet the population’s banking needs.

Thus, in

1980 Illinois had 1,286 banks for a population of 11.4 million, but only 16.0
banking offices per 100,000 population.

By contrast, California, which allows

statewide branching, had only 283 banks to meet the banking needs of 23.7
million people in 1980; however, these banks operated 4,563 banking offices
(including head offices), or 19.3 offices per 100,000 population.
The really binding rules with respect to geographic expansion have to do
primarily with deposit-taking; a bank cannot establish an out-of-state office
for the purpose of accepting deposits.

A bank can, however, accept and

solicit out-of-state deposits from offices within its home state, either
through brokers or by placing ads in out-of-state newspapers and other media,
and banks do so at both the wholesale and retail level.

As the technology of

transferring funds has improved and as transactions costs have been reduced by

improvements in the means for disseminating information, the importance of
out-of-state offices for generating deposits has greatly declined.

As table 4

indicates, the generation of certain kinds of deposits has become a nationwide
phenomenon.

Large denomination, or wholesale, sources of funds such as

federal funds and large negotiable CDs have long been purchased in national
money markets.

More recently, banks have been able to sell fully insured

deposits in smaller denominations through offices of brokerage firms
throughout the country.
Bank lending is much less restricted geographically.

Banks may establish

loan production offices wherever they please, and most larger banks have taken
advantage of this leeway to service loan customers concentrated in particular
geographic areas.

Loans can be solicited anywhere; it is merely the location

of the office that issues the loan that may be restricted.
Because nonbank subsidiaries of bank holding companies do not accept
deposits, they are afforded more geographic freedom than bank subsidiaries.
Permissible nonbank activities may be carried on anywhere in the United States
unless restricted by state law.

Many of the nation’s larger banks have

achieved a near nationwide geographic presence by expanding into permissible
nonbank activities like consumer finance, mortgage banking, and numerous other
lending and nonlending activities under Section 4(c)(8) of the Bank Holding
Company Act.

Table 5 shows the geographic dispersion of some of the larger

bank holding companies.
Geographic restrictions are sometimes greater in the bank’s home state or
home country than in foreign countries.

First Chicago Corporation has more

branches in foreign countries than in the United States.
are only part of the reason; although

Unit banking laws

Citicorp’s 1,417 offices in 93 foreign

countries far outnumber its 848 domestic offices, Citibank itself does have
318 bank branches in the state of New York, a number that exceeds its 248
branches and representative offices in foreign countries.

In general, the only current limitations on geographic expansion, other
than the establishment of full-service deposit gathering offices, seem to be a
banker’s imagination, capital resources, and perception of profitable
opportunities.
Causes of Change
Why have pressures for regulatory change suddenly appeared in recent
years?

The primary reason is that the existing structure of regulation was no

longer effective.

As documented above, such dramatic changes had occurred

that the reality bore little resemblance to the legal structure.
not happen overnight.

But this did

Signs of the growing ineffectiveness of regulation had

been noticeable for many years.

A number of banking reform commissions had

been established, starting with the Commission on Money and Credit in 1958, to
examine the reasons for the deterioration and to make recommendations for
changes to improve the effectiveness of the laws governing the financial
system.

(The work and recommendations of these commissions are reviewed in

Jacobs and Phillips, 1983.)

But the recommendations were, for the most part,

left lying on the table (Jones, 1979).

Until the enactment of the Depository

Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St
Germain Depository Institutions Act of 1982, only piecemeal changes had been
made.

These changes served to delay more serious deterioration but did not

make the fundamental changes that could have prevented the decay.
Much of the existing regulatory structure was put in place in response to
the crisis of the 1930s.

Bank safety and the preservation of the country’s

financial system were the overriding considerations.

Economic efficiency,

equitable treatment of customers, and other desirable objectives were put on
the back burner.

New regulations reduced competition through restricting

entry, limiting branch banking, and curtailing interest rates paid on

deposits.

They also reduced risk exposure through eliminating the need to

seek higher yielding, riskier loans to finance high deposit rates and by
restricting the types of activities in which banks could engage.

These

regulations were grafted onto a structure of specialized financial
institutions which were kept out of each others1 turf partly by their own
conservatism but primarily by the high costs of transferring, processing, and
storing funds and information.
But few things in life stay fixed, and the economic and technical
environments began to change shortly after World War II.

In the 1960s, the

changes in these environments accelerated and provided both the economic
incentive and the technical means to circumvent existing regulations.

The

acceleration of the rate of inflation in the mid-1960s caused market rates of
interest to climb above the ceiling rates commercial banks and other
depository institutions were permitted to pay on deposits, bringing about
disintermediation on a broad scale.

Further acceleration of inflation in the

1970s pushed market rates on some loans, particularly to households and
smaller business firms, above usury ceilings in many states.
Immediate raising or removal of the ceilings on deposit rates has not
always been viewed as desirable by policy makers, as some institutions,
particularly thrifts, were locked in to low, fixed-rate mortgages that they
had made in earlier periods of slower inflation, and payment of the higher
deposit rates would have been a serious drain on their resources.

Moreover,

policy makers tended to be overly optimistic that inflation would slow in the
near future and viewed the ceilings as temporary expedients until interest
rates declined again.

Thus, depositors searched for alternative securities

that had characteristics similar to deposits but paid market rates of return
while thrift institutions searched for new powers that would protect them from
similar experiences in the future.

The development of the electronic computer provided the means by which
financial institutions were able to offer deposit-like services that made it
easy and cheap to bypass deposit rate ceilings on time deposits and the
prohibition of interest payments on demand deposits.

This culminated with the

introduction by existing depository institutions of interest-bearing
transactions balances in the form of negotiable order of withdrawal (NOW)
accounts and the introduction of money market mutual funds by new,
"unregulated" competitors.

The popularity of these accounts led those

institutions hurt most by deposit losses to bring intense pressure on
legislators and regulators either to liberalize the regulations or to extend
them to competitors.

The major successes of the deregulation movement so far

have been the Depository Institutions Deregulation and Monetary Control Act of
1980, which enlarged thrift institutions1 asset powers and will phase out
deposit interest rate ceilings by 1986, and the Garn-St Germain Depository
Institutions Act of 1982, which authorized money market deposit accounts
effective December 1982.

Subsequently, the Depository Institutions

Deregulation Committee authorized super-NOW accounts effective January 1983.
The interest rates on balances over $2,500 in either of these accounts are not
regulated.

The new technology also permitted the development of new products

such as generic cash management accounts that bundle into one package a number
of services previously marketed separately, including interest-bearing
accounts, check-writing privileges, credit cards, lines of credit against
predetermined collateral, and security trading, combined with complete on-line
and hard copy accounting statements of all transactions.
Although it is too early to say for sure, the new electronic technology
may reduce further the apparently small economies of scale in banking
(Benston, Hanweck, and Humphrey, 1982), thereby enhancing the ability of
smaller institutions to compete and survive.

This tentative conclusion

contradicts the frequently heard assertion that small institutions will not
survive in the age of the computer because of the great economies of scale and
utilization associated with electronic processing of transactions.

However,

the conventional argument confuses economies of scale in data processing with
economies of scale in the financial services firm.

To the extent that data

processing services can be purchased from a service bureau— and small banks
not only do this but, in some cases, have organized jointly owned service
companies to provide such services— the economies are external to the
financial services industry itself and need not imply economies of scale for
firms within that industry.

Such economies could, of course, result in some

degree of concentration in the computer services industry.

But the ultimate

outcome in banking depends on future developments both in technology and in
the organizational arrangements by which financial institutions obtain data
processing services.

HOW BANKS HAVE FARED IN RECENT YEARS

Problems of Measurement
In assessing how well banks have fared in recent years relative to their
competitors, one encounters several problems of measurement.
of an organizational nature.

One of these is

In comparing banking with nonbanking

competitors, should only the bank’s activities be considered or, when the bank
belongs to a holding company, those of the entire organization?

There would

appear to be a strong case for including the activities of all the
subsidiaries of the holding company in such comparisons.

Clearly, the

performance of the holding company, not the bank, is the ultimate concern of
stockholders and managers.

More importantly for our purposes, the competitive

effects of market share and concentration are best measured by combining the

shares of all institutions under common control, rather than by looking only
at the share accounted for by some selected group of subsidiaries.
Another problem concerns the choice of the unit of measurement.

A common

choice, has been assets, largely because data have usually been available.
However, a total assets measure would greatly understate the importance of a
brokerage and investment banking firm like Merrill Lynch relative to the
banking industry, making the country’s largest broker appear smaller than many
medium-sized banks.

This is because the primary roles of such a firm are

those of broker, underwriter, and dealer, with inventories of securities
largely limited to those maintained for trading purposes.

Thus, the assets of

such a firm would in no way reflect the scope and extent of its financial
activities— at least until it got into the business of operating money market
mutual funds.

On the other hand, a total assets measure inflates the economic

contribution of money market mutual funds, since the service offered by such
funds is primarily to add an additional layer of intermediation between
investor-depositors and banks, thereby enabling smaller investors to overcome
the impediments to higher returns imposed by interest rate regulation and
reserve requirements.
A possible alternative measure that would avoid these problems is
employment, which is not subject to the same distorting effects as total
assets and, presumably, is closely related to the firm’s economic
contribution.

However, employment is an input, and its use begs the important

question of whether institutions differ in their productivity and/or relative
use of labor and capital in generating output.

Moreover, employment is

itself a function of banking structure, varying directly with the number of
banking offices and inversely with the degree to which banks are free to
compete on price.

A related measure that in some degree accounts for

differences in the quality and productivity of employees is employee
compensation.

Other measures, such as profits and value added, are superior on

conceptual grounds, but accurate data on them are simply not available.
BanksT Share of the Financial Services Market
There is a widespread impression that banks have continually lost market
share to other financial and nonfinancial firms in recent years.

However,

after a sharp loss in market share in the years following World War II, banks
seem to have held their own since 1960.

Data from the Flow of Funds accounts

(table 6) indicate that, although bank holding companies have gained market
share in some product lines and lost share in others, their share of total
financial intermediation as measured by assets has varied between 36.5 percent
and 39.5 percent in the 1960-81 period.

The employment and employee

compensation data in table 7 also provide evidence of the continued strength
of banks’ position in the financial services sector.
Inroads by Other Financial and Nonfinancial Firms
The stability of banks’ overall market share since 1960 contradicts the
perceptions of many bankers that nonbank financial and nonfinancial firms were
steadily encroaching on commercial banking’s traditional product lines.

large part, that perception was based on the fact that such firms have,
indeed, made major inroads in specific financial services.

It was also

engraved in bankers’ consciousness by a 1974 study by Cleveland Christophe
(published by Citicorp) titled Competition in Financial Services, which
documented the extent of unregulated firms’ activities in the extension of
consumer credit.

Christophe’s findings were startling to many bankers, as few

had recognized the importance of the competition represented by firms such as
Sears and General Electric whose primary activities were nonfinancial.
bankers were aware of competition from consumer finance companies and

Most

depository institutions, but the fact that Sears had more active charge
accounts and volume (as of 1972) than either Master Charge or BankAmericard
(the predecessors of MasterCard and Visa) was somewhat disquieting to many in
the banking industry.
Indeed, Sears and its two large national retailer rivals, Montgomery Ward
and J.C. Penney, had combined installment credit ($6.9 billion) exceeding that
outstanding at the nation’s three largest bank holding companies (BankAmerica,
Citicorp, and Chase Manhattan with $4.3 billion) by more than 50 percent.

that weren’t bad enough, Sears earned more money after taxes in 1972 on its
financial service business than did any bank or bank holding company in the
country.

That Sears had such a large volume of consumer receivables— its $4.3

billion of credit card receivables at year-end 1972 was roughly 80 percent of
the $5.3 billion of installment credit on all bank credit cards— should not
have been surprising.

Sears began to provide consumer credit to support its

retail operations in 1910.
However, table 8 shows that by 1981 bank cards had displaced Sears from
its preeminent position in the credit card business.

Visa is the current

leader in charge volume, a very important measure of business activity because
the income generated from merchants’ discount fees is proportional to charge
volume.

With domestic charge volume of $29.3 billion in 1981, Visa nearly

tripled the volume of Sears; in 1972, Sears’ volume was 73 percent greater
than Visa’s.
balances.

Visa is also the leader in number of active accounts and customer

Moreover, MasterCard is only slightly smaller than Visa.

Many

retailers have begun accepting one or both bank cards alongside their own
proprietary cards.
MasterCard in 1981.

For example, J.C. Penney began accepting Visa in 1980 and
Montgomery Ward now accepts both bank cards.

To analyze the extent to which other changes occurred over the past
decade, Harvey Rosenblum and Diane Siegel updated and expanded the Christophe
study and compared the bank-like activities of about 40 financial and
nonfinancial companies with those offered by the largest bank holding companies
(Rosenblum and Siegel, 1983).

As can be seen in table 9, the trends cited by

Christophe nearly a decade ago continued unabated through 1981, as most of
the industrial and retailing giants identified in his study expanded their
financial services further.

In 1981, as shown in table 10, seventeen companies

had profits from financial activities that exceeded $200 million.

Of these,

nine are bank holding companies; the other eight are Prudential, American
Express, Aetna, Equitable, ITT, Sears, General Motors, and Merrill Lynch.
Furthermore, finance companies are no longer strictly "captives".

Five top

companies, as shown in table 11, have evolved in a way that allows them to
conduct less than 10 percent (and as little as 1 percent ) of their financing
in conjunction with the sale of their parents1 products.
Table 12 lists 27 of the largest lenders in the United States (each with
over $5 billion in receivables).

Of the top 10 companies shown, seven are

bank holding companies, one is an insurance company and broker, and two are
the finance subsidiaries of automobile manufacturers. Of the other 17
companies, only eight are bank holding companies.
Perhaps the best way to examine the effects on banks of nonbank entry is
to look at what has happened in individual product lines.

Turning first to

consumer finance, we find that the largest bank holding companies have made
impressive gains in the last decade vis-a-vis certain of their nonbank
competitors.

This is shown in figure 1.

As indicated by table 13, auto lending is dominated by commercial banks,
which held 47 percent of the market at year-end 1981.

But the three captive

automobile financing subsidiaries^!^ 3^ ^rcent of the market.
L ! l) ft H \\ I

FEDERAL RESERVE BARK OF DALLAS

20
Figure 1
WORLDWIDE CONSUMER IN STA LLM EN T C R ED IT H ELD BY S E L E C T LA R G E BANK
HOLDING COMPANIES, R E T A IL E R S , AND CONSUMER D U R A B LE GOODS
M AN UFACTU RERS A T YEA R-EN D

billion dollars

1972

billion dollars

1981

billion dollars
— 50

$45.8
-General Electric

S w

40
J.VrgSijfj - Ford Motor
<is
* * • * .£ ? * ,!-

fft

30-

$27.7
Chase
’Manhattan

20 -

General
Motors

-Bank
America

$14.9
- J.C. Penney

io-

- Marcor
-Citicorp
- Sears
3 manufacturers

S O U R C E : Rosenblum and Siegel, Chart 1.

3 retailers

3 banks

Furthermore,
only

three

captive

the

b a n k s 1 share was

years

finance

earlier
companies

Banks

still

account

industrial

(C&I)

loans

largest

bank holding

year-end

1981,

companies
the

that,

for

credit,

cannot

smaller

both

volume.

Trade
be

used

Nevertheless,
that

supply

year-end

lenders

increased

for

the

triple

held

the

should

not

States.
$141.6

total

and

same

credit

table

imperfect

substitute

other

creditors

or m e e t

credit

have

nonfinancial
Some

portion

had

this

firms

selected

$77.4

was

There

utilizing
for

bank

C&I

the

loans

importance

growing

used
and

credit

evidence
source

dollar

because

payrolls.

Moreover,

short-term

billion

used

the
is

14,

and

34 n o n b a n k

widely

employee

ignored.

alternatives

firms
of

domestic

the m ost

credit

cannot

shown
of

the

importance

the

pay

percentage

points.

Nevertheless,

reached

commercial

underestimated.

trade

the

peak

outstanding

Siegel.

the

billion

held

below

period,

12 p e r c e n t a g e

l i o n ’s

United

Rosenblum

the

points

terms

trade

outstanding.

Over

businesses,

its

1981,

1978.

companies

almost

studied

nonbank

13 p e r c e n t a g e

many

bank

credit.

commercial

provide

credit

those

firms

paper
other

businesses.
Foreign
the

last

decade.

banks

held

equal

U.S.

have
At

$31.1

about

also

added

year-end

billion

10 p e r c e n t

1981,

C&I

U.S.

loans

the

competition

amount

in b u s i n e s s

branches

and

agencies

U . S .- d o m i c i l e d
of

C&I

loans

lending
of

foreign

businesses.

issued

during

U.S.

This

banks

businesses.
With

funds,
that

banks

but

have

respect
less
made

commercial

than

forays

mortgages,

insurance

into

banks

companies.

bank-like

are

Four

important

the

services— Prudential,

source

insurance

companies

Equitable,

Aetna

Life

& Casualty,

and

American

mortgages

outstanding

worldwide

commercial

greater

sector

would

Nor
of

Siegel

15).

These

fund

assets

about

Among

studied

automobile

cards.

leaving

their

aggregate
the m o r e

probable
market

with

money

and

the

rivals

figures

15,

liquid

a number

other

the

suggested.

profitability

the
and

are

assets

size w i t h

and

combined.

(see

table
market

directly

the
of

combined

n a t i o n ’s
$50.4

two

billion

Manufacturers

billion

have

order

savings

roughly

basic

future,

product

areas,

financial

their

banks

companies

and

billion

all money

Citibank,

Sears

$16.9

funds

fund

insurance

Ford

year-end
were

1981.

among

the

ago.

sense

and

only

a number

gains

those

companies.

Rosenblum

market

$42.5

provision

their

fund

The
by

percent

market

the

commercial

money

billion

area.

studied

all

America

a decade
in

lending

included,

financing.

then

deposits
table

compete

this

comparable

fundamental

balance,

Christophe

aggregate

ability

Lynch,

roughly

been

market

listed

holding

for near l y

deposits,

worldwide

bank

operated

Bank

losing market

their

bank

largest

companies

If m o n e y

commercial
$24.5

lease

the

was

had

lending

outstripped

the

which

companies

Despite

credit

1982,

with

had

receivables

firms,

billion

compares

nonbank

1982.

Merrill
1,

dominate
34

the

companies

accounted

between

$35.5

this

dominant

lease

commercial

halfway

companies

total

nonbanking

with

Bank,

the

in D e c e m b e r

of D e c e m b e r

Hanover

companies

banks.

banks

1981;

held

insurance

appeared

the

competitive

largest

receivables

these

year-end

mortgages

commercial

exceeded

have

lease

rank

number

General— had

it w i l l

riskiness.

most
offset

banks

dramatically
their

market

how well

financial

e.g.,

instruments—

services
judge

lines—

necessary

losses,

unchanged,

banks

strength

have

and
to

have

done

their
look

beyond

Bank

Profitability
William

startled

Ford,

bankers

nonfinancial
commercial
market
the

banks

profitable

accounting

before

sliding

percent

increased

down

either

for

financial

it w a s

firms,

and

values

and

stated

and

net

loan

that

a consequence

commercial

the

associations

period

support

War

Ford.

0.75

percent
or

only

period

was

the

reflects

was

since

not

even

after-tax

increased

percent
half

capital,

are

net

income

from

than
IRS

the

However,
such

for

leverage

stated

changes

average

data.

than

recent

industries,

lower

1970s

bank

not

reflect

early
decade.

levels

about

the

differences

assets

the

banks

consistently

from

record
for

nonfinancial

directly

been

net

last

primarily

has

16,

calculated

individual

Banking

grass

table

greater

the

become

reached

percent

1982).

has

0.90

equity

and

assets

does

firms,

some
on

almost

where

and

steadily

turf

and

period

banks

1950s

financial

(Ford,

occurs

commercial

practices,

income

entry

recently

at
in

market
the m a r k e t

worth.

contrast,

considering

this

accounting

profitable

for

this

Atlanta,

traditional

shown

this

return

very

so m a n y

nonfinancial

but

net

the

entry,

post-World

the

equity

than

Bank

ratios

and

less

vehicles.

nonfinancial

Bank

reason

been

appears

capital
of

has

years.

near

total

return

slightly

through most

The

the

Reserve

primary

encroaching

barriers

insured
in

Federal

the

banking

recent
of

the

evidence

assets

years.
all

the

were

that

through

income

percent

value

that

was

And

profitable

motor

arguing

characterized

highly

0.60

institutions

greenest.

President

are
banks

the

accounting

deteriorated
bulk

unexpected
overstated.
is

earnings

the

sharply

from

1960

thr i f t s 1 assets

increases
Thus,

even worse

of m u t u a l

than

their
the

through

(mortgages)

interest
true

savings

rates,

indicate.

and

1980.
are

their

profitability

figures

banks

savings

Indeed,

overstated

earnings

relative

during

As
by

the

and

noted,
fact

accounting

that

book values

industries.

differ

Thus,

against

which

equally

generally

assets

are

not

the

commercial

further

refinement

before

they

smaller
As

banks

the

are

documented

a variety

largest

not

nonbanking

How well

have

they

have

not

done

too well.

with

bank

holding

independent
and

Rhoades,

companies
faster
firms

companies

have

not

have

profitable

1976

their

holding

companies

appears

to h a v e

coin

evaluating

studies

Studies

Nevertheless,

the

1975).

and

affiliated with
than

firms,

less

unaffiliated
after
in

been

poor

market

base

value

problems

total

return

only

been

the

But

time

data

and

are

to
returns

require

Further,

companies,

have
found

Boczar,

for

But
of

the

banks
bank

have

data

are

the

evidence

less

that

banks

less

but

Lastly,

did

and

overall

The

industry.

leasing

considerably

success

profitability

grow

1980).

less-than-resounding

their

1976

finance

equipment

profitable

(Rhoades,

affiliated

(Talley,

bank-affiliated

1977).

they

than

slowly

companies

into

companies.

available,

profitable

grown more

expanded

holding

that mortgage

unaffiliated

activities,

performance

through

found

counterparts

impressive.

the

different

These

commercial

considerably

allowing

these

industries

makes

treat

compounded

data.

bank holding

have

also

and

were

this

fragmentary

but

than

Rhoades

banks

and

amounts

meaningfully.

activities

banking

were

used

section,

mortgage

(Talley,

riskier

Based
Two

different

stock market.
at

are

traded.

financial

done?

failure
income

the

which

capital

is m e a s u r e d

banks

earlier

fragmentary

can

actively

the

different

The

distorts

only

assets

as v a l u e d
are

for

limitations,

importance

values

profitability

only

different

also

bank

available

severe

profitability.

stockholders1 investments,
on

book value

industries
present

have

from market

to m e a s u r e

all

data

only

one

other

bank

still

side

risk.

the

Riskiness
It

economy
late.

often

than
The

and

risk

public

firm,

capital,

measured

the
by

earnings,

the

amount

assets

and

the

even more

firm

capital.

total

measures

for

mutual
loans

considerably
return

per

profitable
relative

unit

equity

Because
measure

the

overall

a whole.

the

riskiness

the

stock market

given

and

impact

when

failures.
for

Thus,

they

t o d a y ’s r e g u l a t i o n s

probability

was

the

formulating

the

and

were

0.14

assets

the

accumu
that

present
both

and

private

and

losses

b a n k s ’ annual

and

1.12

for

2.33

may

and

percent,

and

only

far

slightly

they

for

are
on

profitable

firms.

returns.

risk measure

said

data,
Risk

some
is

reflect

relative

" B e t a ” (3)

analysts

prefer

then measured

the v o l a t i l i t y

portfolio

less

two

and

the most

1.43

these

percent

are

exceed

returns

percent

deviations

volatile

was

all

the

The

can

banking

accounting

assumptions

probability

0.1

For

exceed

Measured

quantified

will

examined.

losses

sectors

returns

stock

profitability.

cumulative

percent

and was

for

this

1980 wer e

percent

average

the

standard

commercial

that

earnings.

that

the

stock market
in

than

certain

returns,

nonfinancial

Under

deviations

1960

0.17

shortcomings

latter

adverse

in p a r t i c u l a r

to m e a s u r e

bankruptcy.

banks

basis,

the

contrast,

the

volatility

The

between

than

the

difficult

standard

relative

profitability

The

risk

greater

importance

probability

associations

industry

the

for

bank

or v a r i a b i l i t y

savings

greater

distribution

equity

respectively.

and

into

volatility

greater

firms,

for m any

considered

percent,

savings

banks

have

banking.

probability

the

other

of w i d e s p r e a d

towards

often

forcing

regarding

the

failures

of m o s t

risk

exposure

though,

bank

justification

the

policy

risk

that

failures

reduce

Risk,
a

the

original

they would
potential

argued

the

either

stock market

’’s y s t e m a t i c ” r i s k

the

risk

coefficient.

inherent
A

3 equal

for

individual

risky

3 of

less

the market;

than

bank holding

that

risky

the

In m o r e
possibly

a portfolio

3 greater

over

commercial
average

recent

below-average

companies

suggesting
than

stock

years,

suggesting

last

3 for

banking

3 for

companies

have

been

traded

become

has

risky

just

risk;
of

and

large

.90,

stock

increased
as

slightly

on m a j o r

companies

sample

been

are

that

above-average

has

holding
has

indicates

average

years

those

stocks

1 indicates

The

bank holding

firm whose

that

than

risk.

the

less

exchanges.
somewhat,

consequence

deregulation.
Commercial
incur

banks,

some

the

Interest

rate

change
and

average

interest
assets;
or

the

rate

change

its

rate

the

shocks

are

able
and

interest

because

the

interest

average maturity

with

paid

through

rate

changes

deposits

changes

whose

sensitivity

from

risks

they

portfolios.

For

and

default

deposits

the

increase
to

its

that

the

interest.

assets

earned
its

losses

interest
Moreover,

perfectly with

risk,
on

than

assets.

rates

assets

received

average

contract

rate

not

in m a r k e t

its

does

shorter

influence

changing
to

exceed

can

risk.

interest

coupon

interest

deposits

the

deposits

bank

relative

in m a r k e t

eliminate

time

sharp

The

risk

paid

deposits

losses.

securities

interest
can

same

an u n expected

its

are

the

control

rate

and

the

liability

amount

interest

a bank

are

asset

are

experiences

parallel

passed

their

interest

securities

average

firms,

assumed

assets,

the

bank

liabilities,

same

sensitivity

other

occurs

from unexpected

by matching
of

the

causes

Rate-sensitive
rates

risk

maturity

thus,

interest

risks

investments.

rates

gains

by managing

two m a j o r
Risk

loans

the

degree

Rate

always
on

banks,

all

that

interest

one-to-one

basis.

Recent

studies

balanced
their
risk

the

suggest

interest

balance

sheets

(Flannery,

example,

the

mismatched
Default

the

rate

unlike

and

well

1980b).

Pennsylvania

interest

been

default

For

purposes

into

two

types— non-crisis

service

occur

are

activity
their

debt

loss

predict
under

defaults

some

two

banks

have

sides

the

little

individual

1980— have
sides,

fully.

institution

reserves.

and

the

control

are

The

losses

limiting

expected

find

revenues

Thus,

defaults

Default
expected

default.

is
on

The

are

periods

stage

two

interest

banks—

rate

for

deliberately

often with

large,

that
the

marginal

likely
by

evidence

time

not

poor

results.

number

defaults

are

and

a blend

the

controlled

establishment

and
the

timely

cycle.

are more

experience

to m a k e

firms

occurrence

defaults

in n a t i o n a l

may

crisis

has

divided

business

defaults

But

Non-crisis

downturns

their

concerned
may

national

large

borrowers

the

comparable
estimate

differ
1958

that,

greatly
and

difference

is m u c h

non-crisis
two.

lower

the

than

payments

between

default-free
of

the

least

from

their

Atkinson,

the

security.

expected

loss

This
from

for m a rketable

default
1967).

difficult

clustered.

indicates

(Hickman,

bank.

the m arket
and

the

crisis

difficult

risk

defaults

it m o r e

defaults

diversification

individual

non-crisis

extent

most

been most

defaults.

triggered

t h e m a r k e t ’s b e s t

losses
of

the

security

available

actual

very

priced

represents

securities,
long

risk

returns

difference

and

any

through

the

cases;

crisis

ability

risk

have

actual

and

are

the

bankers

analysis,

that

reduce

and

over

incurred

the

which
of

randomly

economy w e a k e n s , more

debt.

securities

have

N.A.

defaults

that

individual

adequate

less

that

defaults

economic

risk.

defaults

the

commercial

Risk
risk with

institutions,

However,

sensitivity

the

Crisis

and

Bank,

Traditionally,

are

thrift

sensitivity

reasonably

1980a

First

that,

risk
It

premiums
is

thus

necessary

that

cover

future

banks

with

prior

these

one

success

loans

and

loans

through

firms

correlated
the

use

the

strategy.

probability

nonbanking

date

nonbank
Indeed,

because

activities

than

permissible

lines,

however,

most
in

For most

important

1977.

reserves

experiences

accord

study

the

that

some

suggest

appropriate

when

fact,

bank

through
the
at

their

major

that,

accounting

for

has

not

trust

currently well
bank holding

services.

below

the

companies,

accounting

exceeded

the

of business.
into

risk.

any
(p.

113)

nonbanking

into

some

likelihood

community welfare,
investments

that

commercial
for

into

nonbank

in m a n y

the

Bank

levels

average

each

expansion

increase

expanded

via

lines

the

expansion

reduction

sufficiently

company

investing

company

probability
in

higher

the

bankruptcy

is m u c h

significantly

nonbanking

that

already

expanded

returns

include

has

increase

bank holding

and

investments

industry

yet

risk
The

been

and

concluded

limited.

into

has

evidence

companies

potential

investment

the

either

streams

This

expand

bank holding

entering,

own.

Hanweck,

holding

small

earnings

examined

1977.

best,

the

risk

have

(Boyd,

impact

by very

could

activity,

overall

independent

to m a t e r i a l l y

advising,

their

activities

first

is ,

activities

are

have

in b a n k i n g ,

investment

failed

countries

studies

the v a r i a n c e

cards,

solvency.

level

industry

These

developed

recent

that

activities

bankruptcy.

recent

companies

suggest

business.
the

lenders

holding

is m i n i m i z e d

area

the

bank

1971

However,

with

during

diversification

risk-minimizing

new

examined

results

reduce

The

nonbank
line

may

bankruptcy

activities

bankruptcy

The

less

banks

Three

P i t h y a c h a r i y a k u l , 1980)
on

the

acquisition,

for

this

earnings.

risk.

activities.
of

recognized

not

known,

negatively

and

this

motivation

types

premiums

developments,

is w e l l

de n o v o
either

losses

energy

recognition
As

these

would

banking
percent

credit
these

threaten
is
of

far

their

the

assets

later

study

these

results

study

considered

companies
also

and
be

understated

the

analyzes

activities

(Stover,

time

and

some

these

insurance,

correlated
of

This
stock

with

savings

banks

been

which

the

that

less

attribute

subjects

(1981)

both.

the

past

that

risk

were

could

entering

The

last

negatively

offset

in)

casualty

associations.

recent
by

events,

the

negative

that

examines

the

that,

companies,

their

stock

were

announced,

relationships.

the

new

jumps

Company
to

thereby

the

change

Act

same

limiting

However,

This

holding

late

than would

phenomenon
would

company

stock

the

formations

prices.
of

restrictions

the

1960s

prices

Amendments

similar

between

the

by more

organizations
of

the

companies

finds

companies

such

study

bank holding

unpredicted

reduction.
any

another

Announcements

companies,

find

that

increased

light

been

formed

Bank Holding

holding

risk

1982).

believed

one-bank

failed

they

basis

loan

study

participated

identified

earnings

have

formations

accompanied

this

and

the

as m u l t i b a n k

diversification

periods.

risky,
not

after

that

and

banking.

one-bank holding

investors

1970 w e r e

activities

Swary

day

Stover

This

permissible

concluded

significantly

supported

Lakonishok,

formed

predicted

profitable,

authors

and

both

actually

study

earlier

associations.

suggests

after

loan

performance

increased,
have

and

The

its

correlation would

indirectly

large

because

into

the

that

to b a n k h o l d i n g

participated.

companies

savings

commercial

Harris

holding

reported

because

permissible

diversification

and

finding

(Eisenbeis,
when

negative

reductions

actually

In p a r t i c u l a r ,

primarily
of

they

performance

banking,

those

risk

activities.

and

activities.

included

the

earnings

reduced

the

financial

investment

activity was

value

of w h i c h

similar methodology

which were

in w h i c h

implications

nonpermissible

using

potential

activities

all

significantly

the

only

the

(not

1982)

The
1970,

possible
study
pre-

by
and

Aharony

and

post-1970

PROBABLE

FUTURE DEVELOPMENTS

What

banks

have

amply

documented.

banks

play?

but

it w i l l

But

part,

largely

decisions

they

Goals

Strategic

and
In

others.

determined
identify

world

Deregulation
Banks
industry,

large

wholesale

counterpart
Jones,
shops.

regional
This

industry,

even

employees.
deregulation

they

are

doing

What

role

will

legislation
and,

now

and

has

been

commercial
regulation,

particular,

the

years.

government.

is w h a t

risks

examine

have

how

best

to m e e t

major

and

that

stores

second
Jones

St.

ranks

no-advice

commission

rates

and

the

grocery

out

determine

1975.

operates

how best

investment

this

offices
in

number
and

few
a

few

offices

specialty

industry

bare-shelf
377

nationally,

limited

The

banking

mostly

industry:

offices

even has

markets.

basically

its

Edward

one-person

any

firm

capital

and

27th

in n u m b e r

brokers
As

store

firms.

102nd

the

supermarkets

"warehouse,"

discount

structure

load.

structure

The

the market,

function.

number

survey

areas

important

regional

only

market

increasingly

Louis,

largest

competition

planning.

specialty
and

the

services

strategic

nationally

local

have

goals,

and w h o l e s a l e

which

the w o r k

retail

their

decide

geographical

will

is m e a n t

rival.

number

out

and

They

the m arket

operating

"7-11"

though

will

specify

becomes

the

firm

banks

lines

process

Bare-shelf,
of

several

product

numerous

the

themselves

their

operating

the

hold?

determined

and

a greater

and

future

banks

resembles

firms

cities,

the

how well

pursue,

perceived

supermarkets

and

the

industry

firms,

the

planning

large

in m a j o r

the

opportunities,

want

their

unregulated

increases

may

does

environment,

This

choices,

past

Planning

them

them.

the

will

customers

potential

retail

over

longer will
for

achieve

what

depend

make

which

this

a deregulated

emphasize,

done

would

developed
be

after

expected

the

from

the

i n d u s t r y ’s d y n a m i s m
profitable.

While

primarily

entry

by
a

examined

recent
the

effects

pressures,

new

categories:

firms

operate

brick

and

consumer

reduce

service

bank

excessive
some

Unlike

but

largely

this
gifts,

caught

numbers

are

firms,

been

substantial

basis

only

banks

branch

different

less

because

the

cannot

products,
was

that

had

existing

prepared

fell

into

for

three

producers;

and

marketing

particularly
to

about

particular

not

distinct

have

cost-cutting,

among

cost

Among

price

brought

firms

low

and

They

and,

which
be

under

price.

kind

rules

necessary
of

allowed.

may

important

learn how

seen

Regulation

under
In

personnel

offices.

overinvestment,

planning

a necessity

are

the

different

severe

by mergers

Company

deregulation.

aimed

the w i n n i n g
firms;

and

for

rules.

were

many

branches

firms

that

new

who

of w e a k e r
that

McKinsey

this

and

deregulation.

adapting

they

overlooked,

followed

ground

employment

competition

deregulation

has

in p r o f i t s ,

producers,

full-line

suggests

branches

deposits,

competition

firms

larger

underwent

large measure

concluded

group

that

introduction

national,

different

mortar

there

1981),

variability

specialized

undergoing

importance

industries

absorption

study

industries

The

banking

consolidation

Goodrich,

products,

study

Each

This

previously

the

firms.

under

investment

deregulation,

increased

low-cost

The

and

capital.

the m a r k e t

strategies.

ongoing

(Bleeke

for

particularly

specialty

need

changeover.

broad

study

most

firms.

unbundling

entry

years,

continuing

were

the

observed

increased

firms,

characteristics

and

segments

recent

there

result

smaller

the

noting
compete

free market

addition,
are

for

where

deregulation

required

that

tends

compete when

The

recent

acceleration

particular,

thrift

institutions

with

prevented

least

Planning might

will

readily

costly

disposed

for
of

have
some
when

years

conditions

come.
change.

Commercial banks can ease the process of deregulation and succeed in the
new environment by taking advantage of all the flexibility and options that
are now available to them.

On the lending side, for example, many banks have

shaken off their product and geographic shackles by using the bank holding
company device.

Deregulation of deposit interest rate ceilings will likely

improve the penetration by nationally oriented bank holding companies into the
markets of self-chosen, locally limited banks.
In the last year or so competition for deposits has taken some new forms.
Alliances that would have been termed "unholy" not long ago are commonplace
now.

Merrill Lynch, the same company that has $50.4 billion of money market

fund assets that purportedly compete with bank and thrift deposits, acts as a
broker in the placement of retail CDs issued by many banks and thrifts, thus
giving them a nationwide reach.

Nor, as can be seen in table 4, is Merrill

Lynch alone in this regard; it is joined by many other investment banking
firms, including Sears/Dean Witter, Shearson/American Express, and E. F.
Hutton.

Together, these four companies operate about 1,325 offices

nationwide.

Collaboration with national brokerage houses enables

comparatively small institutions such as City Federal Savings and Loan of
Elizabeth, New Jersey, to compete toe-to-toe with Bank of America for retail
CDs.
The market for funds in denominations greater than $1 million has been
national ever since Citibank invented the negotiable certificate of deposit in
1961.

The same is true of the market for large repurchase agreements.

Bank-related commercial paper, also sold in a national market, amounted to
some $31.9 billion at year-end 1981.

What was true a decade ago for wholesale

deposit markets is now becoming true at the retail level— the geographic scope

of retail deposit markets is broadening.

Some banks have begun to compete for

retail deposits nationally, particularly since deposit interest rate ceilings
have been eliminated on most time and savings deposits, and these accounts are
fully insured so that the identity of the bank is not of great interest to
most depositors using brokers.

Another example of the expanding geographic

reach of banks in deposit gathering is provided by Citibank (South Dakota)
which has taken several advertisements in the Wall Street Journal that invite
the reader to contact a Citibank account representative about rates and other
terms offered on Citibank consumer CDs.
telephone number.

Contact is available via a free 800

Ironically, one of the Citibank advertisements recently

appeared right next to a similar ad from a money market fund.
Bankers1 Complaints:

Justified or Gratuitous?

In recent years, commercial banks have increasingly complained about the
inroads other financial and nonfinancial firms have made into their
traditional banking turf and about regulations that hamstring them from
counterattacking and invading their opponents' home turf.

This attitude is

reflected vividly in a recent booklet entitled The Old Bank Robbers' Guide to
Where the New Money Is published by Citibank.

The booklet counsels Willie

Sutton, the well-known bank robber of yesteryear who guaranteed his
immortality by explaining that he robbed banks because "that's where the money
is," to:
try the brokerage houses that run the money market funds. But that’s
not all. Try the insurance companies, the retailers, bus lines,
manufacturers, travel agents, movie makers, utilities, data proces
sors, publishers and anyone else who's gone into the financial services
business. That’s where the money is! (Citibank, p. 3).
The extent of the inroads of nonbanks into commercial banking has already been
documented in the previous section.
Are the commercial banks justified in their complaints?

Are they

constrained by regulatory, legal, or other external barriers from offering the

same services as their new-found competitors?

We shall examine the ability of

banks to offer each of the 18 services cited in the Citibank booklet and
listed in table 17, only the first five of which Citibank acknowledged banks
could offer.
Perhaps the service offered by nonbank competitors that bankers have
complained about most is the generic cash management account (CMA).

This

account usually combines five separate services, all of which are included on
Citibank’s list— a consumer credit line, a credit card, security trading, a
money market account, and check writing— wrapped together by a single
accounting statement.

It was first introduced by Merrill Lynch in 1977, but

did not take off immediately.

Indeed, for some years it was viewed as a

"dog", generating much paperwork, but little income for brokers (Smith, 1982).
Commercial banks were always able to offer consumer credit lines and
credit cards, to trade and take positions in federal government and most
municipal government securities, and to serve as agents for the remaining
municipal and all corporate security transactions.

However, only recently did

banks attempt to expand their activities in the corporate security area.
Early in 1983, BankAmerica Corporation received permission from the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act to
acquire all the shares of Charles Schwab & Company, the nation’s largest
discount broker.

A year earlier, the Security Pacific National Bank entered

into a cooperative arrangement with Fidelity Brokerage to provide brokerage
services to its customers on a fee basis and also received permission from the
Comptroller of the Currency to operate a discount brokerage service as a
subsidiary of the bank.

Although commercial banks are prohibited by the

Glass-Steagall Act of 1933 from giving investment advice and taking positions

in some municipal revenue and all corporate securities— that is, from being
full-service investment bankers— as agents they can directly execute trading
orders on all securities generally included in cash management accounts.

contrast, savings and loan associations may invest in full-service investment
banking firms.
Paying market rates of interest on deposits has been a more severe
problem for the commercial banks when market interest rates climbed above
Regulation Q ceilings.

Selling money market funds not subject to interest

rate ceilings has been considered a sale of securities and therefore not
permissible under the Glass-Steagall Act.

However, it is clear that the

problem is due to Regulation Q, not to the Glass-Steagall Act, insofar as it
prevents banks from offering small investors a deposit account paying market
interest rates.

Yet, until recently, few banks, other than the largest,

actively lobbied for the repeal of Regulation Q.

In addition, banks could

have provided customers with repurchase agreements.

Although these are not

insured, neither are money market fund accounts.
Check writing facilities are not a problem, of course.
market funds use commercial banks for this service.

Indeed, money

It would have been

technically possible for banks to tie check writing with repurchase agreements
through some form of overdraft provision.

Although such arrangements were

likely to have encountered resistance from the Federal Reserve, the important
point is that they were not tried.

If they had been combined with earlier

lobbying against Regulation Q, changes might have occurred before December
1982.

But even earlier, a number of banks had designed cash management

services.
Continuing down the list, commercial banks always were able to extend
loans and mortgages.

Thus, any losses of market share in these services could

not be blamed totally on regulation.

As discussed earlier, historically,

banks were Johnnies-come-lately in both services.
The other services on the list are either not flourishing or not strictly
financial and have not been the target of major inroads.

Life, property, and

casualty insurance have not been exceptionally profitable in recent years,
although insurance brokerage probably would complement nicely the activities
of larger banks.

Real estate trading may complement mortgage banking, but is

not strictly financial.

Nor are travel agencies and car rentals.

This is

also true of data processing and telecommunications, which banks can do for
themselves and, on a limited basis, for others.
Thus, with the possible exception of full-line securities activities, it
would appear that commercial banks have been inhibited in their expansion into
other financial services in recent years as much by internal, self-imposed
constraints as by external constraints.
out-competed.

They were simply out-imagined and

Because banking has been relatively profitable during these

years, bank management may not have felt the drive to seek additional
profits in new, uncharted waters.

Belatedly, commercial banks have begun to

realize this and have taken the first steps to break their internal cultural
bonds and do battle with the invaders.
PUBLIC POLICY CONCERNS
As far as regulatory reform has already gone, and despite the effective
nullification of some restrictions by the workings of the marketplace, further
legal and regulatory changes are necessary if the goal of an optimal financial
structure is to be achieved.

To the extent that it is deemed desirable for

banks and other financial institutions to offer broader ranges of services or
compete in broader geographic markets, they should not be forced to resort to
clumsy organizational expedients to do so.

Geographical Restrictions
Among the most obviously outdated and undesirable restrictions remaining
are geographical limitations on holding company and branch bank expansion,
including home office protection.

Although geographic expansion through

nonbank subsidiaries of bank holding companies, loan production offices,
banking by mail, and toll free phone numbers has negated some of the barriers
to competition erected by state branching laws, protected pockets of privilege
still prevail in some local markets, particularly in deposit-taking and small
business lending.

There are no obvious economic reasons why even these

isolated sanctuaries from competition should be allowed to survive.
Branch banking has been severely restricted in most states, for reasons
ranging from fear of monopoly to outright protectionism designed to maintain
the small bank as a local institution.

The latter reason for restricting

branching has often been buttressed by the argument that branch banks have not
been convincingly demonstrated to be superior to unit banks in terms of
operating efficiency— although a recent study (Weisbrod, 1980) indicates that,
when account is taken of the benefits to consumers of the greater convenience
offered by branching, branch banks do much better in comparison with unit
banks.

In any event, this argument is irrelevant.

Enlightened public policy

does not consist in outlawing all those forms of business enterprise which
have not been shown unquestionably to be efficient, but in allowing all forms
to compete for the consumer’s favor in a free marketplace.
The states’ rights arguments against a federal override of existing state
branching restrictions, at least for national banks, are similarly misguided.
The fact is that there appears to be little popular opposition to branch
banking.

In practice, the branching issue has been decided in most states by

the small bank lobby.

More importantly, the arbitrary restrictions placed on

banking by state branching laws should no more be tolerated than state taxes

designed to eliminate chain stores or the sale of yellow-colored margarine.
All are impediments to commerce imposed for the benefit of competitors, not
competition.
On the other hand, in phasing out these geographical restrictions,
certain safeguards would seem desirable.

The frequent proposal to move first

to reciprocal interstate branching on a regional basis is not as innocuous as
it may seem.

In fact, it would enable existing institutions within each

region to merge, increasing local concentration and reducing the opportunity
for heightened competition that would result if each such institution
acquired, or were acquired by, a banking organization headquartered in another
region of the country.
Mergers and Acquisitions
Similarly, though some liberalization of merger and acquisition policy
might be a natural and desirable result of eliminating geographic
restrictions, care should be taken to prevent anticompetitive acquisitions.
Existing antitrust laws may be adequate to the task, but greater assurance
might be achieved through new legislation.

One option that might be

considered would be an upper limit on the number of offices a banking
organization could operate in any local market, perhaps taking account of area
and population.

While allowing banks to expand essentially wherever they

wished, such a provision would prevent concentration in local banking markets
and impose an upper limit on concentration nationwide.
The arguments for eliminating existing restrictions on product offerings
of various institutions are similar, although some of the side issues are
quite different.

A continuation of the trend in the Depository Institutions

Deregulation and Monetary Control Act and the Garn-St Germain Depository
Institutions Act would eventually result in a financial system consisting of
firms with all-purpose charters and no price constraints in which

specialization would simply be the result of a business decision, rather than
of law or regulation.

In such an environment, a congressional decision to

subsidize housing would be an above-board choice to override the marketplace,
rather than to grant special benefits to a specialized financial institution.
The result, one may surmise, would not be a reduced level of subsidization of
housing but a more efficient subsidy.
Among the few serious issues that might reasonably be invoked to block
the complete abolition of functional restrictions is the fear of conflicts of
interest.

Despite assurances that such conflicts could easily be policed, and

despite the skepticism regarding conflicts of interest by some academic
economists, this fear remains strong and little concrete evidence has been
adduced to assuage it.

Consequently, the Glass-Steagall restrictions on

security underwriting and dealer activities by banks may be among the last to
go— if, in fact, they do go.

In this context, it is also of some importance

to remember that the Glass-Steagall restrictions on bank securities activities
are not barriers to entry in the usual sense, but barriers to entry by only
one type of institution representing only 15,000 of the more than 70,000
financial services firms and the nearly 3 million nonfinancial firms in the
country.
THE FUTURE
The future of the banking industry will be exciting, both for the public
and, in particular, for the industry itself.

More changes are likely to occur

in the next five years than in the last 50 in terms of both products and
structure.
equilibrium.

Deregulation has displaced the structure from its previous
There will be considerable and at times rather wild churning

until a new equilibrium is reached.

As the old ground rules disappear,

uncertainty will increase.

Conditions may appear chaotic for a period,

particularly to outsiders.

In such a situation, not everyone will react the

the same way or as effectively.

Thus, there will be winners and losers before

everyone settles down to the new ground rules.

Market shares will change,

and, either through absorption or through liquidation, the losers will depart
from the industry.

There will even be some new entrants.

survive when the churning stops is anyone’s guess.

How many firms will

What is obvious is that

there will be fewer than the 15,000 commercial banks, 4,000 savings and loan
associations, 500 mutual savings banks, 20,000 credit unions, 2,000 life
insurance companies, 250 money market funds, 500 other mutual funds, 3,000
property liability insurance firms, 3,000 security dealers, 3,000 finance
companies, 800 mortgage bankers, and many more self-managed pension funds and
other financial institutions than we have now.
Although the departure of a goodly number of firms will produce a
considerable uproar about the plight of the industry, it should be of no more
concern to the public than the failures of a number of brokerage firms after
the demise of fixed commissions in 1975 or, more recently, the actual and
threatened departures of some older firms in the airline industry.

(Actually,

there are almost twice as many airlines today as there were before
deregulation, albeit many are small and specialized.)

The institutions that

we call commercial banks today are likely to be heavily represented among the
survivors, but that result is by no means guaranteed, nor is it a matter of
great concern from society’s standpoint.

As we argued at the beginning of

this paper, the public is interested in the quality and price of the services
offered, not in the identity or health of any particular suppliers.
The surviving institutions will need to respond to a new set of
circumstances.

This will not be easy to do and the penalties for being wrong

will be much more severe than before.

Moreover, firms will be paying dearly

for past responses that were correct under the old ground rules but are now

incorrect.

As noted earlier, the construction of additional branches was the

correct strategy for gathering consumer and small business deposits as long as
all competitors were limited to paying the same interest rates.

But with the

freeing of deposit rates, competition by price is likely to dominate
competition by convenience and many of the branches will become costly white
elephants.
Because of the increasing importance of technology, the new entrants are
likely to be firms outside the financial services industry such as computer
software and hardware firms.

Smaller firms that find it costly to develop

their own delivery systems will be able to rent them either from suppliers
outside the industry or from larger firms within the industry, possibly on a
franchise basis.

Competition will be intense.

public at large the future looks bright.

But for the survivors and the

T ab le 1

N oninterest Incom e as a Percent
of N et Interest Incom e

1977

1978

1979

1980

1981

( - .................... p e r c e n t ----------------- )

Citicorp
BankAmerica Corp.
Chase Manhattan Corp.
Manufacturers Hanover Corp.
Continental Illinois Corp.
Chemical New York Corp.
J. P. Morgan & Co.
First Interstate Bancorp
Security Pacific Corp.
Bankers Trust New York Corp.
First Chicago Corp.
Wells Fargo & Co.
Crocker National Corp.
Marine Midland Banks, Inc.
Mellon National Corp.

23.1
24.0
33.1
23.3
31.5
23.0
44.1
21.3
33.1
36.2
37.1
19.3
17.9
21.6
24.5

32.8
22.6
30.2
23.1
32.9
25.0
53.1
17.7
30.0
22.3
43.0
16.9
15.0
18.5
25.9

SOURCE: Company Annual Reports and 10-K forms.

32.2
25.0
28.6
22.8
36.2
23.1
47.4
17.7
32.9
38.0
46.7
16.1
16.1
20.5
26.0

46.0
32.0
35.0
26.5
33.4
24.9
55.4
19.8
41.4
49.7
64.6
24.1
19.1
22.0
31.6

65.0
35.0
37.0
41.4
40.0
32.8
64.6
25.0
44.7
50.0
57.5
32.3
23.9
27.3
31.9

Tab le 2

Permissible N onbank Activities for Bank Holding Companies
U nder Section 4(c)8 of Regulation Y, A pril 1983

Activities permitted by regulation

Activities permitted by order

Activities denied by the Board

1. Extensions of credit2
Mortgage banking
Finance companies: consumer,
sales, and commercial
Credit cards
Factoring
2. Industrial bank, Morris Plan bank,
industrial loan company
3. Servicing loansand other extensions
of credit2
4. Trust company2
5. Investment or financial advising2
6. Full-payout leasing of personal or
real property2
7. Equity or debt investments in com
munity welfare projects2
8. Providing bookkeeping or data pro
cessing services to holding company
subsidiaries and, with restrictions, to
others2
9. Acting as insurance agent or broker
primarily in connection with credit
extensions2
10. Underwriting credit life, accident,
and health insurance directly related
to extensions of credit by the hold
ing company system
11. Providing courier services2
12. M anagem ent consulting for unaffil
iated banks1’ 2
13. Sale at retail of money orders with a
face value of not more than $1000
and U.S. Savings Bonds and issuance
and sale of travelers checks1’ 2
14. Performing appraisals of real estate1
15. Management consulting to nonbank
depository institutions

1. Buying and selling gold and silver
bullion and silver coin2,4
2. Issuing money orders and generalpurpose variable denominated pay12 4
ment instruments ’
3. Futures commission merchant to
cover gold and silver bullion and
coins ’
4. Underwriting certain federal, state,
and municipal securities1 2
5. Check verification1,2’ 4
6. Financial advice to consumers1,2
7. Issuance of small denomination debt
instruments1
8. Futures commission merchant1
9. Discount brokerage1
10. Arranging equity financing1
11. Purchasing a financially troubled
savings and loan association1,5,

1. Insurance premium funding (com
bined sales of mutual funds and
insurance)
2. Underwriting life insurance not re
lated to credit extension
3. Real estate brokerage2
4. Land development
5. Real estate syndication
6. General management consulting
7. Property management
8. Computer output microfilm services
9. Underwriting mortgage guaranty in
surance3
10. Operating a travel agency1,2
11. Underwriting property and casualty
insurance1
12. Underwriting home loan life m ort
gage insurance1
13. O rb anco : Investm ent note issue
with transactional characteristics

A d d e d to list since January 1 ,1 9 7 5 .
A c tiv itie s perm issib le to n atio n al banks.
3Board O rd e rs fo u n d these activities closely relate d to b an kin g b u t d e n ie d pro p o sed acquisitions as part o f its “ go slo w " policy.
4To be d e c id e d on a case-by-case basis.
5O p e ra tin g a sound th rift in stitu tio n has b ee n p e rm itte d by o rd e r in R h o d e Island and N e w H a m p sh ire o nly.
S u b s e q u e n tly p e rm itte d by re g u la tio n .
S O U R C E : E c o n o m ic R e v ie w (Federal Reserve Bank of A tlan ta, S e p te m b e r 1982), p. 17, as u p d a te d by th e authors.

T a b le 3

The Global Activities of Citicorp in 1981

A. In U.S.A. (40 state and District of Columbia)
Subsidiary____________
Citibank
Citibank (NY State)
Citicorp (USA)
Citicorp Industrial Credit
Citibank International
Citicorp Real Estate
Citicorp Capital Investors
Citibank (South Dakota)

Carte Blanche
Diners Club
Citicorp Services
Citicorp Person-to-Person
Citicorp Acceptance
Company
Retail Consumer
Services
Citicorp Associates

_____________Function_____________

_________Branches/Offices

Commercial banking
Commercial banking
Corporate lending
Equipment finance, leasing,
factoring, commercial finance
Edge Act international
banking corporation
Commercial mortgages,
project finance
Venture capital—
d eb t/equity finance
Mastercard/Visa
national operations;
commercial banking
Travel and entertainm ent
card
Travel and
entertainm ent card
Traveler's checks
Home equity and
personal finance
Manufactured housing/
auto/recreational-vehicle
finance
Private-label chargecard services
Processing and related
services for depository
institutions

284 branches, NYC area
34 branches, upstate NY
17 offices in 14 states
32 offices in 22 states
13 branches in 10 states
13 offices in 10 states
New York, San Francisco,
London
Sioux Falls, SD

Cardholders nationwide
Cardholders nationwide
Agents w orldwide
153 offices in 36 states
50 offices in 30 states

18 offices in 12 states
58 offices in 18 states

B. Overseas (92 countries and territories)
Subsidiary

Function

Citibank

Commercial banking

Citicorp International Group

M erchant (investment)
banking

Citibank Overseas
Investment Corp.

Holding company

Branches/Offices
Branches of Citibank and its
banking subsidiaries in 75
countries; representative
offices in 11 additional
countries*
Subsidiaries, representative
offices, and affiliates
in 15 countries
Subsidiaries and affiliates
in 36 countries, including
overseas operations of Cart
Blanche and Diners Club

♦ C itib a n k is re p re s e n te d in six fu rth e r co u n tries by c o m m e rc ia l banks in w h ic h it has substantial m in o rity interests.
S O U R C E : C itic o rp , by perm ission.

T a b le 4

Depository Institution-Broker Relationships in the
Distribution of Insured Retail Deposits
As of August 1982

MERRILL LYNCH (475 offices)
ALL-SAVERS CERTIFICATES for 15 thrifts nationwide
RETAIL CDs* for 20 banks and thrifts nationwide including Bank of America
SECONDARY MARKET IN RETAIL CDs of 2 banks and 2 thrifts
91-DAY NEGOTIABLE CDs for Great Western Federal Savings and Loan, Beverly Hills
DEAN WITTER (8 Sears stores with financial center pilot programs and 320 Dean Witter offices nationwide)
RETAIL CDs* for 2 thrifts including Allstate Federal Savings and Loan
SECONDARY MARKET IN RETAIL CDs for City Federal Savings and Loan, New Jersey
BACHE (200 offices in 32 states)
ALL-SAVERS CERTIFICATES for City Federal Savings and Loan
RETAIL CDs* for City Federal Savings and Loan and one S&L in Los Angeles
SHEARSON/AMERICAN EXPRESS (330 domestic offices)
ALL-SAVERS CERTIFICATES for Boston Safe-Deposit & Trust Company
RETAIL CDs* for selected banks and thrifts
FIDELITY MANAGEMENT GROUP (29 offices in 50 states)
ALL-SAVERS CERTIFICATES for 6 banks including Security Pacific National Bank and First National Bank of Chicago
E.F. HUTTON (300 offices in 50 states)
ALL-SAVERS CERTIFICATES for 15 regional banking companies
EDWARD D. JONES & COMPANY (435 offices in 33 states)
ALL-SAVERS CERTIFICATES for Merchants Trust Company, St. Louis
MANLEY, BENNETT, McDONALD & COMPANY (10 offices in 2 states)
ALL-SAVERS CERTIFICATES for First Federal Savings & Loan, Detroit
PAINE WEBBER (240 offices)
ALL-SAVERS CERTIFICATES for 2 banks in California, including Bank of America
CHARLES SCHWAB & CO. (offices in 38 states)
ALL-SAVERS CERTIFICATES for First Nationwide Savings and Loan, San Francisco
THE VANGUARD GROUP (offices in 50 states)
ALL-SAVERS CERTIFICATES for Bradford Trust Company, Boston

*31/2-, 4-, 5-year, and zero coupon certificates of deposit.
SOURCE: Various issues of A m e r i c a n B a n k e r and other general business
periodicals, as given in Rosenblum and Siegel, Table 14.

T ab le 5

Geographic Locations of the 15 Largest Bank H olding Companies: 1981

Bank H olding C om p an ies

Offices

Citicorp
BankAmerica Corp.
Chase Manhattan Corp.
Manufacturers Hanover Corp.
Continental Illinois Corp.
Chemical New York Corp.
J.P. Morgan & Co.
First Interstate Bancorp
Security Pacific Corp.
Bankers Trust New York Corp.
First Chicago Corp.
Wells Fargo & Co.
Crocker National Corp.
Marine Midland Banks, Inc.
Mellon National Corp.

States

Nonbanking

Banking

40 & D.C.
40 & D.C.
15 & D.C.
32
14
23
6
13
39
4
27
16
6
5
13 & D.C.

422
360
42
471
20
135
7
19
427
2
23
52
15
14
151

25
38
4
28
28
6
5
24
7
8
14
6
5
not avail
11

*These figures are exclusive of banking branches in their home states but include offices of bank
subsidiaries.
SOURCE: Annual Reports and 10-K forms, as given in Rosenblum and Siegel, Table 15.

T ab le 6

Total Private Financial Assets, 1945-1981

1945

1950

1955

1960

1965

1970

1975

1976

1977

1981

1980

1979

1978

(b illio n d o lla r s )

C o m m ercial Banking

143.8

147.8

185.1

(U.S. Banks)

228.3

340.7

504.9

834.3

905.5

1002.9

1146.8

1274.5

1386.3

1520.7

224.2

335.0

448.9

786.0

845.4

936.3

1056.0

1161.4

1244.7

1352.2

3.0

12.8

18.8

18.9

20.6

25.2

29.5

37.5

8.7

16.9

37.7

71.5

129.6

176.2

338.2

391.9

459.2

523.6

579.3

629.8

663.8

17.0

22.4

31.3

41.0

59.1

79.3

121.1

134.8

147.3

158.2

163.3

171.5

175.3

2.4

6.3

11.0

18.0

31.1

43.3

51.6

58.4

61.9

69.2

75.2

43.9

62.6

87.9

115.8

154.2

200.9

279.7

311.1

339.8

378.3

420.4

469.8

508.8

Private Pension Funds

2.8

6.7

18.3

38.1

73.6

110.4

146.8

171.9

178.3

198.3

222.0

286.8

293.2

State and Local G o v e rn m e n t

2.7

5.0

10.7

19.7

34.1

60.3

104.8

120.4

132.5

153.9

169.7

198.1

221.7

O th e r Insurance C o m p an ies

6.9

12.6

21.0

26.2

36.5

49.9

77.3

93.9

113.2

133.9

154.9

180.1

184.2

Finance C o m p anies

4.3

9.3

17.1

27.6

44.7

64.0

99.1

111.2

133.8

157.5

184.5

198.6

224.9

3.9

14.0

9.8

7.2

6.8

6.7

5.8

5.5

1.3

3.3

7.8

17.0

35.2

46.8

43.0

46.5

45.5

46.1

51.8

63.7

64.0

3.7

3.9

10.8

45.2

74.4

181.9

4.9

4.0

5.9

6.7

10.3

16.2

18.5

26.8

27.7

28.0

28.2

33.5

41.8

2642.9

3000.6

3362.4

3767.6

4161.0

(D om estic Affiliates)
Savings and Loan Associations
M u tu a l Savings Banks
C red it U nions
Life Insurance C o m p anies

Em ployee R e tire m e n t Funds

Real Estate In vestm ent Trusts
O p e n -E h d In vestm ent C o m p a n ie s
(M u tu a l Funds)
M o n e y M a r k e t M u tu a l Funds
Security Brokers and D ealers
T O TA L

236.7

291.5

425.2

598.2

929.0

1330.8

2111.6

2370.8

( p e r c e n t o f to t a l)

C o m m ercial Banking

60.8%

50.7%

43.5%

(U.S. Banks)

38.2%

36.7%

37.9%

39.5%

38.2%

37.9%

38.2%

37.9%

36.8%

36.5%

37.5

36.1

36.7

37.2

35.7

35.4

35.2

34.5

33.0

32.5

16.5

17.4

17.2

16.7

16.0
4.2

(D om estic Affiliates)
Savings and Loan Associations

3.7

5.8

8.9

12.0

14.0

13.2

16.0

M u tu a l Savings Banks

7.2

7.7

7.4

6.9

6.4

6.0

5.7

5.6

5.3

4.9

4.6

1.1

1.2

1.4

1.5

1.8

2.0

1.9

1.8

18.5

21.5

20.7

19.4

16.6

15.1

13.2

13.1

12.9

12.6

12.5

12.2

C red it Un ion s
Life Insurance C o m p anies
Private Pension Funds

1.2

2.3

4.3

6.4

7.9

8.3

7.0

7.3

6.7

6.6

7.6

7.1

State and Local G o v e rn m e n t

1.1

1.7

2.5

3.3

3.7

4.5

5.0

5.1

5.0

5.1

5.0

5.3

O th e r Insurance C o m p an ies

2.9

4.3

4.9

4.4

3.9

3.7

4.0

4.3

4.5

4.6

4.8

4.4

Finance C o m p anies

1.8

3.2

4.0

4.6

4.8

4.7

5.1

5.2

5.5

5.3

5.4

2.0

1.7

1.5

1.7

1.5
4.4

Em ployee R e tire m e n t Funds

Real Estate In vestm ent Trusts
O p e n -E n d In vestm ent C o m p an ies

1.1

1.8

2.8

3.8

3.5

2.0
.2

1.3

2.0

2.1

1.4

1.1

1.2

1.1

1.0

100.0%

(b illio n dollars)

20.6

44.4

67.6

81.4

119.5

189.1

249.6

268.4

299.5

357.5

427.6

460.8

% o f Total TPFA

8.7

15.2

15.9

13.6

12.9

14.2

11.8

11.3

11.9

12.7

12.2

11.9

14.3

30.0

36.5

35.7

35.0

37.4

29.9

29.6

29.9

31.2

33.6

33.2

32.6

(M u tu a l Funds)
M o n e y M a rk e t M u tu a l Funds
Security Brokers and D ealers
TO T A L

1.0
99.9%

Trade C re d it by N o n fin . Firms

% o f C o m m e rc ia l Banks

S O U R C E : Board o f G o v e rn o rs o f th e Federal Reserve System, F lo w o f F u n d s .

496.0

T ab le 7

Banking’s Percentage of Financial Sector1

1950

1960

1970

1979

Full-time employees

32.8

31.8

35.4

37.2

Employee compensation

32.3

31.3

33.2

Net income2

n.a.

35.1

26.6

19.7

Value added

n.a.

32.9

31.0

28.5

1Banks include commercial banks and mutual savings banks.
2Net income of banks as a percentage of financial sector net income is a
volatile series. The first year of data is 1957 when banks accounted for 23.7
percent; in 1958 banks’ share jum ped to 37.5 percent, only to drop to 23.9
percent in 1959 before recovering to 35.1 percent in 1960. Over the 1957-79
period, this net income ratio ranged from a low of 14.4 percent (in 1968) to a high
of 37.5 percent (in 1958), with a median of 20.3 percent.
SOURCE: Employee data are from The N ation al In c o m e & P rodu ct
A c co u n ts o f th e U n ited States 7929-76: Statistical Tables (United States Depart
ment of Com m erce, Bureau of Economic Analysis), p. 256 and S u rvey o f C u rren t
B u siness: R e v is e d Estimates o f N ational In c o m e a n d P ro du ct A cco u n ts (United
States Departm ent of Comm erce, Bureau of Economic Analysis, July 1982), p.
241; net income data are from various issues of Statistics o f In c o m e : C o rp o ra tio n
In c o m e Tax R eturns (Departm ent of the Treasury, Internal Revenue Service);
value added data are derived from all of the above sources.

49
T a b le 8

Consumer C redit Card Programs of M a jo r Card Issuers

1972
Number of Active Accounts
at Year-End (millions)
Sears
MasterCard
Visa
American Express

1981

18.5
10.3
10.0
—

24.5
22.1
25.8
10.0

Customer Charge Volume
($ billions)
Sears
MasterCard
Visa
American Express

6.3
5.9
4.4
—

9.8
26.1
29.3
n.a.

Total Customer Account Balances
at Year-End ($ billions)
Sears
MasterCard
Visa
American Express

4.3
2.8
2.3
—

6.8
12.3
15.2
4.2

SOURCE: Data for 1972 are from Christophe, Chart II, p. 6 and data for 1981 are
from company Annual Reports supplemented by phone discussions, as given in
Rosenblum and Siegel, Table 9. For 1981, MasterCard and Visa data are U.S.-only,
while Sears and American Express data are worldwide.

T ab le 9

Estimated Financial Service Earnings of
Nonfinancial-Based Companies

1962
Million
dollars
Borg-Warner

$0.5

Control Data

1972

Percent
of total
earnings

Million
dollars

1981

Percent
of total
earnings

Million
dollars

Percent
of total
earnings

$31

18.0%

1.5%

$6.3

10.6%

nil

55.6

96.2

Ford Motor

0.4

nil

44.1

5.1

186

n.a.1

General Electric

8.7

3.3

41.1

7.8

142

8.6

General Motors

40.9

2.8

96.4

4.5

365

109.62

Gulf & Western

nil

29.3

42.1

24.5

ITT

1.2

2.9

160.2

33.6

387

57.2

Marcor

nil

9.0

12.4

110

n.a.3

Sears4

50.4

21.6

209.0

34.0

3855

51.1

0.9

2.0

15.2

7.6

7.8

Westinghouse

103.0

662.2

29.2

1,732

1Ford M otor Company had a net loss of $1,060 million in 1981.
2General M otors and consolidated subsidiaries had a loss of $15 million after taxes; however, after adding
$348 million of equity in earnings of such nonconsolidated subsidiaries as G M A C , General Motors had after-tax
net income of $333 million.
3M arcor has been acquired by M obil Oil Company. In 1981, Marcor's operating loss was $160 million.
4Sears' financial service earnings are stated before allocation of corporate expenses to its business groups. In
1981, such expenses were $103 million.
5Does not include net incomes of Dean W itter and Coldwell Banker because they were acquired on
December 31,1981.
SOURCE: 1962 and 1972 data from Christophe (1974), Table III, p*10; 1981 data from company Annual
Reports and 10-K forms, as given in Rosenblum and Siegel, Table 1.

T ab le 10

Earnings from Financial Activities, 1981:
M anufacturers, Retailers, Diversified Finance
Companies, Insurance-Based Companies,
and Bank Holding Companies

_______ Company________

Earnings
($ m illio n s )

Prudential
Equitable Life Assurance
Citicorp
American Express
Aetna Life & Casualty
BankAmerica Corp.
Chase Manhattan Corp.
ITT
Sears
J. P. Morgan & Co.
General Motors
Continental Illinois Corp.
Manufacturers Hanover Corp.
First Interstate Bancorp
Chemical New York Corp.
Security Pacific Corp.
Merrill Lynch

1,576
651
531
518
462
445
412
387
3851
375
365
255
252
236
215
206
203

1Sears’ financial service earnings are stated before allocation of corpo
rate expenses to its business groups. In 1981, such expenses were $103
million.
SOURCE: Company Annual Reports and 10-K forms, as given in
Rosenblum and Siegel, Table 2.

T ab le 11

Percent of Financing in C onjunction w ith
Sales of Parent's Products

1972

_______ Company________
General Electric Credit Corp.

1981

not available

43a

less than 1

Associates/G&W

Commercial Credit/Control Data

Borg-Warner Acceptance Corp.
Westinghouse Credit Corp.

Estimated from information in Christophe (1974), pp. 48-49. As of 1973, Westinghouse stated in
its 10-K that the percentage of its parent's products financed was a “small portion" of WCC's business.
bData shown are for 1975, the earliest date available.
SOURCE: For 1972, Christophe (1974), except as noted. For 1981, Annual Reportsand 10-K forms,
as given in Rosenblum and Siegel, Table 3.

T a b le 12

Total Domestic Finance Receivables
of 27 Selected Companies Having Over
$5 Billion in Receivables: 1981

Company

Receivables
($ b illio n s )

BankAmerica Corp.
General Motors
Citicorp
Continental Illinois Corp.
Manufacturers Hanover Corp.
Prudential/Bache/PruCapital
First Interstate Bancorp
Chase Manhattan Corp.
Chemical New York Corp.
Ford Motor
Security Pacific Corp.
Wells Fargo & Co.
First Chicago Corp.
Sears
Equitable Life Assurance
Bankers Trust New York Corp.
J. P. Morgan & Co.
Crocker National Corp.
General Electric
Aetna Life & Casualty
American Express
Mellon National Corp.
Marine Midland Banks, Inc.
Gulf & Western
National Steel
Merrill Lynch
Walter Heller

52.0
45.1
40.6
23.7
23.1
23.0
21.3
21.2
20.3
19.5
19.2
16.1
14.5
13.8
13.7
13.0
12.9
12.7
12.3
10.8
9.5
8.1
7.9
5.9
5.9
5.1
5.1

SOURCE: Company Annual Reports and 10-K forms, as given in
Rosenblum and Siegel, Table 4.

T ab le 13

Domestic Automobile Loans Outstanding
as of year-end: 1977-1981

1981
(

1980

1979
■ - - $ m illio n s - -

..............

1978
-

1977
.............. )

General Motors Acceptance Corp.1
Percent of total

$ 28,545
23%

$ 20,298
17%

$ 17,526
15%

$ 13,519
13%

$10,999
13%

Ford Motor Credit Co.2
Percent of total

$ 10,450
8%

$ 8,977
8%

$ 7,678
7%

$ 6,527
6%

$ 5,127
6%

Chrysler Financial Corp.3
Percent of total

$ 1,948
2%

$ 1,742
2%

$ 1,472
1%

$ 1,728
2%

$ 1,634
2%

Total of three auto finance companies
Percent of total

$ 40,943
32%

$ 31,017
27%

$ 26,676
23%

$ 21,774
21%

$17,760
21%

Commercial banks
Percent of total

$ 59,181
47%

$ 61,536
53%

$ 67,367
58%

$ 60,510
60%

$49,577
60%

Other
Percent of total

$ 26,307
21%

$ 24,285
20%

$ 22,319
19%

$ 19,363
19%

$15,574
19%

Total auto loans outstanding

$126,431

$116,838

$116,362

$101,647

$82,911

includes small amount of financing of other General Motors products such as trucks and tractors.
2These domestic numbers are estimates. They also include a small amount of financing of Ford's other products.
includes Canadian and Mexican automotive receivables. The 1977 figure includes a small amount of European receivables as well.
SOURCE:

F e d e ra l R e s e rv e B u lle tin ,

company Annual Reports and 10-K forms, as given in Rosenblum and Siegel, Table 6.

T a b le 14

Business Lending by Selected Nonbanking-Based Firms and
Bank Holding Companies at Year-End 1981a

Commercial
and Industrial
Loans
(

Commercial
Mortgage
Loans

Lease
Financing

.................... ---------- $ m illio n

Total
Business
Lending
............ )

39,365

1,768

14,417b

55,550

3,602

3,054

1,581b

8,237

4 Insurance-Based

399

35,506

892b

36,797

3 Retail-Based

606

15 Industrial/Communications/
Transport^
10 Diversified Financial^

15 Largest BHCs
Domestic
International
Total, Top-15 BHCs
Domestic Offices, All
Insured Commercial Banks

—

606

—

43,972

40,328

16,890b

101,190

141,582
118,021

19,481
5,046

14,279b

175,342
123,067

259,603

24,527

14,279

298,409

327,101

120,333c

13,168

460,602

aThis table includes business lending data for 32 of the 34 companies covered in Appendix A of Rosenblum and
Siegel (1983). O m itted are two oil-based companies which had no commercial loan receivables at year-end 1981.
^Includes domestic and foreign lending and may include leasing to household or government entities,
in c lu d e s all real estate loans except those secured by residential property.
^Financing by banking and savings and loan subsidiaries has been subtracted.
SOURCE: Company Annual Reports and 10-K forms and
Rosenblum and Siegel, Table 10.

F e d eral R eserve B u lle tin ,

April 1982, p. A76, as given in

T ab le 15

Money Market Fund (MMF) Assets of Selected Nonbank Institutions:
December 1,1982

Number of
MMFs

Company

Net MMF Assets
($ b ill io n )

Merrill Lynch

50.4

15.5

Sears/Dean Witter

11.9

E. F. Hutton

7.7

Prudential/Bache

4.3

American General Corp.

0.4

Transamerica Corp.

0.3

Equitable Life Assurance

0.4

Aetna Life & Casualty

0.03

Ford Motor

not available

Shearson/American Express

90.9
SOURCE: D o n o g h u e ' s M o n e y
Rosenblum and Siegel, Table 13.

Fund

R e p o rt,

December 6, 1982, as given in

T a b le 16

Profitability of Insured Commercial
Banks: 1952-1980

Net Income as Percent of
Year

Total
Assets

Total
Capital

Equity
Capital

1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980

0.55
0.55
0.68
0.57
0.58
0.64
0.75
0.63
0.81
0.79
0.73
0.72
0.70
0.70
0.69
0.74
0.72
0.84
0.89
0.87
0.83
0.85
0.81
0.78
0.70
0.71
0.77
0.81
0.80

8.07
7.93
9.50
7.90
7.82
8.30
9.60
7.94
10.02
9.37
8.83
8.86
8.65
8.73
8.70
9.56
9.70
11.48
11.89
11.85
11.60
12.14
11.89
11.19
10.66
10.93
11.96
13.01
12.85

10.14
10.31
11.98
12.37
12.39
12.25
12.86
12.53
11.75
11.41
11.72
12.80
13.89
13.66

SOURCE: FDIC

A n n u a l R e p o rt,

various issues.

T ab le 17

Financial Services Offered by Banks and Other Financial Firms:
Who Does What According to Citibank

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.

Activities

Banks

Take Money/Pay Interest
Check Writing
Loan
Mortgage
Credit Card
Interstate Branches
Money Market
Securities
Life Insurance
Property Insurance
Casualty Insurance
Mortgage Insurance
Buy/Rent Real Estate
Cash Management Account
Travel Agency/Service
Car Rental
Data Processing (General)
Telecommunications

X
X
X
X
X

SOURCE: Citibank,

O l d B a n k R o b b e rs G u id e to W h e r e th e N e w

Other
Financial
Firms
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
M o n e y Is,

pp. 22-23.

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Full text of Working Papers (Federal Reserve Bank of Chicago) : The Future of Commercial Banks in the Financial Services Industry, SM-83-5

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