A comparative analysis of the US and EU retail banking markets - Wsbi

In terms of funding of the business mortgage market,
commercial banks now directly fund more than a third of
outstanding business mortgages, up from 20% two
decades ago. Private ABS issuers are now the second biggest
providers of business-mortgage funding, accounting for
15% of the market. Meanwhile, direct funding by savings
institutions has declined significantly (savings institutions
hold less than 8%, compared with 22% twenty years ago).
In terms of the types of business loans being extended by
banks, there has been a notable shift from shorter-term
non-mortgage business loans to loans collateralised by
business real estate.
The FDIC study also reports on household-sector credit,
which includes both mortgage credit and consumer credit to
households.
Home mortgage credit market shares are already reported
and commented on earlier in this chapter, under the section
on mortgage credit, where the dramatic loss of market share
of savings institutions to mainly mortgage banks and
government-sponsored entities is explained, and where the
market share of commercial banks is said to have remained
stable in the last 30 or so years.
In terms of consumer credit, commercial banks fund around
a third of the market (compared to around half the market
in the 70s), with ABS issuers also funding about a third.
The rest of the market is made up of credit unions and
finance companies, which each originate around 15% of
the market’s loans, while savings institutions fund about
3%. As in business mortgages, ABS issuers have risen to
represent key players in the consumer credit market, when
20 years ago they did not exist.
Another sector that has grown market share as a funder of
the non-financial sector is the mutual-fund industry. Of course,
since mutual funds hold securities rather than loans, their
growth represents less direct competition than the growth
of federally related mortgage pools and ABS issuers for
the types of lending that make banks special-loans to
households and businesses.
The above makes clear the extent to which US domestic debt
has moved from being funded via traditional intermediation
to being funded through direct credit markets. However, it
only partially explains the role of banks in providing funds,
as it does not recognise the importance of the services
provided by US banks to facilitate funding in securities
markets. The same FDIC study highlights the role of banks
in providing services in originating, servicing, or enhancing
the creditworthiness of credit flows that end up being
funded elsewhere. It then considers the contribution that
such assets, which are not booked on a bank’s balance
sheet, make to the income of banks. Noting that the share
of net operating revenue from non-interest income of
commercial banks has more than doubled since 1980, the
study reveals that about 18% of non-interest income
reported by banks in 2001 reflected fees for servicing assets
funded elsewhere and securitisation income.
The study concludes that although commercial banking’s
on-balance-sheet activity has declined as a piece of the
credit-market pie, the industry's off-balance-sheet activities,
which in home-mortgage and consumer-credit markets tend
to be related to the loan-securitisation process, are a growing
source of income, particularly in the case of large banks.
This has not been the case for community banks. As explained
above (in the section on small business lending), size is
important in securitisation which depends on achieving
large scale. Thus growing commoditisation has perhaps
penalised small banks more than most. The result has been
that community banks have virtually dropped out of credit
card lending and no longer dominate mortgage or auto
lending 397 , while community banks have remained important
for less standardised types of lending, such as small business
loans (as reported above) and loans collateralised by
business real estate.
397 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004.
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