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

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Savings banks, in contrast to the focus of S&Ls on promoting home ownership, were established to promote savings among the working and lower classes, who in earlier times were effectively ignored by the large and established commercial banking community, by accepting deposits and providing interest. The intent was not to earn a profit for the founders of the bank. Instead, the earnings would go to the depositors. The first savings banks of the United States were established in 1816, when the Philadelphia Saving Fund Society began operations on a voluntary basis and the Provident Institute for Savings in Boston was granted the first savings bank charter. Soon after the early success of those two savings banks, other savings banks were chartered in a number of states, primarily in the Mid-Atlantic region and the industrial North-east, where there were large numbers of wage earners seeking a safe haven for their savings 25 . In the early 1980s however many savings banks failed for the same reasons as S&Ls. In addition, many failures of thrifts occurred between 1985 and 1994 as a result of banking legislation 26 . Banking legislation of that era also changed considerably the profile of thrifts. For example, federal deregulation laws in the 1980s gave savings banks the opportunity to be federally chartered as well as to become capital stock corporations (see ownership structure section below). Also, the activities of thrifts were much broadened (see activities section below). The market share of savings institutions in the US banking market in terms of total assets at the end of 2003 was 15% 27 . 3.2.1.1.3.2 Ownership structure The system for savings institutions incorporates basically two choices for corporate governance, the mutual and the capital stock (e.g. mutual holding) form of ownership. The original corporate organisation of both S&Ls and savings banks was the mutual one. In a mutual savings association, depositors are technically also the ‘owners’ of the assets and are therefore entitled to a share of the profits. In a mutual savings association however depositors do not have the same rights as members or shareholders since the ownership rights do not provide either voting rights or any influence in managing the business 28 . Instead, such rights are exercised by trustees in these institutions. The ‘Trustee system’ is the principle characteristic that distinguishes mutual thrift associations from member-owned banks. Trustees are members of a larger group known as the Corporators. Corporate powers of the mutual savings association are vested in the Corporators, and this group represents the diverse interests and communities served by the bank. Corporators elect individuals from the group to govern the operations of the bank without profit to themselves. The elected Trustees are responsible to ensure that the interests of the depositors, borrowers, and members of the community in which they serve are considered when management decisions are made. Further, a Board of Trustees ensures that the customers’ deposits are kept and invested safely, interest is paid to the depositors out of the revenues generated from investments after deducting expenses, and that the principal is available to customers on request. In mutual savings associations, profits are distributed to the customers in proportion to the business they do with the institution. A newer mutual charter variation is that of the mutual holding companies (MHCs) 29 . This is a corporate structure that combines elements of a mutual savings association with a stock entity. In a basic MHC reorganisation, a mutual savings institution forms a new, wholly-owned subsidiary stock savings institution and transfers substantially all of the mutual's assets and liabilities to the stock institution. The original mutual institution then becomes a MHC by adopting a new mutual holding company charter. In effect, the mutual account holders of the mutual savings institution become the owners of the mutual holding company. 25 About three-quarters of all mutual savings banks in the US today are located in Connecticut, Massachusetts and New York. Demographic and economic conditions in the South and the expanding West favoured more the development of commercial banks and stock savings associations. 26 In the early 1980s, congressional activity was dominated by actions to deregulate the product and service powers of thrifts (and to a lesser extent of banks). These deregulatory actions were generally unaccompanied by actions to restrict the increased risk taking they made possible, and so they contributed to bank and thrift failures. A detailed analysis of the impact of regulation on the failure of thrifts can be found in “History of the Eighties: Volume 1: An examination of the Banking Crisis of the 1980s and early 1990s”, Chapter 6, FDIC website. 27 ESBG calculation based on figures from FDIC and CUNA. 28 “History of the Eighties: Volume 1: An examination of the Banking Crisis of the 1980s and early 1990s”, FDIC website. 29 Mutual holding companies were first authorised by the Competitive Equality Banking Act of 1987. Those provisions were clarified by congress in the Financial Institutions Reform, Recovery and Enforcement Act in 1989. 26
The subsidiary stock institution issues the stock, the majority of which is owned by the MHC (no less than 50.1%). A minority portion may be publicly offered. The MHC's board of directors/trustees is elected by the same group (corporators or depositors) who elected the directors/trustees of the mutual savings institution. Originally, most savings institutions were mutuals. But since the early 1980’s, there has been a growing trend of shifting ownership from depositors to shareholders through the so-called mutual-to-stock conversion 30 , the main reason being to raise equity capital 31 . Also, the mutual holding company form allows thrifts, as commercial banks with the holding company form, to be part of universal finance groups offering insurance and securities services and underwriting as well as investment banking. 3.2.1.1.3.3 Deposit insurance Savings institutions, as commercial banks, are insured by the FDIC 32 . The money collected by the FDIC savings institutions is subsequently distributed into two different FDIC accounts: the Bank Insurance Fund (for savings banks) and the Savings Association Insurance Fund (for S&Ls ). However, in special cases they can also be insured by the respective other fund or even both funds (see insurance part of commercial banks section for more detail). 3.2.1.1.3.4 Activities Until the 1980’s savings institutions were mainly active in those fields they had originally been chartered for. Savings banks focussed on receiving savings deposits from individuals, investing them 33 and providing a modest return to their depositors in the form of interest, while S&Ls focussed on mortgage lending. However, over the years, the charter of savings institutions has changed considerably. The Garn - St. Germain Act of 1982 broadened the savings institutions’ powers allowing savings banks to issue credit cards, make non residential real estate loans and commercial loans; activities previously only allowed to commercial banks. S&Ls were also permitted to invest up to 30 percent of their assets in consumer loans, and were allowed to invest in state and local government revenue bonds. This deregulation practically eliminated the distinction between commercial and savings institutions. As a further result of this deregulation, most federally chartered S&Ls and savings banks today have identical powers 34 . Although the FIRREA 35 imposed back some restrictions on thrift activities in 1989 36 , commercial banks and savings institutions can today offer virtually the same bundle of financial services products, from transactions, savings, and time deposits to consumer, real estate, and commercial loans. They nevertheless differ noticeably in their commercial lending capacity because "basket limits" were imposed to preserve their primary character as retail mortgage-lending institutions. Under these limits, a savings institution can engage in mortgage lending without limit, consumer lending up to 35% of its assets and commercial lending up to 10 % of its assets (with an additional 10% for small-business loans) 37 . The elimination of lending limits on small business loans and an increase of the lending limit on other business loans from 10% to 20% of assets is however likely to be introduced soon given that the US House of Representatives voted overwhelmingly in favour of regulatory relief legislation H.R.3505, which proposes such changes, in March 2006. The measure now has to be passed in the Senate. 30 In 1983, 77 percent of all S&Ls were mutual institutions. By 1996, only 42 percent of all institutions were mutuals. This trend is still ongoing. Source: http://www.siue.edu/~jso/Papers_Publications/thrift.doc 31 “Mutual to stock conversions, problems with the pricing of IPOs”, J.A. Colantuoni, FDIC Banking Review. 32 The FIRREA abolished the FSLIC as the original insurer of S&Ls in 1989 and turned the responsibilities over to the FDIC. 33 Originally, the investment of savings banks funds was restricted to government bonds, but soon high-grade municipal, railroad, utility and industrial bonds, blue-chip common and preferred stocks, first mortgage loans and real estate as well as other collateralised lending were added. 34 The only exception is mutually state chartered savings banks that convert to a federal savings bank charter. 35 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 9th of August 1989. 36 Thrifts were required to adhere to national-bank limits on loans to one borrower and on transactions with affiliates, limits were imposed on state-chartered thrifts, the use of deposits was restricted and investments in junk bonds were prohibited. 37 Garn-St. Germain Depository Institutions Act of 1982, SS 321-335, 96 Stat. 1469, 1499-1505 (1982) (codified at 12 U.S.C. 1464(c)). 27
Page 1: September 2006 RESEARCH A COMPARATI
Page 4 and 5: IE UK FR BE NL LU DK DE SE CZ AT SL
Page 6 and 7: The following WSBI/ESBG committees
Page 8 and 9: 4 Regulation and supervision compar
Page 10 and 11: 6.5 Issues of competition in retail
Page 12 and 13: To finish, if we had to pick from a
Page 14 and 15: In the US, credit institutions have
Page 16 and 17: Following the same logic, the EU co
Page 18 and 19: In that context, it is tempting to
Page 21 and 22: 3. INSTITUTIONAL COMPARISON 3.1 Sec
Page 23 and 24: The market share of the US banking
Page 25: FDIC-insured commercial banks are i
Page 29 and 30: Regulatory reform over the past thi
Page 31 and 32: State credit unions were first exem
Page 33 and 34: There has however been much effort
Page 35 and 36: 3.2.2.2.2.2 Ownership and corporate
Page 37 and 38: Hermann Schulze-Delitzsch and Fried
Page 39 and 40: In contrast, building societies in
Page 41 and 42: The commitment of savings banks is
Page 43 and 44: 4. REGULATION AND SUPERVISION COMPA
Page 45 and 46: In addition, for regulations define
Page 47 and 48: The European Parliament has to be k
Page 49 and 50: In fact, it should be mentioned her
Page 51 and 52: As far as coordination at the feder
Page 53 and 54: Despite the trend towards the estab
Page 55 and 56: Another important factor in the cho
Page 57 and 58: In the European Union, contrary to
Page 59 and 60: Although younger than CESR, both CE
Page 61 and 62: 4.2.5.1.1.1.1 Limitation of the geo
Page 63 and 64: 4.2.5.1.1.3 Recent trend: regulatio
Page 65 and 66: Another important common feature be
Page 67 and 68: The best execution rule was first m
Page 69 and 70: 4.3.2.2.4 National Market System ru
Page 71 and 72: The ISD set a basis for the develop
Page 73: Best execution rules exist in both
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The decline of savings institutions
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Relative to population, the Europea
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5.2.2 Size of credit institutions 5
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5.2.2.2 European Union In Europe, t
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5.2.3 Concentration and consolidati
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5.2.3.2 European Union Average CR5
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In terms of the nature of consolida
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100% Graph 9: Structure of the asse
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In terms of growth of the volume of
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5.3.2 Efficiency of credit institut
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Table 16: Evolution of the Return o
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Finally, looking at cost-income rat
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9. The last couple of decades have
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102
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Furthermore, the average outstandin
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Under an open-end credit, the credi
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Table 19: Evolution of outstanding
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6.2.1.2.2 Regulatory framework over
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6.2.1.3 Comparison 6.2.1.3.1 Size o
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In terms of market competition, the
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The residential mortgage market in
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Funding by retail deposits represen
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In sharp contrast, the US mortgage
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6.2.3.1.2 Lenders to small business
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The securitisation process requires
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Factoring is also continuously gain
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6.2.3.2.4 Securitisation of small b
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The above fears can hardly be allay
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- ACH credits and debits: the stati
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6.3.2.1.2 Financial intermediaries
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It should be noted that two of the
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Assuming that technology, globalisa
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The report adds: “although it bou
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Graph 19: Use of different distribu
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In terms of funding of the business
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Since then, established banks have
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MoU Memorandum of Understanding OTC
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Annex 2: Statistical appendix Table
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Table F: Share of US banking indust
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Table L: Structure of the liabiliti
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Table R: Number of ATMS in the EU a
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F - Federal Deposit Insurance Corpo
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A comparative analysis of the US and EU retail banking markets - Wsbi

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