Offices of Bank Holding Companies

SIC 6712

Companies in this industry

Industry report:

Offices of bank holding companies are primarily engaged in holding or owning the securities of banks for the sole purpose of exercising partial or complete control over the activities of those organizations. Companies holding securities of banks, but which are predominantly operating the banks, are classified according to the kind of bank operated.

Industry Snapshot

Holding companies played a relatively minor role in the U.S. banking industry throughout most of the twentieth century. However, in 1999 Congress passed the Gramm-Leach-Bliley Act, which greatly expanded banks' field of play by creating financial holding companies (FHC), which could engage in activities other than banking as long as they were financial in nature. As a result, many major bank holding companies elected to become FHCs and expanded into such areas as securities and insurance underwriting. Although only about 12 percent of bank holding companies elected to become FHCs, by 2010 the top ten bank holding companies all held FHC status, and FHCs controlled more than 75 percent of bank holding company assets.

In 2010 the entire financial services industry in the United States was still reeling from the effects of the subprime mortgage meltdown and resulting financial crisis of the late 2000s. Dun & Bradstreet reported there were 1,857 bank holding companies with 27,397 employees that year. Together these firms generated $11.9 billion in annual revenues.

Organization and Structure

Bank holding companies are essentially corporations whose assets are comprised of controlling shares of stock in one or more banks. The two principal types of companies are "one-bank" and "multibank" holding companies (MBHCs), which together encompass nearly all large banks. Although the majority of bank holding companies in the United States are classified as "one-bank" holding companies, most of these companies were organized to directly operate a bank, and are not, therefore, included in the bank holding company industry. The multibank corporations that make up the industry exercise varying degrees of control over the subsidiaries they own.

MBHCs earn money by increasing the scope, diversity, and efficiency of banks and bank branches. Banks and their branches, in turn, earn money by paying interest at rates lower than that charged on loans. Banks also generate revenue from such services as asset management, investment sales, and mortgage loan maintenance. Because of regulatory constraints, banks not associated with holding companies must operate under restrictions that often put them at a disadvantage compared to other financial institutions.

To overcome regulatory restraints, banks often use holding companies to circumvent legal restrictions and to raise capital by otherwise unavailable means. For instance, many banks can indirectly operate branches in other states by organizing their entity as a holding company. Banks are also able to enter, and often effectively compete in, related industries through holding company subsidiaries. In addition, holding companies are able to raise capital using methods that banks are restricted from practicing, such as issuing commercial paper.

Another important advantage that MBHCs have over individual banks is economies of scale. Many subsidiary banks benefit from operational efficiencies such as centralized and computerized bookkeeping, auditing, advertising, marketing, purchasing of supplies, research, personnel recruitment, group insurance and retirement programs, tax guidance, investment counseling, and other advisory services. In addition to greater access to capital, holding companies also facilitate mobility of money among their subsidiaries and allow them to spread gains and losses over all members of the holding corporation.

Background and Development

MBHCs first appeared in the United States around 1900, when they were used to develop banking networks that were otherwise prohibited by law and custom. Most of the organizations were relatively small Midwestern operations. During the 1920s and 1930s the number of holding corporations increased as the population shifted to urban areas and rural banks sought to pool their resources. At the same time, banks in the Midwest, West, and South increased the use of holding companies to combat the threat of eastern and western banks that were expanding nationally. By 1929 bank holding companies and a few chains that resembled holding companies controlled about 8 percent, or 2,103, of all U.S. banks. They also held more than 12 percent, or $11 billion, of all loans and investments.

Regulation Defines the Industry.
After the Great Depression, the banking and bank holding industries came under intense scrutiny. Initially, the federal government regulated both industries in an effort to create a division between banking and investment activities. Later, however, regulations were used to influence the competitive structure of financial markets. In general, regulatory measures that shaped banking activities were responses to financial crises rather than the result of constructive economic planning.

Loose government regulation of holding banks ended with the Banking Act of 1933. In response to thousands of bank failures during the Great Depression, this act led to increased legislation between 1930 and 1960 that limited bank holding activity and expansion. The Bank Holding Company Act of 1956 required bank holding companies to refrain from all nonbanking related operations. It also required companies to seek state permission before acquiring banks in other states. In 1956 a total of 53 MBHCs represented 428 banks with 783 branches that controlled about $14.8 billion in deposits. By 1965 the number of companies participating in the industry remained at 53, although total deposit assets had nearly doubled to $27.5 billion.

Prompted by the Federal Reserve Board, Congress enacted laws in 1966 that were designed to revive the bank holding industry by eliminating many of the restrictions enacted in 1933. These laws resulted in favorable tax provisions as well as massive industry growth between 1965 and 1970. During this period, the number of MBHCs rose to 121 and deposits in holding company banks skyrocketed to more than $78 billion, or 16.2 percent of all U.S. bank deposits.

In 1970 new legislation was enacted that established a list of permissible activities in which holding companies could participate. One facet of these amendments to the 1956 act gave multibank companies an avenue for significantly broadening their operations. It allowed industry participants to operate nonbanking subsidiaries across state lines even though those subsidiaries engaged in some of the prescribed bank related activities. The result was that by 1974 about 275 MBHCs controlled approximately $359 billion in assets.

The Late 1970s and 1980s.
Before the 1970s, most bank holding companies were competing against organizations within the banking industry, all of which were subject to the same legal restrictions. However, the dynamics of banking began to change in the 1970s in three principal ways that had a profound effect on the multibank holding industry as monetary policy shifted, new industries and products competed for traditional banking dollars, and new technology changed the way banks conducted business.

The shift in monetary policy was partly a result of failed regulatory policies of the 1950s and 1970s. Because the government limited rates that banks could pay depositors, banks were placed at a competitive disadvantage in relation to government securities and instruments offered by financial institutions. New investment vehicles that offered higher rates than bank deposits, such as Merrill Lynch's Cash Management Account, began acquiring deposits that would have been made to banks.

Certificates of deposit became a popular way for banks to attract more money, though at a higher cost. As the cost of money increased for banks, profit margins narrowed. To offset increased costs, banks were forced to charge higher interest rates on loans, which meant that they were assuming more risk. Furthermore, in 1979 the Federal Reserve reacted to rising inflation rates by keeping the money supply stable and allowing interest rates to vary. The net result of this move was that many banks experienced higher costs of money, or deposits, than they could earn on their loans.

The 1980s were a time of rapid foreign expansion for the U.S. and foreign banking industries. Between 1980 and 1990 the number of foreign-owned banks on U.S. soil increased from less than 400 to more than 700, including branch banks. The number reached 747 in 1992 before falling slightly to 720 in 1993. Foreign banking assets in the United States also climbed during that period, from $198 billion to about $850 billion, accounting for approximately 25 percent of total U.S. banking assets by 1990. The majority of this expansion was concentrated in New York, California, Illinois, and Florida, and was principally conducted by Japan, Canada, France, and the United Kingdom. U.S. expansion abroad mimicked the pace set by foreign banks throughout much of the 1980s.

In the late 1980s and early 1990s, a sluggish world economy and an ailing global banking industry slowed expansion of most holding companies. Beginning in 1988, expansion by foreign banks slowed and continued to lag into the 1990s. Many U.S. banks, in contrast, deliberately reduced activity abroad. By 1991 the number of U.S. branch banks operating abroad had fallen to 793. Of the 123 banks operating those branches, 92 were national banks that represented 674 branches and the other 120 branches were owned by 31 state banks. In 1992, 120 Federal Reserve member banks were operating 774 branches in foreign countries and overseas areas of the United States, a decline from the 916 branches at the end of 1985. Of the 120 banks, 88 were national banks operating 660 branches and 32 were state banks operating the remaining 114 branches.

The overall slowdown in global expansion by MBHCs reflected slim profit margins typically offered by overseas markets. Companies that tried to compete outside their national borders saw lower profit margins and stiffer competition for a variety of reasons. In 1991, for instance, MBHCs in the largest industrialized nations generated domestic interest margins (net interest income as a percentage of average interest-earning assets) of 4 percent, compared to interest margins of only 2.1 percent in foreign markets. While some banks tried to improve international margins by investing in technology and consolidating operations, other competitors retrenched.

Another way in which the banking environment began to change in the 1980s was through the increase in the number of products and industries competing with banks. For economic and regulatory reasons, banks suddenly found themselves competing with pension funds, insurance companies, mutual funds, and private finance companies. Manufacturing companies with finance subsidiaries, such as General Electric and Ford Motor Company, were also vying for traditional banking dollars. These new competitors often enjoyed many of the advantages that bank holding companies offered to individual banks, such as the ability to engage in interstate activities.

New technology changed the face of banking forever in the 1980s. Electronic fund transfer systems, automated teller machines, and computerized home banking services all transformed the way in which banks conducted business. These advances, in addition to increased automation of normal operations, reduced labor demands and hastened the trend toward larger and more centralized banking organizations. They also diminished the role that banks had traditionally played as personal financial service organizations.

Changes in monetary policy, increased competition, and new technology resulted in the general decline of the banking industry. At the same time, insurance companies increased their percentage of assets to nearly 18 percent, and pension fund holdings jumped from 13 percent to more than 20 percent of all U.S. assets. Most strikingly, mutual funds increased their share from about 2 percent to more than 10 percent.

As competition in financial markets heated up, bank holding companies became an increasingly important factor because of the regulatory advantages favoring individual banks. Also driving MBHC growth was the erosion of restrictions on interstate banking in 1985. Legislation in that year allowed states to decide whether to allow interstate banking. By 1992, 950 MBHCs controlled more than 90 percent of all bank assets. Furthermore, the total number of individual banks declined 30 percent from 1983 to 1992 to about 10,000. In the mid-1990s, with deregulation, the largest national banks were able to move into any state and buy smaller banks to establish their presence. This trend added to the decrease of individual banks. In a 1994 survey of European banks by Gemini Consulting, it was predicted that within the next decade, 15 to 20 retail banks would dominate Europe. Edward Crutchfield, Jr., chairman and CEO of First Union Corporation, predicted that eight to ten institutions eventually would account for 50 to 80 percent of the nation's banking business.

In addition to consolidating operations through MBHCs, banks also began exposing themselves to more risk to maintain traditional profit margins. Although the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and other legislation was enacted to correct many of the restrictions that limited the industry's freedom, banks continued to increase their exposure to risk throughout the 1980s.

Deregulation of banks in the early 1980s through DIDMCA and other legislative measures, in combination with higher lending risks assumed by many banks, culminated in a banking crisis in the late 1980s and early 1990s. In 1989, 206 banks failed, and another 168 failed the following year as the U.S. economy sank into recession. In response to troubles within the industry, legislators passed laws designed to impose more vigilant government monitoring of bank activities. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was one example of this legislation.

A poor economy increased the acute profit pressures most banks faced. Holding companies became the focus of the banking industry. Many smaller and mid-sized banks found they simply could not compete in the financial environment that had developed by the early 1990s. Commercial bank loans fell slightly from $2.3 billion in 1990 to $2.28 billion in 1991, and loans to corporate clients dropped 20 percent in 1995. Although deposits and assets continued to increase slightly through the early 1990s, rising costs were placing downward pressure on profit margins. The percentage of U.S. assets held by the banking industry continued to decline to 24.5 percent by 1993. As a result, increasing numbers of banks were merging with, or being acquired by, MBHCs to compete effectively.

Analysts suspected that relaxed federal regulation of bank-brokerage companies would lead to more traditional bank mergers in 1997. According to Michael Ancell, a financial services industry analyst at Edward D. Jones & Co., a St. Louis brokerage firm, bank mergers would be fueled "by the need to compete and the difficulty in growing earnings and investing for the future at the same time." The 1933 Glass-Steagall Act restricted banks' ownership of brokerages, but under the latest revision of the act, banks could derive up to 25 percent of their revenues from brokerages, up from 10 percent.

MBHCs' Competitive Response.
MBHCs were taking measures aimed at allowing their members to compete more effectively in financial markets. Some of these measures included orchestrating cost-cutting programs, centralizing and automating operations, exploring new markets, emphasizing fees from services, and trying to initiate legislation that was more favorable to their industry.

Perhaps the most important change that MBHCs brought to the industry in the early 1990s was centralized organizational control and consolidation of assets. Two-thirds to three-quarters of the banks that had merged with holding companies in 1990 and 1991 had already consolidated some or all of their systems, operations, and technical management by 1992. MBHCs were finding that they could reduce operating costs of the individual banks they had acquired by an average of 30 percent.

Much of the consolidation activity occurred among mid-sized and larger banks. It involved the transfer of a significant amount of the industry's cumulative technology base to bigger corporations, which resulted in a major shift of management and asset control from banks in the $250 million to $2 billion deposit range to MBHCs with more than $4 billion in deposits. By mid-1992 the top 150 MBHCs controlled 15 percent of all banks, 30 percent of all branch offices, and 50 percent of all deposits in the banking industry.

In addition to consolidation of assets and management, MBHCs took advantage of increased asset bases to invest in labor saving technology and to increase customer service. As banks became more consolidated, especially during the 1980s and early 1990s, the number of employees shrank. For instance, despite an increase in the dollar value of assets, loans, and investments held by banks, the number of employees in the banking industry declined from 1.54 million in 1987 to 1.5 million by 1993.

MBHCs also allowed increased activity of member banks and subsidiaries into new markets and financial products, many of which were off limits to individual banks. Partial deregulation of MBHCs and reduction of some interstate trade restrictions were largely responsible for the new activities. Many banks positioned themselves for future success by replacing income from interest streams with fee income streams. For instance, some banks were expanding fee-based financial advisory services related to underwriting debt and equity, securing loans, underwriting commercial paper, and treasury management. Banks also entered mortgage banking, asset management, and investment sales, which were traditionally relegated to other financial sectors.

One of the greatest areas of growth in new markets in the early 1990s was in mutual and money market fund sales, which became a viable market for banks following legislation enacted in 1987. By 1993 more than 90 percent of all banks with more than $1 billion in assets offered mutual funds, and all banks combined accounted for 30 percent of all money market fund sales. In 1995 $2.2 trillion was held in American mutual funds, nearly as large as the amount held in bank deposits. Few MBHCs managed funds, and derived fee income through leasing arrangements with broker-dealers operating on a bank's premises. An increasing number of larger MBHCs, however, were managing their own funds, allowing them to also earn custodial, transfer agent, and advisory fees.

Despite generally favorable legislation enacted in the late 1980s and early 1990s, MBHCs still sought to remove competitive barriers that many industry participants felt were outdated holdovers from the Depression era. Furthermore, some analysts believed that new federal legislation handicapped MBHCs.

Although holding companies played a relatively minor role in the U.S. banking industry throughout most of the twentieth century, during the 1980s and early 1990s the bank holding industry experienced rapid growth and became a force in the country's financial markets. In fact, the number of MBHCs in the industry jumped from 284 in 1980 to more than 950 by 1992, with total employment surpassing 1.3 million for the top 100 companies alone. As a testament to the significance of the industry, the top 300 companies had assets of $2.8 trillion in 1992, representing nearly 90 percent of the assets of the entire banking industry. In 1996, the top ten companies employed over half a million people and had combined assets of $1.7 trillion.

The emerging dominance of MBHCs reflected serious problems in the overall banking industry, however, as well as a basic restructuring of U.S. financial markets. Increased competition from less regulated financial services firms, stagnant growth in loans and deposits, and general shifts in monetary policy contributed to the decline of banks. In fact, the percentage of U.S. assets held by commercial banks decreased from nearly 40 percent in 1970 to 24.5 percent by 1993. In 1994, federally insured depository institutions held $5 trillion in assets, up slightly from the previous year. In 1995, $2.7 trillion was held in U.S. bank deposits, but the future remained uncertain for commercial banks. Depositors realized they could get better returns than those offered by low-interest savings accounts at nonbank lenders, such as GE Capital, who offered cheaper credit than banks, for example. Bank loans dropped from 50 percent of all corporate debt to less than 30 percent, and from 75 percent of banks' total business to less than 60 percent. According to the 1997 Federal Reserve Bank bulletins, commercial banks had a good year in 1996, with reported strong growth, preserving high levels on return of equity and return on assets. There was strong growth of interest-earning assets and delinquency, and charge-off rates stayed low for business loans but climbed throughout the year for consumer loans.

In response to an increasingly threatening environment, bank holding companies in the 1990s took advantage of their size and invested in new lines of business, expanded nationally, and increased income from service fees. They also relied on favorable legislation, implementation of new technology, and foreign markets to increase profits. Online banking influenced the industry, allowing customers new and quick access to markets. The United States banking industry in the late 1990s was estimated to be worth $520 billion.

Restructuring Strengthens Industry.
Industry consolidation and subsequent efforts by MBHCs to strengthen the banking industry began to pay off in 1991. According to one survey of the top 300 MBHCs, the banking industry was healthier than it had been in several years. MBHCs in particular showed signs of renewed strength and stability. Banking industry profits for the top 300 of the 950 MBHCs jumped from 63 percent in 1991 to 76 percent in 1992. During the same period the total assets of these companies increased from $2.6 trillion to $2.8 trillion. Moreover, these MBHCs controlled nearly 90 percent of all industry assets. Profits were also up, and in 1996 the top five MBHCs alone had assets of $1 trillion.

Significantly, the survey indicated that increased earnings and financial performance were the result of cost-cutting measures and market positioning, rather than the effect of temporary economic factors. Some of the nation's largest MBHCs, for instance, had jettisoned hundreds of millions of dollars worth of real estate and other nonperforming assets. Improved margins were largely a result of strengthened capital positions, geographic expansion, increases in fee-based income, and heavy investments in technology. The survey showed, for instance, that 9 of the 20 highest rated MBHCs derived at least 40 percent of their income from fees, a trend that was gaining momentum.

Late 1990s.
In addition to strengthened market conditions, MBHCs in the mid-1990s benefited from a moderate rebound in overall residential and commercial lending, and increased competition, particularly from nonfinancial corporations entering the banking field through subsidiaries. The most successful MBHCs were those with innovative products and delivery systems, creating new securities by converting assets into marketable certificates, and expanding into foreign markets. In 1995 the Riegle-Neal Interstate Banking and Branching Act gave national banks authority to open interstate branches by merging with existing banks or opening offices.

In the late 1990s, past deregulation initiatives continued to spur mergers as well as a drive by MBHCs to offer more one-stop shopping services to customers. Industry giants such as Nationsbank and BankAmerica merged in 1998, creating a new BankAmerica that exceeded Chase Manhattan in size and revenues. In the late 1990s, the banking industry had a value of $520 billion and included 9,100 commercial banks and 1,800 thrift institutions. Though actual numbers of banks and thrifts had declined during the 1990s, due in part to consolidation and mergers, the rising prevalence of large national banking chains stimulated competition to meet the needs of customers who disliked the impersonal feel of the new "mega" banks. Banks continued to forge ventures and to offer formerly untraditional services such as brokerage, securities underwriting, and insurance.

In 1997, changes to the 1993 Glass-Steagall legislation allowed MBHCs to own securities subsidiaries, which could contribute as much as 25 percent of sales revenue. The opportunity created more mergers including those between Sun Trust Banks and Equitable Securities, Fleet Financial and Quick and Ready, and Bankers Trust and Alex Brown.

In 2003, the three holding companies that dominated the industry were Citigroup, Inc., Bank of America, and J.P. Morgan Chase. These companies, and their lesser counterparts, were significantly affected by the repeal of the Glass-Steagall Act, which led to the acceleration of commercial and investment banking's commingled existence. The banks were highly interested in their new ability to leverage low-margin lending into the much more profitable fee-based businesses, such as underwriting shares. According to the Economist (U.S.), "For the most part, the industry leaders today are no longer banks, but financial-services companies. Their activities extend far beyond traditional commercial-banking tasks such as taking in savings and making loans. Many now engage in investment-banking activities such as underwriting bond and equity issues, advising on mergers and acquisitions and, crucially, selling on loans to other investors (by organizing syndicates, buying credit derivatives that pay out in the event of a default or issuing securities bundling loans together)."

The plunge by U.S. banking institutions into investment-based services was not without pitfalls, with giants Citigroup and J.P. Morgan Chase both stumbling. In 2003, Citigroup announced charge-offs of more than $1 billion related to allegations of irregularities in the pricing of initial public offerings. J.P. Morgan Chase also reported a charge-off in excess of $1 billion related to the company's dealings with the bankruptcy of energy-giant Enron in late 2001. The bust of the dot-com industry also adversely affected the industry.

The general ill health of the U.S. economy darkened the skies for the banking industry in the early 2000s. A mild recession began in March 2001, but was catapulted into major economic worries following the September 11 terrorist attacks. According to the Federal Reserve, commercial and industrial loans dropped 10 percent, or $113 billion, between March 2001 and August 2002. The economic turndown led to job layoffs, stock market degradation, and a slew of bad debts. Many of the banking industry's adventures into investment services were, in hindsight, ill advised.

Despite weak economic conditions, the moribund stock exchange, and a long list of bankrupt clients, the banking industry remained solid on the foundations of its deposit-taking and lending services. Margins were strong during 2002, with banks charging more for its loan services than the costs incurred to fund the loans. Earnings for 2002 were on pace to top a record $80 billion, with many banking companies posting double-digit gains.

By the mid-2000s bank holding companies were also making inroads into the insurance industry, which came open to banks with the Gramm-Leach-Bliley Act of 1999. In 2004 bank holding companies' income from insurance-related business increased by 22 percent to reach $40.8 billion. The number of bank holding companies reporting insurance revenues increased by 11 percent during 2004 to 1,257. However, just 93 reported earnings from insurance premium income, indicating that they were actually underwriting insurance rather than simply acting as an agent for an independent insurance company.

At the end of 2004 the Federal Reserve reported a total of 5,863 bank holding companies in operation, which controlled 6,235 insured commercial banks and held about 96 percent of all commercial bank assets. FHCs numbered 600 domestic firms and 36 foreign firms. Of domestic FHCs, 34 had assets in excess of $15 billion; 110 had assets between $1 billion and $15 billion; 82 had assets between $500 million and $1 billion; and 374 had assets less than $500 million. During 2004 a total of 47 domestic bank holding companies applied for and received FHC status.

Bank holding companies took advantage of their size and invested in new lines of business, expanded nationally, and increased income from service fees. They also relied on favorable legislation, implementation of new technology, and foreign markets to increase profits. Online banking influenced the industry, allowing customers new and quick access to markets. During the 2000s, the line between banking services and investment services was substantially blurred as banks became increasingly involved in investment-related activities.

According to the Federal Reserve, in the fourth quarter of 2004 total assets of bank holding companies increased by $393.2 billion to reach $10.3 trillion, the first time the industry surpassed the $10 trillion mark. The majority of growth was driven by an 11 percent increase in loans, which grew $170 billion, along with securities and money market assets, which increased $170 billion. In addition, the industry experienced a 22 percent decline in loan losses as default rates dipped to 0.64 percent, down from 0.91 percent in 2003 and 1.14 percent in 2002. The domination of the largest firms was affirmed as the 50 largest banks accounted for 90 percent of increases in loan assets.

During the mid-2000s bank holding companies rode the wave of a mortgage boom, fueled by historically low interest rates, which fell to 1.3 percent during 2004 before edging upward to 3 percent in May 2005. Refinancing hit record highs in the early 2000s before cooling off slightly during the mid-2000s as interest rates rose. Despite an anticipated slowdown in the housing market, home sales continued to set a record pace during 2005.

Because the housing market is notoriously cyclical, banks that invested heavily in the mortgage business during the upswing suffered when the market went cold in 2006. Analysts had warned that banks with significant interest in mortgages could face problems caused by the increased popularity of adjustable rate mortgages. When the rates go up, borrowers are not be able to meet their loan commitments, and default levels rise. Despite warnings that the favorable market condition would not hold indefinitely, the banking industry remained strong through the first quarter of 2005, posting a record $34.6 billion in net income, up from $31.6 billion in the fourth quarter of 2004. Although revenues were relatively stagnant, with noninterest income increasing just slightly and interest revenue falling 0.6 percent, a 6 percent reduction in noninterest and loan default expenses led to an overall gain. Because banks were allowed to reduce reserves when loan losses are low, about half of the top 100 financial institutions withdrew funds during the first quarter of 2005, leading to a 3 percent decline in reserved funds.

By 2006, it was becoming apparent that the predictions about a subprime mortgage meltdown made earlier in the decade were accurate. Basically, the housing market stalled, and interest rates started to rise as the price of houses fell. Many of the ARMs granted earlier started to be reset at higher rates, resulting in large increases in many Americans' house payment. Many were not able to make this higher payment and defaulted on their loans. In addition, most of these so-called subprime mortgages had been packaged and sold as bundled securities to investors on Wall Street. Suddenly, these investment packages were not so attractive. Also, because large investors were in charge of thousands of these home loans, "negotiations over late mortgage payments were bypassed for the 'direct-to-foreclosure' model of an investor looking to cut his losses," according to Investopedia writer Ryan Barnes, and foreclosures increased to record highs. By September 2009, 14 percent of all mortgages in the United States were either delinquent or in foreclosure. In the second quarter of 2010 alone, more than 895,000 foreclosure notices were filed on U.S. properties. In addition, "Scores of mortgage lenders--with no more eager secondary markets or investment banks to sell their loans into--were cut off from what had become a main funding source and were forced to shut down operations". Some of the banks that did survive incurred huge losses--Citigroup, for example, reported in 2007 that it would write off up to $11 billion worth of subprime mortgage-related securities.

In response, the U.S. government passed the Emergency Economic Stabilization Act of 2008, also referred to as the bailout of the U.S. financial services industry. Provisions of the Act included the Troubled Asset Relief Program (TARP), which allowed the U.S. Department of the Treasury to purchase or insure up to $700 billion of "troubled assets" related to subprime mortgages from financial institutions. Although these bailout funds kept some of the larger institutions afloat, many did not survive. The FDIC reported 25 bank failures in 2008 and 140 in 2009.

Current Conditions

By 2010, some claimed a recovery in the banking industry had begun. According to the FDIC, insured institutions experienced profits of $21.6 billion in the second quarter of 2010, up $26 billion from the $4.4 billion net loss recorded in the second quarter of 2009. About 20 percent of institutions reported a loss in the quarter, as compared to 29 percent in the same period of 2009. In addition, net charge-offs totaled $49 billion, representing the first year-over-year decline since the fourth quarter of 2006. Despite these positive figures, banks continued to shut down. According to the FDIC, 132 banks had failed in 2010 as of mid-October.

The banking industry was also preparing to deal with the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama on July 21. The Act called for a massive overhaul of financial services regulation. The legislation was "expected to result in at least 243 new formal rulemakings by at least 11 federal agencies, including some new entities," according to Iowa Banking Law. Some of the changes included the creation of a Financial Stability Oversight Council and an Office of Financial Research, meant to oversee large bank holding companies; the establishment of a Consumer Financial Protection Bureau, to enhance and oversee consumer rights issues; the reduction of total TARP spending from $700 billion to $475 billion; and new record-keeping requirements for hedge funds, among many other provisions. Industry participants as well as informed consumers were divided about whether the Act would benefit the U.S. financial industry.

Industry Leaders

While the number of national banks is quite large, there are several recognized leaders in terms of size of deposits and range of services. These industry leaders include Bank of America Corp., JP Morgan Chase and Co., Citigroup, and Wells Fargo.

Bank of America Corp., formed by the merger of San Francisco, California-based BankAmerica Corp. and Charlotte, North Carolina-based NationsBank Corp., was the largest financial institution in 2010, based on assets, which totaled $1.78 trillion on June 2010. The bank is heavily involved in commercial banking, savings, trusts, safe deposit, and installment credit. It operates more than 5,900 branches across 40 states, as well as the District of Columbia and several foreign subsidiaries in Europe and Latin America. Bank of America purchased Merrill Lynch for approximately $50 billion in stock in 2010. The company employed 284,000 people and reported 2009 revenues of $150.1 billion.

JPMorgan Chase and Co. operated the second-largest U.S. bank in 2010, with assets of $1.71 trillion. It was formed in 2001 via the merger of investment firm J. P. Morgan and Company Inc. and Chase Manhattan Corp. Chase Manhattan had emerged when Chemical Bank purchased Chase Manhattan in 1996. At the time, the combined entity was the largest commercial bank in the United States with approximately $300 billion in pro forma assets. In 2010, JPMorgan Chase operated about 5,100 branches in more than 24 states. The firm reported revenues of $115.6 billion in 2009 with 222,316 employees. In 2004, the company laid out stock worth $60 billion to purchase BANKONE. Purchases in 2008 included Bear Stearns and Washington Mutual.

New York-based Citigroup Inc. was originally organized in New York in 1812. Its Citibank subsidiary was chartered under the National Banking Act in 1865. The bank conducts general banking business, including retail and wholesale operation, and operates an extensive international network covering more than 140 countries. Citigroup became the first U.S. bank to record total assets of more than $1 trillion and in 2010 held assets of $1.32 trillion. Citigroup restructured into two primary segments--the regional consumer and institutional banking units of Citicorp and the brokerage and consumer finance units of Citi Holdings--after suffering $90 billion in losses as a result of the subprime mortgage crisis. In 2009, Citigroup had 269,000 employees and revenues of $108.0 billion.

Wells Fargo & Co. of San Francisco operated about 6,600 branches in 40 states and was one of the top residential mortgage lenders in 2010. Wells Fargo doubled its size in 2008 when it purchased Wachovia. Assets as of June 2010 totaled $1.13 trillion. With 281,000 employees, Wells Fargo recorded revenues of $98.6 billion in 2009.

Workforce

According to the Federal Reserve, bank holding companies employed nearly 2.2 million people worldwide in the mid-2000s. As automation improves and efficiency increases, the demand for administrative support position is expected to decline, while financial analysts and advisers could increase as much as 30 percent by 2012, according to the U.S. Bureau of Labor Statistics. In addition, growth was expected in the areas of customer service; computer and system information managers; and securities, commodities, and financial services sales agents.

America and the World

Long-term growth markets for U.S. banks are predicted to include the Pacific Rim and Europe. Western Europe's evolution toward unified financial markets was expected to eliminate many of the trade barriers faced by North American competitors in the mid-1990s. Although many MBHCs avoided European markets, Citicorp already maintained an extensive network throughout Europe and hoped to gain from unification. Unfortunately for U.S. MBHCs, the large Japanese banking market remained impenetrable, despite relatively open U.S. financial markets and strategic alliances attempted by a number of U.S. firms with their Japanese counterparts.

Competitive Structure of Global Markets.
Japan was the home to numerous very large bank holding companies in the late 2000s and early 2010s, including Mitsubishi Tokyo Financial Group. After completing a $29 billion deal for UFJ Holdings in 2005, that firm's asset base rose to $1.8 trillion. In the United States, Mitsubishi Tokyo owned about two-thirds interest in UnionBanCal of California. In 2005 Sumitomo Mitsui Financial Group was Japan's second largest bank. In 2005 it had 550 domestic and 40 international offices and owned California-based Manufacturers Bank. Mizuho Financial Group also had assets in excess of $1 trillion. It was created in 2002 with the merger of The Dai-Ichi Kangyo Bank, Fuji Bank, and Industrial Bank of Japan.

Other large multinational banks by asset included Credit Agricole of Paris, the number one commercial bank in France, with 2004 sales of $45.75 billion and 62,000 employees; USB Ag, the largest bank in Switzerland, with 2004 revenues of $59.88 billion and 67,425 employees; and Credit Suisse, the second-largest bank in Switzerland, with 2004 sales of $63.99 billion and 60,500 employees.

Regulation.
The Foreign Bank Supervision Enhancement Act of 1991 (FBSEA) established federal standards for the entry and expansion of foreign banks in the United States. The act also increased the role of the Federal Reserve System in the supervision and regulation of foreign banking operations in the United States. The act required foreign banks competing in U.S. markets to engage directly in the business of banking outside the country and to be subject to comprehensive supervision or regulation on a consolidated basis by its own domestic authorities. The act also required that foreign banks furnish information to U.S. authorities, who assess the bank's application filed under the Bank Holding Company Act.

Research and Technology

The Federal Reserve announced in December 2004 that electronic payment volume exceeded check volume for the first time during 2003 when the number of paid checks totaled 36.7 billion and electronic payment transactions totaled 44.5 billion, compared to 41.9 billion processed checks and 30.6 billion electronic payments in 2000. The expanding use of debit cards, which increased 23.5 percent between 2000 and 2003, drove the electronic payment sector. Over the same period, check transactions declined 4.3 percent.

In addition to automated teller machines (ATMs), debit cards became an important part of electronic banking. Debit cards are used for withdrawals from ATMs as well as for transactions made at point-of-sale (POS) terminals. POS terminals allowed the transfer of money from a buyer's account to a seller's account through either an online transaction or through an automated clearinghouse (offline transaction). For instance, consumers could buy groceries using debit cards that removed money from their personal accounts and transferred them to the store.

Another advance in technology gained stature in U.S. markets was the 'smart card.' Widely used in France and Japan, the smart card contained a microprocessing chip, rather than the standard magnetic stripe on most credit and ATM cards. The chip was more difficult to counterfeit, which was an advantage to MBHCs battling a $1 billion a year fraud problem.

Home banking also became more popular in the United States as more advanced home computer technology allowed consumers more complete and less expensive access to their money. By the mid-2000s Internet banking was provided by every major banking operation as well as many smaller banks. Customers pay bills, check balances, and transfer funds among other transactions. According to Bank Systems & Technology, of the 95 million U.S. households that used the Internet in 2010, 72.5 million participated in online banking and 36.4 million used online bill pay. These figures represented an increased participation rate of 84 percent in online banking and 78 percent in online bill pay since 2000. Geoff Knapp of Online Banking and Consumer Insights stated that "The face of online bill payment has changed significantly over the last decade. Early users were tech-savvy and tended to be young and male, as is typical with new technology. Now it's moms and seniors and people at all income levels using the service. Online bill payment has become mainstream, and there's still room to grow."

Another rapidly expanding area in the banking industry involved "mobile banking." According to Gartner's "Top 10 Strategic Technologies for 2011", by the end of 2010, 1.2 billion people will carry handsets such as cell phones and notebooks capable of performing bank transactions. Figures from research firm IDC showed that mobile banking use nearly doubled between mid-2009 and mid-2010. Jeff Dennes, executive director of USAA, summed up the situation in a September 2010 Banking & Technology article: "Payments are absolutely going to the mobile device. When that happens is anybody's guess. But your wallet at some point will be in your mobile device." As the mobile trend surged ahead, banks struggled to keep up with the technology and maintain some level of profitability.

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