SIC 6712
OFFICES OF BANK HOLDING COMPANIES



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.

NAICS Code(s)

551111 (Offices of Bank Holding Companies)

Industry Snapshot

Holding companies have played a relatively minor role in the U.S. banking industry throughout most of the twentieth century. During the 1980s and early 1990s, however, the bank holding industry experienced rapid growth and became a force in the country's financial markets. According to the U.S. Census Bureau's Statistical Abstract of the United States, bank holding companies' financial assets tripled between 1990 and 2000.

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. During the 2000s, the line between banking services and investment services has been substantially blurred as banks became increasingly involved in investment-related activities.

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, 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. They 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 multi-bank holding industry: 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 was a decade of rapid foreign expansion for 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, 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 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.

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; the other 120 branches were owned by 31 state banks.

The overall slowdown in global expansion by MBHCs reflected slim profit margins typically offered by overseas markets. Companies that tried to compete outside of 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, automatic teller machines, and computerized home banking services all transformed the way in which banks conduct business. These advances, in addition to increased auto-mation 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 shrinkage 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 8 to 10 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 dropped by 20 percent in 1995 to corporate clients. Although deposits and assets continued to increase slightly throughout 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 An-cell, 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 by 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, loan securitization, underwriting commercial paper, and treasury management. Banks also entered mortgage banking, asset management, and investment sales—activities 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, instead deriving 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 implemented in the late 1980s and early 1990s, MBHCs still sought to remove competitive barriers 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—nearly 90 percent of the assets of the entire banking industry. In 1996, the top 10 companies employed over half a million people and had combined assets of $1.7 trillion.

The emerging dominance of MBHCs reflects 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 have contributed to the decline of banks. In fact, the percentage of U.S. assets held by commercial banks declined 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 American bank deposits, but the future still remained uncertain for commercial banks. Depositors realized they could get better returns than those offered by low-interest savings accounts. Nonbank lenders such as GE Capital offered cheaper credit than banks, for example. Bank loans have dropped from 50 percent of all corporate debt to less than 30 percent, 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 captured by 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, too, were up. In 1996 the top five MBHCs alone had assets of $1 trillion.

Importantly, 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.

Future Expectations. In addition to strengthened market conditions, MBHCs in the mid-1990s were expected to benefit 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 expected to be those with innovative products and delivery systems, creating new securities by converting assets into marketable certificates, and expanding into foreign markets.

Although it was unclear what effect the Clinton administration would have on MBHCs, some companies expressed concern over specific administration policies. For example, President Bill Clinton advocated reducing or eliminating the role that private banks played in the student loan program. On the other hand, he was likely to seek a reduction in barriers to small business lending by banks and was pursuing a favorable regulatory reform package in early 1993. 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 and 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 spurred competition in the industry 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.

Online banking developments also promised to influence the industry. In 1997 it was estimated that 4.5 million households would have access to online banking. By the late 1990s, 66 percent of the top 50 banks in the United States offered computer banking from home and electronic bill paying services. The advent and increasing popularity of online banking caused one industry expert ( Knight-Ridder/Tribune News Service, 22 April 1998) to speculate whether the megamergers so characteristic of the industry in the 1990s were really in the public's best interest. According to this expert, the heralded "one-stop shopping" advantage of these mergers (according to the banks doing the merging) was rendered moot by the fact that customers could achieve instant access to many markets, via online home access.

Current Conditions

In 2003, three holding companies dominated the industry: 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 organising 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 by the terrorist attacks of September 11. According to the Federal Reserve, commercial and industrial loans dropped by 10 percent—$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 still 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.

Industry Leaders

Citibank, a subsidiary of Citigroup—the world's second largest financial services institution (behind Japan's Mizuho Financial) and the first U.S. bank to surpass $1 trillion in assets—is itself the world's second largest consumer and corporate banking institution. Citbank has about 1,700 office in 40 countries, with approximately 700 located in the United States. In 2002, parent Citigroup reported a net income of $15.3 billion on revenues of $92.6 billion.

J.P. Morgan Chase, the nation's second largest banking system, is the result of a 2001 merger of Chase Manhattan, a retail banking powerhouse, and J.P. Morgan, an investment bank. J.P. Morgan Chase reported total assets of $712.5 billion in 2001. In 2002 the company reported a net income of $1.7 billion on $43.4 billion in revenues.

After a $43 billion merger in 1998, Bank of America Corporation (resulting from the combination of Bank-America and NationsBank) emerged as the industry leader. Bank of America was, as a result of the merger, situated in locations nationwide. The company included 11,500 branches in almost all of the 50 states and in 40 countries. In 2002 Bank of America had sales of $46.4 billion, resulting in a net income of $9.2 billion. Bank of America came in behind Citigroup and J.P. Morgan Chase with total assets of $619.9 trillion.

Workforce

In 2001, according to the U.S. Department of Labor, Bureau of Labor Statistics, holding offices employed 103,960. Of that total, 20 percent of the workforce held management level positions. Chief executives earned a mean annual salary of $129,032; general and operations managers earned $98,320; and financial managers earned $92,390. Business and financial occupations accounted for another 20 percent of the industry's workforce. Accountants and auditors earned a mean annual salary of $54,350; financial analysts, $54,320; and credit analysts, $42,370. Over 32 percent of the industry's jobs are related to office and administrative support, which had an overall mean annual salary of $30,250.

Growth opportunities with MBHCs will likely be in such technical areas as information systems and data processing, and for securities sales representatives. Growth for this specialty is forecast as excellent through 2005. The top 10 percent of securities sales representatives earn $120,700 or more. Positions may increase for financial professionals who can bring expertise relating to financial products and investment vehicles that are new to the banking industry. Bank information systems professionals with C + + and object-oriented programming skills are in big demand in the banking industry.

America and the World

Long-term growth markets for U.S. banks will likely include the Pacific Rim and Europe. Western Europe's evolution toward unified financial markets is expected to eliminate many of the trade barriers faced by North American competitors in the mid-1990s. Although many MBHCs are avoiding 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 in 1993, despite relatively open U.S. financial markets and strategic alliances attempted by a number of U.S. firms with Japanese counterparts.

Competitive Structure of Global Markets. In 1996 the largest bank in the world was the Tokyo-Mitsubishi bank, with 19,300 employees and $19.6 billion in sales. The world's second largest bank, Sumitomo Bank, is also based in Japan. In 1996 it had assets in excess of $500 billion, with 360 offices in Japan and 74 branches over-seas. Their American subsidiary, the Sumitomo Bank of California, is the fifth largest in the state. Other large Japanese banks include the Dai-Ichi Kangyo, the fifth largest bank in the world, with assets of $500 billion, 400 offices in Japan, and 77 branches in 31 countries; the Fuji Bank; and Sanwa Bank. Despite the size and strength of the many banks in Japan, the industry there was not immune to the global slowdown in the early 1990s. In fact, the Japanese banking industry was especially hard hit by a sinking stock market, falling property values, and bad loans incurred during the 1980s.

Other large multinationals include Credit Agricole of Paris, the number one commercial bank in France, with 1995 sales of $32.34 billion and 72,607 employees; the Credit Suisse, the largest bank in Switzerland, with most of its business conducted outside the country (American subsidiary is Credit Suisse First of Boston); and the Union Bank of Switzerland, the second largest in the country, with two-thirds of its assets coming from over-seas operations.

Because they play different roles in different countries, a true comparison of banks throughout the world is difficult. For instance, although no U.S. banks placed in the top 25 in terms of capital, the U.S. MBHC industry accounted for 200 of the 1,000 largest banks in the world. In comparison, Japan had the second largest number of banks, with 100. Italy, which has a diversified banking industry similar to Japan's, also had about 100 establishments in the top 1,000. Furthermore, some countries, like the United States, still maintain highly fragmented banking industries with thousands of banks serving the market. Japan, by contrast, has 150 banks, while Canada and the United Kingdom have 65 and 550 banks, respectively.

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 requires 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 requires that the banks furnish information to U.S. authorities, allowing the latter to assess the bank's application filed under the Bank Holding Company Act.

Research and Technology

Although most financial payments are still being made with cash, checks, and credit cards, electronic funds transfer (EFT)—including transactions made with automated teller machines (ATMs)—is an important aspect of MBHC branch operations. By 1995, 9.7 billion transactions were processed at 123,000 ATM terminals in the United States. Although ATM growth had slowed in the United States, expansion of that technology in world markets was increasing at a rapid pace. (About 200,000 ATMs were serving customers in Japan and Europe.)

In addition to ATMs, debit cards are becoming an important part of electronic banking. Debit cards are used for withdrawals from ATM machines as well as for transactions made at point-of-sale (POS) terminals. The POS allowed for 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 that was slowly gaining 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—an advantage to MBHCs battling a $1 billion a year fraud problem. Until late 1995, the smart cards had only been tested in specific regions and test market groups. NationsBank started offering smart cards to Atlanta consumers in preparation for the 1996 summer Olympics. It was predicted that by 2000, there would be 100 million smart cards in the United States.

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. Also, about one-third of all American households conducted a banking transaction over the telephone at least once a month. The latest trend is Internet banking, and U.S. banks are competing with each other to provide content via online services. More than 100 banks have created home pages on the Web, and spending on electronic banking has grown at a compound annual rate of 150 percent in recent years.

Some of the greatest growth in electronic services was in the corporate customer market. Banks located a growing number of end-user banking devices on the premises of banks' corporate customers, increasing the number of wholesale banking customers who have online access. A survey by Ernst & Young and American Banker found that banks expected to continue to invest in technology to cut costs, reduce labor, and increase customer service.

An important technological development that affected the internal operations of MBHCs and their members in the early 1990s was image technology and CD-ROM storage devices. This technology allowed banks to electronically scan incoming paper and route information to the appropriate department or bank location. Technological advances also allowed banks to electronically capture and route telephone conversations and faxes.

Further Reading

"Banks to Bet On—or Abandon." Business Week Online, 17 January 2003.

"The Big Fee Haircut." Investment Dealers' Digest, 20 January 2003.

Blackwell, Rob, and Barbara A. Rehm. "Oxley, B of A Chief Speak Out on Regulatory Reform." The American Banker, 14 March 2003, 3.

"Crisis? What Crisis?" The Economist (US), 18 May 2002.

Davenport, Todd. "Credit Quality Hangover Expected to Linger in '03." American Banker, 6 January 2003, 1.

"Economy: The Emerging War Picture: Effects on Finance Depends on How Long It Lasts." US Banker, April 2003, 14.

Finkelstein, Brad. "Big Banks Face Impairment Risk." Mortgage Servicing News, October 2002, 2.

Mandaro, Laura. "Margin Pressures Could Have Large Banks Pining for '02." American Banker, 6 January 2003, 1.

"Money and Financial Markets." Economic Trends, March 2003, 6-7.

"The Party's Over." US Banker, June 2002, 12.

Pryde, Joan. "Modest Profit Growth for Banks in 2003," Kiplinger Business Forecasts, 25 February 2003.

"Recession Sucked $100 Billion from the Economy: What's Left to Lend?" US Banker, November 2002, 75.

Rieker, Mattias. "Some See Darker Clouds Over the Banking Business." American Banker, 11 March 2003, 19.

Thornton, Emily, Peter Coy, and Heather Timmons. "The Breakdown in Banking: Trust is Eroding and Profits May Follow as Business Models Falter." Business Week, 7 October 2002, 40.

"Top Bank Holding Companies by Business Loans." The American Banker, 13 March 2003, 8.

"Top Ten U.S. Bank Holding Companies, 2001." Financial Services Fact Book. Financial Services Facts, 2003. Available from http://www.financialservicesfacts.org .

U.S. Census Bureau. 1997 Economic Census. Washington, D.C.: Bureau of the Census, 1999.



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