Federal Reserve Bank of San Francisco

FRBSF Economic Letter

1998-02 | January 23, 1998

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Trends in Twelfth District Banking in 1997

Elizabeth Laderman and Jennifer Martinez

Western Banking Quarterly is a review of banking developments in the Twelfth Federal Reserve District, and includes FRBSF’s Regional Banking Tables. It is published in the Economic Letter on the fourth Friday of January, April, July, and October.

Trends shaping the banking industry over the past several years continued in full force in the 12th District in 1997. These include changes in market structure, continued alteration of the mix of products and services that banks offer, and innovations in delivery channels.

Changes in market structure

In 1997, mergers continued to reduce the number of banks and thrifts (savings banks and savings and loans) in the District. On net, the number of these institutions declined by 41 (about 5%) in 1997, following a decline of 229 (about 22%) over the preceding five years. Notable mergers and acquisitions in the District last year were First Bank System, Inc.’s (Minnesota) acquisition of U.S. Bancorp (Oregon) and Washington Mutual, Inc.’s (Washington) acquisition of Great Western Bank (California).

Some of the consolidation in recent years has been due to liberalization of branching laws. Last June, Hawaii became the final state in the District to allow interstate bank branching under the Riegle-Neal Interstate Banking and Branching Efficiency Act. Texas and Montana are now the only states that do not permit interstate branching. One of the earliest interstate consolidations was made by Wells Fargo & Company in 1996. BankAmerica Corporation and First Security Corporation followed in 1997, combining most of their separately chartered subsidiaries, some located outside of the District, into one main bank. In addition, Keycorp, headquartered in Ohio, combined its 12th District banks with others into its Cleveland lead bank in 1997. When First Bank System, Inc. acquired U.S. Bancorp and took the U.S. Bancorp name in the latter part of 1997, it also combined the former U.S. Bancorp subsidiaries with its Minneapolis lead bank. And, soon after acquiring Great Western Bank, Washington Mutual consolidated the Great Western offices into Washington Mutual’s American Savings organization, renaming the new entity Washington Mutual Bank, F.A. With the consolidation of affiliated banks and thrifts in different states, well over half of the banking offices in the District are part of interstate branching networks.

Continuing recent trends, 1997 saw a modest reduction in the number and assets of foreign branches and agencies in the District, especially those from Japan. As of the third quarter of 1997, non-Japanese branches and agencies accounted for 45% of the assets of all foreign branches and agencies in the District, up from 43% at the end of 1996 and 37% at the end of 1995.

Trends in products and services

Shifts in market structure have been accompanied by ongoing changes in the mix of products and services that District banks offer. The most important activities continue to involve credit-related services, such as derivatives, securities activities, and credit-scored small business loans. But banks also are acting as brokers for consumer financial investments, offering, for example, mutual funds and insurance. These activities are being added to and, to some degree, are displacing traditional bank products such as deposits and relationship-based loans.

Derivatives contracts continue to be important risk-hedging tools for banks and bank customers. Total notional values for interest rate contracts at 12th District banks stood at $7 trillion as of the third quarter of 1997, representing a 35% annual growth rate, up from 31% growth in 1996. The comparable figures for foreign exchange contracts are $1 trillion in total notional values, representing a 12% annual growth rate, up 1 percentage point over 1996.

Modifications to the prudential limits and firewalls that apply to bank holding companies engaged in securities underwriting and dealing activities through Section 20 subsidiaries became effective on October 31, 1997. These modifications should improve operating efficiencies at Section 20 subsidiaries and increase options for their customers. BankAmerica Corporation, currently the only 12th District banking organization with a Section 20 subsidiary, expanded its securities brokerage and underwriting activities through the acquisition of Robertson, Stephens & Company Group, L.L.C. in 1997. In addition, First Security Corporation has gained approval to engage in these activities for the first time through the formation of a new Section 20 subsidiary.

Credit scoring, another relatively new development, is expected to benefit small business customers. First used in consumer lending, it is a statistically based means of evaluating the expected repayment performance of a loan. This technology can substantially decrease the time, human input, and cost of reviewing small business loan applications and should help boost small business loan volume in the District beyond the $25.5 billion outstanding as of the second quarter of 1997 (32% of total business loans).

One of the strongest consumer trends in recent years has been the shift of household financial assets out of deposits and into mutual funds. Banks have recognized this trend, and some have devoted more of their own resources to selling mutual funds as their deposit growth has slowed. In the 12th District, 23% of banks generated fee income from selling mutual funds and annuities in the third quarter of 1997. The top four banking organizations in the District that sell their own “proprietary” mutual funds have seen the ratio of the assets in these funds to the banks’ total deposits increase from 11% in the third quarter of 1992 to 28% by the middle of 1997.

In addition to selling annuities, banks also may act as brokers in selling other types of insurance. Although most of these policies are for backing up credit repayment, a few California state-chartered banks are beginning to venture into more traditional insurance products.

New delivery channels

Banks in the 12th District are continuing to develop new delivery systems for products and services. For example, Internet banking continues to gain in popularity as a channel for banking services. Between March and October 1997, the number of banks with some form of Web page increased 57% in the U.S. and 29% in the District. A few banks are moving toward providing business banking services through the Internet, and some bankers have reported significant growth in PC banking outside the Internet. New developments such as electronic bill presentment may increase the use of electronic banking: bills would be presented directly to consumers’ personal computers, with an electronic payment option appearing on the screen at the same time.

Banks also are developing highly automated telephone centers to help consumers meet many of their banking needs without visiting a branch. Many bankers believe that the telephone center will be a pivotal delivery channel because of the wide range of banking services as well as technical support it will provide.

Perhaps partially due to these new types of delivery channels, the total number of bank branches in the 12th District declined by 967 (about 10%) in 1997. In addition, some banking organizations have begun a shift away from traditional brick and mortar offices in favor of lower cost “supermarket” branches. These branches may offer the full range of teller transactions or may be more limited-service “banking centers.” In the District, Wells Fargo Bank and Bank of America have increased their activity in this area substantially.


Today, a bank customer may log onto the Internet to inquire about his bank balance. Or, she may walk into a branch of her bank while traveling out of state and buy milk and mutual funds. A small business customer may receive a loan from a bank with far less paperwork than before, while a large business may turn to its commercial bank rather than an investment bank for securities underwriting services . If 1997 trends are any indication, these scenarios will become more and more the norm in the future.

Elizabeth Laderman

Jennifer Martinez
Banking Analyst

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Sam Zuckerman and Anita Todd. Permission to reprint must be obtained in writing.

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