Banking Looks Different

You can blame (or credit) the computer, but you canÌt deny it Û the face of banking is changing. The three articles which follow look at these changes and focus on what they mean for the Federal Reserve, from three different perspectives. Our Research department studies western banking Û shifts in market structure, trends in product mix and services, and new ways to deliver services. Banking Supervision reports on new techniques and talents they have developed to respond to the increased sophistication of the financial industry. In the Operations area the various Federal Reserve Banks are working in concert to streamline systems and to maximize technological applications to benefit the nationÌs payments system.

Trends in Twelfth District Banking

By Elizabeth Laderman and Jennifer Martinez

Recent trends shaping the banking industry over the past several years Û changes in market structure, alterations in the mix of products and services banks offer, and innovations in delivery channels Û continued in full force in the Twelfth District in 1997.Recent trends shaping the banking industry over the past several years Û changes in market structure, alterations in the mix of products and services banks offer, and innovations in delivery channels Û continued in full force in the Twelfth District in 1997.

Changes in Market Structure

The banking industry in the Twelfth District remains dynamic, marked by both mergers and new entries. Notable mergers and acquisitions in the District last year were First Bank System, Inc.Ìs (Minnesota) acquisition of U.S. Bancorp (Oregon) and Washington Mutual, Inc.Ìs (Washington) acquisition of Great Western Bank (California). At the same time as mergers were tending to consolidate the industry, the formation of new banks worked in the opposite direction. In 1997 there were 35 new banks chartered in the District (including several by existing banking organizations), up from 26 in 1996 and 18 in 1995. On net, the number of banks and thrifts (savings banks and savings and loans) in the District declined by 41 (about 5 percent) in 1997, following a decline of 229 (about 22 percent) over the preceding five years.

The liberalization of branching laws is contributing to the increase in consolidation within bank holding companies. 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. Wells Fargo & Company started the trend by making one of the first interstate consolidations 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 Twelfth District banks with others into its Cleveland lead bank in 1997. In late 1997 First Bank System, Inc., acquired U.S. Bancorp, took the U.S. Bancorp name, and combined former U.S. Bancorp subsidiaries with its Minneapolis lead bank. Soon after acquiring Great Western Bank, Washington Mutual consolidated the Great Western offices into Washington MutualÌs 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 now part of interstate branching networks. In addition, the total number of bank branches in the Twelfth District declined by 967 (about 10 percent) in 1997.

Trends in Products and Services

Shifts in market structure are 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 are also 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 western banks stood at $7 trillion as of the third quarter of 1997. Foreign exchange contracts were $1 trillion.

Modifications of the rules that apply to bank holding companies engaged in securities underwriting and dealing activities through securities subsidiaries became effective on October 31, 1997. These modifications should improve operating efficiencies at such subsidiaries and increase options for their customers. BankAmerica Corporation, currently the only Twelfth District bank holding company with a securities 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 securities subsidiary.

Credit scoring, a statistically based means of evaluating the expected repayment performance of a loan, is another relatively new development. First used in consumer lending, credit scoring has the potential to benefit small business customers by substantially decreasing the time, labor, and cost of reviewing small business loan applications, thus boosting small business lending.

One of the strongest consumer trends in recent years is the shift of household financial assets out of deposits and into mutual funds. Banks are recognizing this trend and devoting more of their own resources to selling mutual funds as their deposit growth slows. In the Twelfth District, 23 percent of banks generated fee income from selling mutual funds and annuities in the third quarter of 1997.

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

New Delivery Channels

New delivery systems for products and services are proliferating. For example, Internet banking continues to gain in popularity as a channel for banking services. By the end of 1997 the number of banks with a Web presence had grown to 26 percent in the District and 17 percent in the U.S. While some banks are moving toward providing business banking services through the Internet, others report 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 consumersÌ 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 handle many of their banking needs without visiting a branch. Many bankers see the telephone center as a pivotal delivery channel because of the wide range of banking services, as well as technical support, that will be provided.

Some banking organizations are beginning to shift away from traditional brick and mortar offices to lower cost ÏsupermarketÓ branches. These branches may offer the full range of teller transactions or may be more limited-service "banking centers.Ó In the District, Wells Fargo Bank and Bank of America have increased their activity in this area substantially.

Conclusion

Today, a bank customer may log onto the Internet to inquire about her bank balance. Or, she may walk into a branch of her bank while traveling in a different state and at the same location buy groceries 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 for securities underwriting services rather than to an investment bank. If 1997 trends are any indication, these scenarios will become more and more the norm in the future.