Chapter: 03

The Organization &

Structure of Banks &
Their Industry

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 Organizational Forms of Banks
 The arrangement of personnel & departments
within a bank to produce & deliver its services. A
bank with heavy involvement in consumer loans
& deposits is called “Retail Bank”. The bank
which concentrates mainly upon serving
commercial customers & making large corporate
loans is called “Wholesale Institution”.

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Differences between Large & Small Banks
 Small Banks: The service operations of small banks are
usually monitored by a Cashier & Auditor working in the
accounting division & by Vice-Presidents heading up the
bank’s loan-fund raising, marketing & trust departments.
These officers reports to the Senior Executives of the
bank, consisting of the board Chairman; the President,
who usually runs the bank from day to day; & Senior Vice
Presidents, who are responsible for long-range planning &
for assisting heads of the various departments in solving
their most pressing problems. Senior management, in turn,
reports periodically to the members of the Board of
Directors that is selected by the Stockholders.

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Differences between Large & Small Banks---Contd

 Large Banks: This bank is owned & controlled

by a holding company whose stockholders elect a
Board of Directors to oversee the bank & nonbank
firms allied with the same holding company. The
largest institutions serve many different markets
with many different services, they are better
diversified – both geographically & product line –
to withstand the risks of a fluctuating economy.

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 Unit Banking Organization
 The oldest kinds of banking, offer all of their services from
one office, though a small number of services [taking
deposits, cashing checks ] may be offered from limited-
service facilities such as:
• Drive-up windows.
• Automated teller machine (ATM)
• Retail store point-of-sale terminals.
A drive-through, or drive-thru, is a type of service provided by a business that allows customers to purchase
products without leaving their cars. The format was first pioneered in the United States in the 1930s[1] but has
since spread to other countries. The first recorded use of a bank using a drive up window teller was the Grand
National Bank of St. Louis, Missouri in 1930. The drive up teller only allowed deposits at that time period.

 Reasons for the growth of Unit banking system are:

• Rapid formation of new banks.
• On-line banking.
• Megamergers.

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 Branch Banking
 It serves a rapidly growing region & finds itself
under pressure either to follow its business &
household customers as they move into new areas
or lose them to more conveniently located
competitors.
 Senior management of a branch banking
organization is usually located at home office,
though each full-service branch has its own
management team with limited authority to make
decisions on customer loan applications & other
facets of daily operations.

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Branch Banking----Contd

Branch Banking System

Full-Service Home or Full-Service

Branch Head Branch
Office Office Office

ATM or
Electronic
Drive-up Point-of-sale Communications
Window Terminals in networks
Store

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Branch Banking----Contd

 Reasons for the growth of Branch Banking:

 Shifting of population from cities to suburban communities.
 Bank failures causes healthier banks to take over sick ones &
convert them into branch offices.
 Growth of business increases the credit needs of rapidly growing
corporations.
 Advantages of Branch Banking/Argument for Branch
Banking:
 Greater operating efficiency.
 Increases the availability & convenience of services to customers.
 Stimulate faster economic growth.
 Fewer bank failures because a branch bank is less dependent on
the volume of business from single industry or local market area.

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Branch Banking----Contd
 Argument Against Branch Banking:
– Drives out small competitors.
– Leaving the customer with fewer sources of banking
services.
– Leads to higher service fees.
– Drains scarce capital away from local communities
toward the largest cities.
– Slowing local economic development.
– Loans & deposits interest rates increases through
mergers.

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 Bank Holding Company Organizations
 A bank holding company is simply a corporation chartered
for the purpose of holding the stock of at least one bank.
Banks acquired by holding company are identified as
Affiliated Bank. Any company has control over a bank or
over any company if—
(A)The company directly or indirectly or acting through one
or more other persons owns, controls, or has power to vote
25 percent or more of any class of voting securities of the
bank or company;
(B)The company controls in any manner the election of at
least two directors of at least one bank or company; or
(C)The Board determines, after notice and opportunity for
hearing, that the company directly or indirectly exercises a
controlling influence over the management or policies of
the bank or company.
(D) Prior approval taken from Fed.
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 Types of Bank Holding Company
Two types of Bank Holding Company
 One Bank Holding Company
 Multi-bank Holding Company
For any multi-bank holding company to acquire direct or
indirect ownership or control of any voting shares of any
additional bank if, after such acquisition, such company
will directly or indirectly own or control more than 5
percent of the voting shares of such bank; again prior
approval from the fed is required.

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Advantages of Bank Holding
Company
- Greater Efficiency
- Different types of Services
- Lower possibilities of Failure
- Higher & stable profit

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Disadvantages of Bank Holding
Company
- Reduce competition
- Increase service charges
- Ignore the credit needs of small towns &
cities
- Accept higher fees

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Other forms of Bank
 Financial Holding Companies (FHC)
– Offers broadest range of financial services
– Each affiliated financial firm has its own capital,
management, profit/loss which are separated form each
other. So, each firm has protection against company-wide
losses.
 Bank Subsidiaries (BS)
- Parent bank controls the subsidiaries and can offer
different financial services. Profit/loss of each subsidiary
affects the parent bank and thus the risk exposure is high.
- Size limits are imposed upon this (BS) form of
organization

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Foreign Bank penetration of Domestic Market
 Representative Offices: Facilities operated in a different region or
nation from a bank’s home office that provide links back to the home
office. Representative office may only carry out non-profit activities
(e.g. providing information to clients and prospects, maintaining
contacts with clients, prospects and main office). therefore, tasks such as
signing a contract on behalf of the company and invoicing (profit-
activities) are not allowed.
 Agency Offices: Offices that provide limited services to customers in
distant markets, such as credit & cash management services.
 Full-Service Branches: Offices that provide the same full menu of
services as a bank’s home office.
 Shell Branches: Special offshore facilities set up to raise new funds &
avoid some regulations.

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Reasons for the Rapid Growth of Foreign Bank
Activities
1. The financing of exports from the home country to host
country.
2. Providing services to foreign nationals who have come
to study or work.
3. Tapping the Money Market for liquid funds.
4. Assisting with the flow of foreign capital into the most
promising local investments.
5. Avoiding regulatory restrictions on banking in their
home countries by entering the more open local market.

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Foreign Banks in Bangladesh
1. American Express Bank Ltd.
2. Citibank N.A
3. Commercial Bank of Ceylon Limited.
4. Habib Bank Ltd.
5. National Bank of Pakistan
6. Shamil Bank of Bahrain E.C.
7. Standard Chartered Bank Ltd.
8. State Bank of India
9. The Hong Kong and Shanghai Banking Cor.
Ltd.(HSBC)

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Goals of Financial Firms

 Expense Preference Behavior

 Agency Theory
- Agency cost and performance
depend on effectiveness of corporate
governance
 Shareholders’ wealth maximization

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