Remarks
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
the
University of North Carolina School of Law Banking Institute
Chapel Hill, North Carolina
April 6, 2000
In one way or another, every item on this conference agenda deals with the evolution of
banking and financial services. It is fitting that we are discussing such topics in North
Carolina, which, among all the states, provides perhaps the best example of this
evolution. The direct descendent of the marriage of two Charlotte banks - American
Trust and Commercial National - more than 40 years ago is today one of the largest
financial services companies in the world - Bank of America. In fact, the state - indeed,
Charlotte -- is home to two banks with more than $100 billion in assets, the other being
First Union, where the late Federal Deposit Insurance Corporation Director C. C. Hope
retired as Vice Chairman in 1985 after 38 years at the bank.
North Carolina is home to enormous and complex institutions. But of the 118 banks and
savings institutions in the state, 108 are community banks with assets of one billion
dollars or less - and 50 have assets of fewer than $100 million. So North Carolina
reflects the wide range of institutions in the U.S. banking system today-a few very large
institutions and many smaller ones. Some observers have referred to this as a "barbell-
shaped" industry.
This evening I will discuss some implications that arise from a financial services industry
that is increasingly bifurcated by size -- and complexity. And I will conclude with a few
thoughts about this trend as it affects regulation and deposit insurance.
But first, let's look at a few simple statistics that illustrate this structural change. Fifteen
years ago, 41 banking organizations held 25 percent of U.S. domestic deposits; today
only seven organizations hold 25 percent of deposits. Fifteen years ago, the combined
assets of small banks and savings associations with assets of less than $100 million
were more than double the assets held by the largest bank in the country. Today, that
relationship is reversed. Bank of America's assets are more than double the combined
assets of all small banks and thrifts with assets of less than $100 million - all 6,000 or so
of them. It was this structural transformation that brought North Carolina to the forefront
of U.S. banking: At the beginning of the 1980s, the top three banks in North Carolina
had total assets of $14 billion, and accounted for less than 1 percent of the nation's
banking assets. Today the top three North Carolina banks have total assets of $866
billion, or 12.5 percent of the nation's banking assets.
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
the
University of North Carolina School of Law Banking Institute
Chapel Hill, North Carolina
April 6, 2000
In one way or another, every item on this conference agenda deals with the evolution of
banking and financial services. It is fitting that we are discussing such topics in North
Carolina, which, among all the states, provides perhaps the best example of this
evolution. The direct descendent of the marriage of two Charlotte banks - American
Trust and Commercial National - more than 40 years ago is today one of the largest
financial services companies in the world - Bank of America. In fact, the state - indeed,
Charlotte -- is home to two banks with more than $100 billion in assets, the other being
First Union, where the late Federal Deposit Insurance Corporation Director C. C. Hope
retired as Vice Chairman in 1985 after 38 years at the bank.
North Carolina is home to enormous and complex institutions. But of the 118 banks and
savings institutions in the state, 108 are community banks with assets of one billion
dollars or less - and 50 have assets of fewer than $100 million. So North Carolina
reflects the wide range of institutions in the U.S. banking system today-a few very large
institutions and many smaller ones. Some observers have referred to this as a "barbell-
shaped" industry.
This evening I will discuss some implications that arise from a financial services industry
that is increasingly bifurcated by size -- and complexity. And I will conclude with a few
thoughts about this trend as it affects regulation and deposit insurance.
But first, let's look at a few simple statistics that illustrate this structural change. Fifteen
years ago, 41 banking organizations held 25 percent of U.S. domestic deposits; today
only seven organizations hold 25 percent of deposits. Fifteen years ago, the combined
assets of small banks and savings associations with assets of less than $100 million
were more than double the assets held by the largest bank in the country. Today, that
relationship is reversed. Bank of America's assets are more than double the combined
assets of all small banks and thrifts with assets of less than $100 million - all 6,000 or so
of them. It was this structural transformation that brought North Carolina to the forefront
of U.S. banking: At the beginning of the 1980s, the top three banks in North Carolina
had total assets of $14 billion, and accounted for less than 1 percent of the nation's
banking assets. Today the top three North Carolina banks have total assets of $866
billion, or 12.5 percent of the nation's banking assets.
Today, the difference between large and small institutions is not just one in degree, but
also one of type. Bank of America - as an example - provides more kinds of services
than any community bank does through its multiple nonbank subsidiaries and affiliates.
It is a much more complex institution than if it were simply a community bank multiplied
by thousands.
And -- with the passage of the Gramm-Leach-Bliley Act -- a stroke of a pen ratified
years of incremental change in the structure of the financial industry - and could
accelerate it by opening the door to the creation of more and larger diversified financial
conglomerates. It is true that some smaller banks have also taken the first step to
engage in new financial activities authorized by the new law. In fact, more than two-
thirds of the recent applications to form financial holding companies have come from
companies with total assets of less than $1 billion. With Gramm-Leach-Bliley, however,
the largest institutions will only get larger and more complex.
Consolidation in banking, both domestically and across international borders, can be
expected to continue, as banks strive to reduce operating costs and strengthen and
diversify their revenue streams. So, even more than today, one end of the banking
industry barbell could become the province of giants, firms that offer the full menu of
financial services through integrated and technologically sophisticated delivery
platforms.
What does this mean for community banks? Will community banks be able to compete?
The challenges facing community banks are well known.
These institutions traditionally have enjoyed wider net interest margins than their larger
bank peers, in significant part because of their lower-cost core deposit base. That
advantage can be expected to narrow over time as a result of funding competition from
large banks, non-banks and Internet providers.
And community banks remain more dependent for their earnings on the net interest
income from their loans and investments. In 1999, 28 percent of the net operating
revenue of banks less than $1 billion in asset size came from non-interest income and
much of that came from sources tied to traditional banking activities, such as service
charges on deposit accounts. In contrast, banks over $1 billion in size derived 47
percent of their net operating revenue from non-interest income, including, for the
largest institutions, significant amounts from trading revenues, investment banking fees,
venture capital gains, and earnings on asset management and custodial activities.
Because of their smaller base of revenue sources, community banks' efficiency ratio,
roughly defined as the amount of overhead expended to generate a dollar of revenue,
was a full 10 cents worse in 1999 -- $0.68 versus $0.58 -- for small banks with assets of
less than $100 million than for larger banks.
also one of type. Bank of America - as an example - provides more kinds of services
than any community bank does through its multiple nonbank subsidiaries and affiliates.
It is a much more complex institution than if it were simply a community bank multiplied
by thousands.
And -- with the passage of the Gramm-Leach-Bliley Act -- a stroke of a pen ratified
years of incremental change in the structure of the financial industry - and could
accelerate it by opening the door to the creation of more and larger diversified financial
conglomerates. It is true that some smaller banks have also taken the first step to
engage in new financial activities authorized by the new law. In fact, more than two-
thirds of the recent applications to form financial holding companies have come from
companies with total assets of less than $1 billion. With Gramm-Leach-Bliley, however,
the largest institutions will only get larger and more complex.
Consolidation in banking, both domestically and across international borders, can be
expected to continue, as banks strive to reduce operating costs and strengthen and
diversify their revenue streams. So, even more than today, one end of the banking
industry barbell could become the province of giants, firms that offer the full menu of
financial services through integrated and technologically sophisticated delivery
platforms.
What does this mean for community banks? Will community banks be able to compete?
The challenges facing community banks are well known.
These institutions traditionally have enjoyed wider net interest margins than their larger
bank peers, in significant part because of their lower-cost core deposit base. That
advantage can be expected to narrow over time as a result of funding competition from
large banks, non-banks and Internet providers.
And community banks remain more dependent for their earnings on the net interest
income from their loans and investments. In 1999, 28 percent of the net operating
revenue of banks less than $1 billion in asset size came from non-interest income and
much of that came from sources tied to traditional banking activities, such as service
charges on deposit accounts. In contrast, banks over $1 billion in size derived 47
percent of their net operating revenue from non-interest income, including, for the
largest institutions, significant amounts from trading revenues, investment banking fees,
venture capital gains, and earnings on asset management and custodial activities.
Because of their smaller base of revenue sources, community banks' efficiency ratio,
roughly defined as the amount of overhead expended to generate a dollar of revenue,
was a full 10 cents worse in 1999 -- $0.68 versus $0.58 -- for small banks with assets of
less than $100 million than for larger banks.