U.S. Banking System

Banking Function

Banks carry out the function of intermediation.

1. Denomination intermediation: by accepting small amounts of savings from individuals, and by pooling those funds to make large loans, extended principally to corporations and governments that have frequent and large dollar amount funding requirements.
2. Default risk intermediation: banks issue safe and liquid securities, in the form of deposits to individual borrowers, and in turn make loans to riskier borrowers with the funds it has attracted, and the bank absorbs any problems with the loans while depositors continue to receive safe, uninterrupted monthly interest payments.
3. Maturity intermediation: means borrowing comparatively short-term funds from savers, who often cannot commit their funds over long periods, and making long-term loans to borrowers (corps., governments, real estate mortgages) who require long-term committed funds.
4. Liquidity intermediation: checking and saving accounts are highly liquid in such that they are convertible to cash with little risk of loss and low transaction costs for savers yet, the bank accepts illiquid direct claims from borrowers which may entail considerable risk and high transaction expenses.
5. Information intermediation: financial institutions use their skills in gathering and processing information from the financial marketplace compared to an individual borrower who may not have the expertise nor the time to determine the credit suitability of a borrower or investment.. Savers delegate the task of professional management to ascertain and monitor borrowers to the financial intermediary however, conversely, they give up yield in exchange for the service.
6. Risk pooling/diversification intermediation: the intermediary invests in a wide variety of loans and assets with a corresponding wide variety of risk and return characteristics and maturities, and through diversity obtains stability of earnings. Small investors have limited funds and cannot diversify their investments thus it relies on the intermediary to pool the funds, thus lowering risk for all savers. As the size of the bank and its operation increases, the intermediary also lower costs for all savers.

Types of Banks

Commercial Banks: Federally chartered banks, foreign bank branch office and bank holding companies.

Largest commercial banks domestically chartered in the United States (measured by Consolidated Assets at June 30, 2014, in US$ Millions):
1. JP Morgan Chase Bank N.A. ($2,002,047)
2. Bank of America N.A. ($1,454,742)
3. Wells Fargo Bank N.A. ($1,436,828)
4. Citibank N.A./Citigroup ($1,375,847)
5. US Bank N.A. ($384,194)
6. Bank of New York Mellon ($319,318)
7. PNC Bank NA ($316,652)
8. State Street Bank ($277,883)
8. Capital One N.A. ($239,590)
9. TD Bank N.A. ($219,657)
Source: Federal Reserve System
Largest bank holding companies in the United States (measured by Assets at December 31, 2014; In $US Thousands):
1. JP Morgan Chase & Co. ($2,573,126,000)
2. Bank of America Corp. ($2,106,796,000)
3. Citigroup, Inc. ($1,842,530,000)
4. Wells Fargo & Co. ($1,687,155,000)
5. Goldman Sachs Group ($856,301,000)
6. Morgan Stanley ($801,382,000)
7. GE Capital Crop. ($508,255,287)
8. US Bancorp ($402,529,000)
9. Bank of New York Mellon Corp. ($385,303,000)
10. PNC Financial Services Group ($345,243,081)
Source: National Information Center (NIC), Federal Reserve System
Foreign banks operating in the United States
1. Subsidiaries: independently capitalized and legally a local bank in the U.S., able to carry out banking activities as any other regulated bank but may not own certain subsidiaries such as a travel agency.
2. Branches (Federal/state): covered under the parent's capital structure thus a direct liability; acts as a full service bank in taking deposits and make loans.
3. Agencies: allowed to make loans but not except deposits in the United States.
4. Representative offices: nor allowed to take deposits or make loans. It acts as an intelligence gathering operation and stirs business to the banks in its home country.

International Banking Facilities (IBFs): euro-banks in the U.S. (on/off shore) post 1981; may be a U.S. bank (commercial or savings) but must maintain a separate book to record eligible assets and liabilities; allowed to deal with parent or other IBFs; can take deposits from outside the U.S.; no reserve requirements, credit regulation or state and local taxation; no negotiable CDs; no U.S. corp. deposits.

Securities houses (investment banks/merchant banks); retail brokerage; trading; investment banking; comprehensive: engaged in the underwriting of debt and equity (Sovereign and private), asset management, retail/secondary market debt and equity, money market accounts and cash management for corps. and individuals.

Money-center banks: very large banks located in financial hubs such as New York City, Chicago, Charlotte or San Francisco, with operations that are geared to national and international capital markets (commercial banks).

Regional banks: operate in localized markets particularly to with consumer branch networks. The "super-regional" banks operate in a multi-state territory (commercial banks).

Local banks: local savings and loan, mutual savings banks, community banks, thrift institutions (and credit unions) offering banking services

A De Novo bank is any new bank that is in organization or has just opened for business (taking deposits and making loans).

Mortgage Banks do not accept deposits and are residential mortgage lenders. These banks usually operate by obtaining a "warehouse" credit facility from another, larger financial institution, which they then utilize to originate and fund the mortgage and then sell the mortgage to the larger institution, any institution or investor or to FNMA / FHLMC.

Banker's Banks (provide services to other banks in the United States):
Alabama Bankers' Bank
Arkansas Bankers' Bank (ABB)
Atlantic Central Bankers Bank (ACBB)
Bankers Bank
Bankers' Bank Northeast (BBN)
Bankers? Bank of Kansas
Bankers' Bank of the West
Community Bankers Bank
First National Banker's Bank
Great Lakes Bankers Bank
Independent Bankers? Bank
Independent Bankers? Bank of Florida
Midwest Independent Bank
Mississippi National Bankers Bank
Nebraska Bankers' Bank
Silverton Bank (FDIC receivership on April 24, 2009)
The Bankers Bank
The Bankers? Bank of Kentucky
TIB / The Independent Bankers Bank
United Bankers' Bank

Consolidation of commercial banks, savings banks, specialty insurance, investment banking / brokerage, finance company and asset management is still taking place on an annual basis in North America, Europe and Asia, with the resultant surviving companies known as Financial Services providers (both consumer and commercial capability).

Non-bank / Non-depository financial services include Check Cashiers, Check Cashier Lenders / Payday loans, Credit Service Organizations, Domestic Money Transmitters, Foreign Money Transmitters, Draft and Money Order, Insurance Premium Finance Companies, Motor Vehicle Sales Finance Companies, Sales Finance Companies and Mortgage Brokers.

Deposit Insurance

In the United States, banks and credit unions are required to carry deposit insurance on consumer, coroporate and trust checking and deposit accounts up to an amount of USD$250,000. The insurer is usually the FDIC (Federal Deposit Insurance Corporation). FDIC coverage is per Depositor's legal ownership not per account. Legal ownership is by individual, joint or testamentary account. Separate insurance is also available for funds held for retirement purposes (Individual Retirement Accounts, Keoghs, and pension or profit-sharing plans).

Single / Individual Accounts - These are deposit accounts owned by one person and titled in that person?s name only. All of a depositor's single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if a depositor has a checking account and a CD at the same insured bank, and both accounts are in the depositor's name only, the two accounts are added together and the total is insured up to $100,000.

Joint Accounts - These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person?s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000. If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.

  • Deposits with each FDIC-insured bank are insured separately from any deposits at another insured bank.
  • If an insured bank has branch offices, the main office and all branch offices are considered one insured bank, a depositor cannot increase insurance coverage by placing deposits at different branches of the same insured bank.
  • Similarly, deposits held with the Internet division of an insured bank are considered the same as deposits with the "brick and mortar" part of the bank, even if the Internet division uses a different name.
  • If two banks are affiliated, such as having a common holding company, but are separately chartered (indicated by having two different FDIC Certificate numbers), deposits in each bank would be separately insured.
  • FDIC   www.fdic.gov/deposit/index.html

    The U.S. Banking System has several key components:
  • Various types of banks listed above. The United States maintains a dual banking system, which refers to the condition that both states and the federal government issue bank charters. The Office of the Comptroller of the Currency (OCC) charters national banks; the state banking departments charter state banks.
  • The Federal Deposit Insurance Corporation (FDIC) insures the deposits of banks up to a maximum amount per account holder. The FDIC is also the federal regulator of state-chartered banks that do not belong to the Federal Reserve System. The FDIC is also the appointed receiver of failed institutions by their regulator, and resolves the issue by either liquidating them or selling the institutions to redeem insured deposits.
  • The Federal system is the central bank of the United States. Membership in the Federal Reserve System is required for national banks and is optional for state banks. The Federal Reserve also regulates all bank holding companies.
  • Federal Home Loan Banks provide liquidity to banks within their geographic jurisdiction.
  • Farm Credit Banks specialize in agricultural lending.

  • Federal Home Loan Bank System

    In addition to the Federal Reserve system in the United States, there is also the Federal Home Loan Bank (FHLB) System. Although the FHLB system was chartered by an act of Congress in 1932 as a Government Sponsored Enterprise (GSE), it is private system with each district bank capitalized by its shareholders, which are the financial institutions (community banks, savings & loan, commercial banks, credit unions and insurance companies) located within each respective district. There are 12 district banks within the FHLB system, located in Atlanta, Boston, Chicago, Cincinnati (Ohio), Dallas, Des Moines (Iowa), Indianapolis, New York, Pittsburgh, San Francisco, Seattle (Washington) and Topeka (Kansas). The function of the FHLB is to provide support, correspondent banking services and credit to local financial institutions engaged in primary, single-family residential mortgage lending. Oversight of the FHLB system is conducted by the Federal Housing Finance Board (FHFB).

    The main function of the FHLB system is as a wholesale financing source to local financial institutions engaged in the primary single-family residential, multi-family and commercial mortgage lending market. No financing is offered directly to consumers. Financing, grants and qualitative support is also extended to promote community economic development. In addition, FHLB banks provide non-credit portfolio and interest rate management technical assistance and advisement and also correspondent banking services (ACH, settlement services, deposit accounts) to its members.

    The FHLB system obtains financing in the private sector and then provides low-cost wholesale funds to its respective member banks. Consolidated Obligations (CO) are debt securities (bonds and discount notes) issued by the Federal Home Loan Banking System (FHLB), Office of Finance (central issuer for all 12 district banks in the FHLB system).
  • The FHLB is a Government Sponsored Enterprise (GSE): rated Aaa / P-1 by Moody's and AAA/ A1+ by Standard and Poor's (Each District Bank of the FHLB system also has their own individual respective rating); There is no guarantee of FHLB issued debt by the U.S. Federal Government.
  • Standard & Poor's Ratings for FHLB Banks:
    Federal Home Loan Bank of Atlanta   AAA/Negative/A-1+
    Federal Home Loan Bank of Boston   AAA/Stable/A-1+
    Federal Home Loan Bank of Chicago   AAA/Negative/A-1+
    Federal Home Loan Bank of Cincinnati   AAA/Stable/A-1+
    Federal Home Loan Bank of Dallas   AAA/Stable/A-1+
    Federal Home Loan Bank of Des Moines   AAA/Stable/A-1+
    Federal Home Loan Bank of Indianapolis   AAA/Negative/A-1+
    Federal Home Loan Bank of New York   AA+/Stable/A-1+
    Federal Home Loan Bank of Pittsburgh   AAA/Negative/A-1+
    Federal Home Loan Bank of San Francisco   AAA/Stable/A-1+
    Federal Home Loan Bank of Seattle   AAA/Negative/A-1+
    Federal Home Loan Bank of Topeka   AAA/Stable/A-1+
  • The FHLB System is one of the largest debt issuers in the world and is the second largest GSE borrower.
  • Interest paid on FHLB debt securities are exempt from state and local income tax.
  • FHLB debt securities are eligible for collateral for certain public deposits and eligible for investment by national banks and thrifts.
  • Loans made by FHLB District Banks to member institutions (advances) are generally short-term, and are over-collateralized with residential mortgages. FHLB maintains its own collateral delivery system with its members.
  • All FHLB, Office of Finance issued CO debt is the joint and several liability among all of the 12 FHLB District Banks.
  • The primary source of income for each of the 12 district banks in the FHLB system is the spread between the interest it pays to borrow funds and the interest it earns on funds lent to members. Federal Home Loan Banks are not subject to federal income tax, however they do contribute 20% of their net earnings to fund a portion of the interest on the Resolution Funding Corporation (REFCorp) debt, which was issued for the resolution of insolvent savings and loans. In addition, the Federal Home Loan Banks contribute the greater of 10% of their net income or $100 million toward the Affordable Housing Program, which awards grants and rate-subsidized loans for housing serving very low- to moderate-income families and individuals.

    The extension of credit to a member Borrower is secured by collateral, which is a security interest in pledged fully disbursed, first position conventional mortgages on qualifying residential (one-to-four unit single-family dwellings, including condominiums, PUDs, townhouses and mobile homes affixed to the land) and commercial real estate (maximum LTV 85%), HELOC / second position mortgages (one-to-four unit single-family dwellings, including condominiums, PUDs, townhouses and mobile homes affixed to the land), government and agency debt securities. Advances (for financial institutions with primary regulator composite CAMELS rating of 1 or 2) are based on a percentage of the value of the underlying mortgage collateral (each FHLB bank accepts the same type of collateral, however each bank has its often percentage of advance guideline). Acceptable collateral is Residential 1st Mortgage (Fixed / Adj.), Multi-family Residential (min. 5 units), Commercial Mortgages, HELOC / Second Mortgages, Government / Agency Securities and private issued MBS securities, FHLB Deposit Collateral / Cash.

    Loan proceeds may be utilized by a member Borrower to purchase or fund:
  • Loans secured by residential real property
  • Mortgage-backed securities
  • Participations in loans secured by residential real property
  • Loans or investments financed by advances made pursuant to a Community Investment Cash Advance Program
  • Loans secured by manufactured housing (regardless of whether such housing qualifies as residential real property)
  • FHLB banks also offer off-balance sheet over-the-counter interest rate swaps, and interest rate caps and floors.

    The FHLB system acts as an alternative to the existing secondary market for originated mortgages by purchasing 15- and 30-year conventional and FHA fixed-rate loans, within the conforming loan limits. The FHLB can also provide liquidity by funding loans in the member Borrower's portfolio until they are sold into the traditional secondary market (FNMA and FHLMC) and funds are received from the investor.

    Federal Farm Credit Banks

    The Federal Farm Credit Banks (?FFCB?) are a government sponsored enterprise (GSE, created 1916) and is a nationwide network of lending institutions and affiliated services and other entities. Through its non-deposit taking Banks and related associations, the System lends money and provides related credit and other services to farmers, ranchers, producers and harvesters of aquatic products, rural homeowners, certain farm-related businesses, agricultural and aquatic cooperatives (or to other entities for the benefit of such cooperatives), rural utilities, and to certain foreign or domestic entities in connection with international agricultural credit transactions. The Banks and related associations are not commonly owned or controlled. They are cooperatively owned, directly or indirectly, by their respective borrowers. System institutions are federally chartered under the Act and are subject to supervision, examination and regulation by an independent Federal agency, the Farm Credit Administration (FCA).

    The Farm Credit System is composed of four regional Farm Credit Banks (FCB), one regional Agricultural Credit Bank (ACB) and numerous associations (approximately 99 related Production Credit Associations / PCAs, Federal Land Credit Associations / FCLAs and Agricultural Credit Associations /ACAs. The PCAs, FLCAs, and ACAs are collectively referred to as Associations) across the nation. The System Banks and Associations are cooperatively owned, directly or indirectly, by their borrowers, which are the smaller, local banks that lend directly to the agricultural sector in all 50 states of the United states and in Puerto Rico. These entities have specific lending authorities within their chartered territories.

    As none of the banks within the system are deposit taking institutions, funds are raised through the issuance of Farm Credit Debt Securities in the U.S. domestic and global capital markets by the Federal Farm Credit Banks Funding Corporation (FFCBFC).

    AgriBank, FCB
    Serves Arkansas, Illinois, Iowa, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, Wisconsin and Wyoming.
    CoBank, ACB (Agricultural Credit Bank)
    Agricultural Credit Bank with a national charter to finance agricultural cooperatives and rural utility systems, CoBank has 11 regional banking centers. Its regional office in the Northeast lends to Farm Credit associations in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. International banking services are provided through its headquarters in Denver.
    Farm Credit Bank of Texas
    Providing short-term financing to New Mexico, Northwest Louisiana and Texas. Long-term financing to Alabama, Louisiana, Mississippi and Texas.
    AgFirst, FCB
    provides funding and financial services to 23 farmer-owned financial cooperatives in Delaware, Florida, Georgia, Kentucky (specific counties), Maryland, North Carolina, Ohio (specific counties), Pennsylvania, South Carolina, Tennessee (specific counties), Virginia, West Virginia, the District of Columbia and the Commonwealth of Puerto Rico.
    U.S. AgBank, FCB
    U.S. AgBank, FCB serves Farm Credit Associations in Arizona, California, Hawaii, Nevada, Utah, Idaho, Kansas, Colorado, Oklahoma, and New Mexico.
    The Federal Farm Credit Bank Funding corporation (?FFCBFC?) is the fiscal agent for the banks of the Federal Farm Credit system and is authorized to sell:
  • Federal Farm Credit Banks Consolidated Systemwide Bonds
  • Federal Farm Credit Banks Consolidated Systemwide Discount Notes
  • Federal Farm Credit Banks Consolidated Systemwide Master Notes
  • Federal Farm Credit Banks Global Securities
  • Federal Farm Credit Banks Consolidated Systemwide Medium-Term Notes
  • Agricultural lending products include:
  • Crop Lines of Credit
  • Breeding Stock Loans (cow/calf loan)
  • Feeder Livestock Loans (stocker/feeder loan)
  • Hog Loans
  • Dairy Loans
  • Tree and Vineyard Development
  • Machinery / Equipment Loans (purchase or refinance row crop and ranch equipment, rolling stock, agri-business equipment)
  • Grain Facility Loans (grain storage/merchandising)
  • Feedlot Facility Loans (financing for feed and commodity inventory and accounts receivable)
  • Feed and Hay Loans
  • Farmland Purchase/Refinance Loans
  • Farm Building Construction
  • Livestock Facility Loans
  • Farm Service Agency (FSA) Guaranty and Beginning Farmer Loans
  • Farm Service Agency (FSA) Guaranteed Loans are used by farmers who do not qualify for conventional financing. The FSA provides guarantees of up to 90% of any losses on the loan to the participating lender under the FSA program. FSA Beginning Farmer Down Payment Loans is a program for qualified beginning farmers to purchase land up to a purchase price of $250,000.00. An applicant must make a 10% cash down payment. FSA directly lends 40% of purchase price with a 15-year term and a fixed interest rate of 4.0%. The participating lender provides 50.0% of the purchase price with a 30-year amortization schedule.

    The FSA Farm Ownership (FO) loan program assists beginning and established farmers to purchase farmland, to build or repair structures or other fixtures, and to promote soil and water conservation. The Operating Loan (OL) loan program assists producers with the purchase or lease of items needed for a successful farm operation, such as livestock, farm equipment, feed, seed, fuel, farm chemicals, insurance, or other operating expenses. Additionally, these loans can be used to pay for minor improvements to buildings, costs associated with land and water development, family subsistence, as well as to refinance debts under certain conditions.

    Agricultural Credit Associations (ACAs)
  • Provide financing to farmers, ranchers, agriculture-related businesses and rural residents for the purchase, improvement or refinancing of debt on real estate. ACA's also provide financing for expenses associated with the production, processing and marketing of food and fiber, as well as for equipment, facilities and livestock.
  • Federal Land Credit Associations (FLCAs)
  • Provide financing for the purchase, improvement or refinancing of debt on real estate.
  • Federal Land Bank Associations (FLBAs)
  • Provide financing for the purchase, improvement or refinancing of debt on rural real estate such as farms, timberland, recreational property, agribusiness firms and rural homes.
  • Adjustable or fixed interest rate financing.
  • Monthly, quarterly, semi-annual or annual payment options.