Bank Of America

Industry Analysis: The U.S. commercial banking industry was healthy in the mid-2000s, surviving the sluggish economy of the early 2000s and the 9/11-terrorist attacks. The consolidation frenzy of the commercial banking in the 1990s had slowed down drastically by the early 2000s. The total number of mergers and acquisitions that took place in 2004 fell to 226, compared to 475 in 2000. At the same time, the number of new banks established in 2004 dropped to 122, compared to 217 in 2000.

The number of commercial banks in operation fell down to 7,598 in the first quarter of 2005, down from 8,129 in 2002. Of the 5,743 state-chartered banks, 919 were members of the Federal Reserve System. These banks comprised about 12 percent of all insured U.S. commercial banks and held about 15 percent of all insured commercial bank asset. The 445 largest banks, those with assets of more than $1 billion--accounted for 87 percent of the banking industry's total asset base of $8.6 trillion (as of March, 2005) with the vast majority being controlled by the top 50 bank holding companies. Some of the functions of the Commercial banks perform U.S. economy are as follow, facilitate banks with the elastic credit system for steady growth, efficient transfer of money, they encouragement of savings for lending purposes, addition of credit to credit-worthy borrowers, increasing production and capital investment. facilitate trade through foreign exchange, they function as trust advisors, they facilitate safekeeping of valuables and provide brokering activities.

Numerous banks in the mid-2000s "continued to take advantage of the Gramm-Leach-Bliley Act--landmark legislation passed in late 1999, which allowed banks to engage in other activities, as long as they are financial in nature, by transforming their status from BHCs to financial holding companies (FHC)." Although only 600 in number in 2004, over half of the nation's largest banks (with assets in excess of $10 billion) had elected to become FHCs. By the mid-2000s, FHCs controlled over 75 percent of all BHC assets. The top FHCs in 2005 were Citigroup, Inc., J. P. Morgan Chase & Company, Wells Fargo and Company, Bank of America, and Wachovia Corporation.

Despite the increasingly relaxed regulatory climate, this lowered the entry barriers and increased the treat of substitution, the banking industry continuous to be one of the most regulated parts of the U.S. financial system and thus making the threat of entry weak. Commercial banks, which are organized primarily to conduct general banking business, are most often state or national banks. State banks are organized under a charter granted by the state government, while national banks are organized under charters issued by the Comptroller of the Currency of the United States.

The regulation of banks on the state level is delegated to a banking authority in each state. These bodies exercise primary and additional regulatory powers. There are four primary bank regulatory powers: new bank charter approval, new branch or separate facility application approval, cease and desist orders, and officer removal orders. There are also four additional state bank regulatory powers: power to fine, power to order affiliate examinations, power to order special examinations, and power to issue regulations. Such regulatory powers are exercised by either the state's primary banking authority or by the state's banking board, depending upon the structure of the state's system. Most states maintain a banking board consisting of between 5 and 17 members who are generally appointed by the governor for three to six year terms. Some states, however, regulate banking without a banking board.

The U.S. banking system is the product of two centuries of adjustment designed to make banks serve the interests of the widest number of people operating in a capitalist economic system. Banking regulation proceeds downward from the Federal Reserve Bank through a variety of national regulations to state regulations crafted to suit the needs of particular localities. The "dual" banking system created by the actions of independent national and state regulatory agencies has allowed innovation in local banking, while ensuring continuity in banking between the states.

The stock market crash of 1987 came at a bad time for commercial banks. After investing heavily in infrastructure to make them competitive in the investment banking industry, the banks were faced with a much smaller and more competitive market in the wake of the crash. Equally troubling to the banking industry was the failure of hundreds of savings-and-loan institutions.

Throughout the 1990s banks were granted greater freedom to focus on other activities, such as investment banking. Following a series of concessions by regulatory bodies, state banks strived to court wealthier clients by delving into the surging hedge fund industry (investment strategies that in general "hedge" against market downturns), acting as management custodians, lenders, and brokers. Furthermore, commercial banks increasingly participated in the lucrative investment-banking sector, a practice forbidden commercial banks since the Great Depression. Thus the industry continued to chip away at the long-standing regulatory climate restricting the range of banks' activitie. By the end of the decade, however, bankers finally achieved the sweeping legislation they were hoping for.

As U.S. banks enjoyed record revenues as a result of the Gramm-Leach-Bliley Act in November 1999. Also known as the Financial Services Modernization Act, this legislation repealed the Glass-Steagall Act (The Glass-Steagall Act also created the distinction between commercial and investment banking. Commercial banks were prohibited from underwriting securities, engaging in the stock market, and a host of other activities that legislators felt had contributed to the financial crisis. Commercial banks were to focus on accepting deposits and providing commercial loans. The act also built on long-standing distrust in the United States of centralized monetary institutions by regulating and restricting bank branching.) The Gramm-Leach-Bliley law allowed banks to engage in a range of activities prohibited since the Great Depression. By establishing financial holding companies, banks could establish brokerages, insurance operations, and other financial service offerings in addition to their traditional banking activities all under one institution.

Both national and state commercial banks in the early 2000s did see increased loan and lease losses, as the U.S. economy continued to weaken. However, these were "offset in large part by realized gains in investment account securities: these gains developed as banks' portfolios benefited from declining short- and immediate-term market interest rates,"