3-4.What are unit banks?

Unit banks offer their full menu of services from only one office, though they may operate any
number of drive-in windows, automated teller machines, and point-of-sale terminals. These
organizations are very common today.

3-5.What advantages might a unit bank have over banks of other organizational types?
What disadvantages?

Unit banks have the advantage of being less costly to operate because full-service branch offices
are an expensive way to grow and, because unit banks tend to be relatively small, they seem to
be able to offer personalized services better than larger institutions. One disadvantage is the
heavy dependence of most unit institutions on a single market area which increases their risk of
failure and, some authorities believe, unit institutions may not be able to afford technologically
advanced service delivery systems

3-6.What is a branch banking organization?

A branch banking organization sells its full menu of services through several locations, including
head office and one or more full-service branch offices. Regardless of its number of offices it is
one corporation with one board of directors. However, each office has its own management team
with limited authority to make decisions on customer loan applications and other facts of daily
operation.

3-7.What trend in branch banking has been prominent in the United States in recent
years?

Branch banking has become increasingly important with the great majority of states now
allowing statewide branching. Today, more states permit statewide branching and only a
minority restrict branching in some way. There was an increase in the number of branches in the
60’s, 70’sand 80’s as the population from cities to suburban areas. However, in recent years the
growth in full-service branches has slowed because of the sky-rocketing costs of land and
building office facilities. In addition, ATM’s and electronic networks have taken over much of
the routine banking transactions. There is not as much need for full service branches as before.

3-8.Do branch banks seem to perform differently than unit banks? In what ways? Can you
explain any differences?

Branch banking has a number of important advantages. With offices spread over different areas
branch banks may achieve more stable earnings and revenue flows. They may be able to grow
faster because the additional offices can bring in more debt capital (principally deposits) with
which to grow. However, research evidence accumulated in recent years suggests that adding
new branch offices can subject the bank to high fixed costs, due to large and rising construction
costs, which means the bank must work harder simply to reach a break-even point. Moreover,
branch offices that are poorly situated or that have the misfortune to be located in an area whose
economy is deteriorating may generate higher costs than revenues and saddle the bank with
persistent net losses.

3-9.What is a bank holding company?

A bank holding company is a corporation that holds an ownership interest in at least one bank.
It’s also allowed to own nonbank businesses as long as they are related to banking

3-10.When must a holding company register with the Federal Reserve Board?

If the company owns at least 25 percent of the outstanding stock of at least one bank or otherwise
exerts a controlling influence over at least one bank, it must register with the Federal Reserve
Board and seek the Fed's approval if it wishes to increase its share of ownership in those banks in
which it already has an interest or wishes to acquire additional banks or nonbank businesses.

3-11. what nonbank businesses are bank holding companies permitted to acquire under the
law?

The Bank Holding Company Act (as amended) requires a registered bank holding company to
acquire only those nonbank businesses that are "closely related to banking" and "in the public
interest." Among the most popular of these nonbank businesses that have been approved for
holding-company acquisition include finance companies, mortgage banking firms, leasing
companies, insurance agencies, data processing firms, and several other businesses as well.
Increasingly as the 1990s began, bank holding companies sought approval to acquire failing
savings and loan associations which the Federal Reserve Board granted after a case-by-case
review. These S&L acquisitions were sanctioned by the U.S. Congress when the Financial
Institutions Reform, Recovery, and Enforcement Act was passed in 1989 and, with passage of
the Federal Deposit Insurance Corporation Improvement Act in 1991, bank holding companies
were granted permission to acquire even healthy savings and loan associations with Federal
Reserve Board approval. Today, the Gramm-Leach-Bliley Act allows financial services
companies to be affiliated with each other. This includes investment-banking activities which
allow banks to underwrite securities.

3-12.Are there any significant advantages or disadvantages for holding companies or the
public if these companies acquire banks and other nonbank business ventures?

The ability of holding companies to acquire nonbank businesses has given them the capacity to
cross state lines even where state law prohibited entry by out-of-state banking firms. It also
allows a holding company to diversify across many different product lines to help stabilize the
company's net earnings. However, launching nonbank businesses can stretch holding-company
management too far and make it ineffective, resulting in damage to the performance of banks
belonging to the same holding company. The public may gain if holding companies are less
subject to failure than other types of financial service firms and are more efficient to operate.
However, the public may lose if the concentration of services in bank holding companies causes
the prices of those services to rise or if resources are drained away from local communities
causing slower growth of those communities.

3-14.Can you see any advantages to allowing interstate banking? What about potential
disadvantages?

As far as problems are concerned, interstate banking threatens to increase the concentration of
banking resources in the U.S., especially among larger banks in various regions of the nation.
Increased concentration possibly could lead to higher prices and less service if the antitrust laws
are not fully enforced. However, interstate banking can allow banks a chance to absorb higher
returns on their stocks and can improve stability since banks are allowed to diversify itself to
lower risk.

3-15.How is the structure of the nonbank financial services industry changing? How do the
organizational and structural changes occurring today among nonbank financial service
firms parallel those experienced by the banking industry?

Almost all of baking’s top competitors are experiencing much the same changes as banks. For
example, consolidation and convergence are occurring at a rapid pace. Generally, nonbank firms
have experienced the same dynamic structural and organizational revolution as banks and for
many of the same reasons

3-16. what relationship appears to exist between bank size, efficiency, and operating costs
per unit of service produced and delivered? How about among nonbank financial-service
providers?

With respect to bank size, we can assume that costs per unit decrease as more units of the same
service are produced because of greater efficiencies in using the firm’s resources to produce
multiple units of the same service or service package. However, as more services are offered,
operation cost is reduced greatly since resources are being used more effectively

3-17.Why is it so difficult to measure output and economies of scale and scope in the
financial services industry? How could this measurement problem affect any conclusion
reached about firm size, efficiency and expense behavior?

We have to be cautious about the conclusion reached by cost studies because the financial
service business is changing rapidly in form and content and the available statistical
methodology have serious limitations in that they focus on a single point in time rather than
attempting to capture the dynamics of the industry
3-18.What is expense-preference behavior? How could it affect the performance of a
financial firm?

Expense preference behavior describes an approach to management in which managers use the
resources of the firm to provide them with personal benefits not needed to produce and sell the
products. This behavior leads to increasing costs of production and declining returns to the firm’s
owners.

3-19.Of what benefit is agency theory in helping us understand the consequences of

changing control of a financial services firm? How can control by management as opposed
to control by stockholders affect the behavior and performance of a financial services
provider?

Agency theory analyzes the relationship between a firm’s owner (shareholder) and its managers.
It explores whether there is a mechanism to compel managers to act in the best interest of and
maximize the welfare of the firm’s owners. Owners do not have access to all the information and
cannot fully evaluate the performance of a manager.

3-20.What is corporate governance and how might it be improved for the benefit of the
owners and customers of financial firms?

Corporate governance describes the relationships that exist among managers, the board of
directors, the stockholders, and other stakeholders of a corporation. Corporate governance can be
improved through larger boards of directors and a high proportion of outside directors. Thiswill
expose managers to greater monitoring and discipline.