US Bank of Washington (9-292-057 HBR Case Study) -Commercial Banks and their Role -Their changing role in US economy -Possible strategies for value creation in the future Done By- 109 Ghanshyam Gupta 301 Balagopal Padmakumar 302 Harbir Singh Banga 402 Rishi Bajaj 503 Anirwan Bhattacharya

1. U.S BANK OF WASHINGTON
HBR Case Study
GROUP 1.
Ghanshyam Gupta 109
Balagopal Padmakumar 301
Harbir Singh Banga 302
Rishi Bajaj 402
Anirwan Bhattacharya 503

2. Rishi Bajaj 402

3. • A financial institution that provides banking and financial
services to Commercial institues, organizations, bodies,
companies and entities.
• The traditional commercial bank is a brick and mortar
institution with tellers, safe deposit boxes, vaults and ATMs.

4. • The term ‘Commercial Bank’ used for a normal bank to
distinguish it from an investment bank.
• After the Great Depression, the U.S. Congress required
that banks only engage in banking activities, whereas
investment banks were limited to capital market
activities.
• Since the two no longer have to be under separate
ownership, some use the term "commercial bank" to
refer to a bank or a division of a bank that mostly deals
with deposits and loans from corporations or large
businesses.

5. • The largest commercial banks
– Bank of America Corp,
– JP Morgan Chase & Co,
– HSBC Bank,
– Citigroup, and
– Goldman Sachs Group
(96 percent of all exposures and had the largest share of
derivative exposures of the commercial banking sector)
• Some commercial banks, also have investment banking
divisions, while others, such as Ally, operate strictly on
the commercial side of the business.

6. • Processing of payments by way of telegraphic
transfer, internet banking, or other means
• Issuing bank drafts and bank cheques
• Accepting money on term deposit
• Lending money by overdraft, installment loan, or
other means
• Providing documentary and standby LC,
Guarantees, Performance Bonds, Security
underwriting and other forms of off balance
sheet exposure

7. • Safekeeping of documents and other items in safe
deposit boxes
• Sales, distribution or brokerage, with or without
advice, of: insurance, unit trusts and similar financial
products as a “financial supermarket”
• Cash management and treasury
• Merchant Banking & PE Financing
• Traditionally, large commercial banks also underwrite
bonds, make markets in currency, interest rates and
credit related securities (usually handled by IB now)
• Broader role towards economy, government.

8. Primary Function
Accepting Deposits
Making Advances
Credit creation

9. Secondary Function
Agency Functions
General Utility Functions

10. • To collect and clear cheque, dividends and
interest warrant.
• To make payment of rent, insurance premium,
etc.
• To deal in foreign exchange transactions.
• To purchase and sell securities.
• To act as trusty, attorney, correspondent and
executor.
• To accept tax proceeds and tax returns.

11. • To provide safety locker facility to customers.
• To provide money transfer facility.
• To issue traveller's cheque.
• To accept various bills for payment e.g phone
bills, gas bills, water bills, etc.
• To provide merchant banking facility.
• To provide various cards such as credit cards,
debit cards, Smart cards, etc.

12. Ghanshyam Gupta 109

13. The two main roles played by banks in US are
• Operate payment system of credit cards, checks etc
• Channelizing credit to business and households, investing
money into the economy

14. • Traditionally, banks funded their loan portfolios by issuance of
deposit/insurance & pension liabilities to the investors.
Credit Market in 1950
• Primary Asset Held: U.S. Treasury Securities, C&I loans, Business
& Home mortgages, Consumer Credit
• Sources of Funding: Zero interest bearing checking accounts,
saving accounts
• There has been a shift in how banks lend: from short term
lending of funds unsecured by real estate to collateralized loans.

15. • Asset securitization of home mortgages as well as consumer credit have
resulted in an reduction in the extent to which commercial banks fund
these loans directly to the client.
• There has been a change in the composition of bank loan portfolio as
well as the bank customers.
• Small time deposits have been increasing as a percentage of total assets.
Demand deposits continued to fall.
• There has been a change in the maturity structure of bank’s assets,
average maturity of banks loans and earning assets has risen since 1988.
• Providing several services through separate business units e.g. US
Bancorp

16. • The Gramm-Leach-Bliley Act, allows banks again to merge with
investment and insurance houses.
• Banks have expanded the use of risk-based pricing from business
lending to consumer lending
• Third, banks have sought to increase the methods of payment
processing available to the general public and business clients.
These products include debit cards, prepaid cards, smart cards, and
credit cards.

17. Anirwan Bhattacharya 503

18. • Held loans and securities as assets, which in turn were
primarily funded by issuance of deposit liabilities
• By 1989, loans accounted for over 61% of total assets held by
US commercial banks
• Strong growth in real estate loans, steady growth in consumer
loans
• Due to high perceived risk in commercial sector, banks’ real
estate portfolio has seen a shift from commercial to
residential mortgages

19. • $11 billion consumer receivables mostly credit card debt and
automobile loans were securitized in 1989
• Securitization helped banks to remove underlying loans from
bank’s balance sheet thus lowering the regulatory capital
required to support actual level of bank’s lending activity
• It also enabled banks to earn free income from originating
and servicing the loans
• Non-interest income has seen an increase

20. • In 1989, Net income for banking industry was down due to
provisions for losses on non-performing loans
• Interest cost of deposits and purchased funds increased
resulting lower net interest margin
• Small banks continued to book relatively high profits, larger
banks, particularly the money center institutions, reported
weak earnings.
• This was due to losses for commercial real estate and
domestic business loans

21. Harbir Singh Banga 302
Balagopal Padmakumar 301