The banking Act of 1933 has strengthened the supervisory powers of the Federal Reserve Board and its regional authorities. US banks were prohibited from expanding geographically and from moving into insurance business and from large areas of securities business, under what is called Glass-Steagall Act of 1932. This act was replaced in the year 1999 by Gramm-Leach Bliley Act, thereby removing the lines of business barriers and permitting banks to acquire securities firms as well as insurance firms and vice-versa. GLB Act, a land mark act, has been termed as the one that brought into being the universal banks. However, this act has erected new barriers to alliance acquisitions.

The deregulation phase
In the United States, banking is no longer a stand-alone financial entity. It is an integral part of the financial institutions which cater to not only commercial banking, but also investment banking, securities trading and insurance. This kind of integration of financial services is due to the emergence of universal banking, which now dominates the US financial system. This kind of transformation from pure form banking to universal banking is referred as the deregulation effort of the 1980s.

The mergers and acquisitions era
The period 1985-2002 may be termed as M&A age for the US financial system, as during this phase many important M&A deals involving banks, securities firms and insurance firms have taken place. These mergers have been driven essentially relying on the economies of scale, and scope enhancement in operating efficiency, technology imperatives, impact of market structure and pricing power, improved financial stability through diversification of revenue streams etc. But all the M&A deals were not success stories. There are more than 350 financial sector acquisitions within US, during the period 1990-2002 each deal exceeding $500 million. Also there are 34 cross border financial sector acquisitions in the US, during the period 1990-2001, each deal involving US$500 million.

Diversity
US financial system has both diversity and fragmentation. There is a spirit of very healthy competition between financial institutions. More importantly there is competition between regulators as well. Major banks are free to choose their own regulator, a feature unique in the US financial system. Regulators, on their part are under pressure to perform well as regulators, which drives them to be innovative.

While there are very big universal banks functioning as financial power houses with global operations, there are small community banks as well, that thrive on relationship banking, with good understanding of the local clientle.

The housing loan bubble in the US
Banking sector in the United States, as elsewhere in the world, has been substantially increasing exposure to the real estate sector, especially in the form of residential housing loans and refinance against houses. Housing loans are on the rise for a variety of reasons: Consumer preferences to own houses, lower regulatory capital, availability of collateral, low interest rates, low credit risk, rising consumerism etc. Will this housing loan bubble burst very soon?

Bank for International Settlements (BIS), in its 75th Annual Report, dated 27th June 2005 says, "The US economy has arguably become over-dependent on consumer spending, borrowing and extraction of equity from housing wealth. This is particularly so because, in aggregate, an increase in housing prices does not boost national wealth in the same way as investment based on savings from income increases productivity. Owners gain from higher house prices, but every one must now pay higher prices for housing services. From this perspective, the US economy is significantly more exposed than it might appear".

The bigger question of risk management
The risk mitigation instruments include interest rate swaps, derivatives, currency, equity and commodity features besides asset-backed securities. These instruments literally transfer the risks from the US banking sector to insurance companies, mutual funds and pension funds. These three financial entities, who bear the risk are not known for stricter regulatory oversight or disclosure norms as banks are.

In fact, their capacity to understand and manage the attendant risks is questionable. Illustratively, can these organizations claim to possess any more efficient techniques in credit risk management, in which banks are supposed to have expertise? Eventually, various risks that these institutions have been trying to bear may befall the economy, with major negative consequences.

Universal Banks in the US by Katuri Nageswara Rao
Universal banks are generally large banks with extensive network of branches that provide many different financial services and are principally engaged in commercial banking, investment banking, securities and even insurance. They invest in the equity and debt of the corporates and may even participate directly in the corporate governance of the firms that rely on the banks as sources of funding or securities underwriters.

Universal banks with some variations in structures have been functioning in the United States, Europe, and Japan. India can also boast of joining the band wagon as SBI, ICICI Bank and IDBI may now be termed as universal banks.

There are many drivers that triggered the setting up of universal banks. Globalization of banking, deregulation of economies, liberalization of trade, capital and labor movements, the imperatives of competition, the concern for financial stability and more importantly, access to superior technology in financial services are some of them. Cross selling opportunities need a special mention here.

Universal banks, which are mega structures aided by technology, could become formidable and very competitive. Further these banks could be perceived as "Too Big to Fail" (TBTF) institutions.

The critics of universal banking point out that there could be cost diseconomies, when major players from different streams of financial sectors merge to form universal banks. They also argue that creation of TBTF institutions is not desirable and universal banks with diverse functions could cause complexities for the regulators. Also there could be issues like conflict of interest and non-availability of efficient top management team to govern a mega bank. In the US, universal banks are created through holding company route.

The Role of Community Banks in the US Economy
Community banks are small in size that cater to the banking needs of the local clientele, and thrive on relationship banking. Community banks represent about 89 percent of all banks but account for only 34 percent of banking offices, 19 percent of bank deposits, 16 percent of bank loans and 15 percent of bank assets.
Community banks play an important role in the financial system of the US economy. They complement the role of large banks by specializing in relationship banking and providing credit to small business-a sector that is arguably underserved by large banks.

In addition, community banks serve customers in rural areas and small metropolitan areas that are not served by large banks. Community banks are important lenders in the farm economy, and they serve the retail deposit needs of many depositors. Although the number of community banks will continue to decline because of merger activity, they will continue to play an important role in the foreseeable future.

Given their importance in the economy, the Federal Reserve has a strong interest in understanding issues facing community banks.
The Federal Reserve's monetary policy responsibilities require it to understand how its policy actions affect community banks and their customers. In the area of supervision and regulation, the Federal Reserve has a legal mandate to supervise state member banks and bank holding companies. This supervision ensures the safety and soundness of the banking sector, but also provides a "window" through which the Federal Reserve can monitor economic conditions more generally. Finally, in the payments area, community banks provide access to payments services for a large percentage of the population. While community banks pose little systemic risk to the nation's financial and payments systems, their importance to some key sectors and areas of the economy warrant Federal Reserve interest and oversight.

Some Recent Trends in Commercial Banking by Huberto M Ennis
Commercial banks in the US are those that function as pure form traditional bankers, essentially with local and regional character.
Most of them are part of a larger company, a bank holding company. Some times more than one commercial bank belongs to the same bank holding company. These banks are called sister banks. In general, sister banks tend to be managed as different branches of a single bank rather than as independent banks. The parent organization is subject to limited liability protection rules with respect to the losses in the bank. Regulators, therefore, have to be concerned with their solvency as losses associated with their failures may still be transferred to the insurance fund, even when the bank holding company does not go bankrupt.

At the beginning of the eighties, the number of commercial banks was more than 14000 but by 2002, this number was less than 8000, because of good number of mergers, apart from closure of banks due to failures. While the number of commercial banks is decreasing, the number of branches is increasing. This indicates that the level of competition in regional markets has not significantly decreased. Commercial banks have roughly kept pace with the secular growth in economic activity. While assets account for 60 percent, securities are about 20 percent. While real estate loans have been rising, commercial and industrial loans have been declining. Deposits have been losing ground to borrowed funds as a source of funding. The increased importance of mutual funds and of money market instruments essentially explain this trend. Capital ratios have been increasing. While banking activities for these banks have become more profitable in general, they have also become riskier. Bank loans to business seem to be very pro-cyclical and both charge-offs and net interest margins seem to be relatively countercyclical.

The Changing Geography of the US Banking Industry by Robert DeYoung, Thomas Klier and Daniel P McMillen
The geographical environment of the US commercial banking industry has been substantially affected by regulatory and technological change. Mergers and acquisitions have allowed large publicly traded banks to move their company headquarters, from smaller cities to larger cities, consistent with the existence of agglomeration economies available to banking companies. Bank branches have moved substantially farther away from bank headquarters, evidence that banking organizations have become less geographically centralized. However, the spatial density of bank deposits in the 50 largest metropolitan areas has remained remarkably stable overtime.

US Banks' Exposure to Foreign Financial Losses by Judith S Ruud
As the lending operations of US banks have become increasingly global over the past two decades, concerns have heightened about the bank's foreign exposure and the ability of regulators to monitor it. During 1980, US banks faced a crisis when several emerging market countries ran into problems in repaying their debts to US commercial banks. The four nations, Mexico, Brazil, Venezuela and Argentina, owed roughly $37 billion to the eight largest US banks and that exposure represented about 150 percent of the banks' capital and the reserve funds. The regulators allowed the banks to take about a decade to clear their books of bad debts. But for this regulatory forbearance, the major banks of US might have faced insolvency, which could have precipitated an economic crisis.

Banks' exposure through derivatives has grown in recent years. With that growth has come, some concern about over-the-counter (OTC) derivatives, which have limited transparency. OTC derivatives market is fairly concentrated among a group of large, systematically important financial institutions that are globally interlinked by a web of bilateral contracts extending virtually worldwide.

The International Lending Supervision Act of 1983 requires US banks with foreign exposure to report quarterly to regulators and to publicly disclose information with regard to foreign exposure.

Of late, while US banks' foreign exposure has increased in absolute terms, it has diminished relative to capital. Moreover, banks' foreign exposure is largely centered in less risky, more developed countries. Cross border lending exposure has been rising, though located in less risky and more developed countries. Local currency claims make up a slightly higher proportion of bank's total foreign exposure in emerging market countries than they do in developed countries.

Banks have implemented a number of techniques to assess risk, including the evaluation of potential future exposure and the value-at-risk models and stress testing. Some observers have proposed that banks improve their reporting of exposure by disclosing the results of their assessments. Other improvements mentioned include changing the Country Exposure Lending Survey to report on specific banks and requiring banks to provide more-detailed exposure information for publication in the survey.

International banking regulators have recommended that banks provide information on the techniques they use or, at the least, disclose the actual assessments those methods produce. For example, a major focus of the Basel Committee on Banking Supervision's new capital accord is to bolster the discipline that investors' transactions can impose on markets by calling on banks to more fully disclose the internal methodologies they use to assess and mitigate credit risk. In addition, the Multidisciplinary Working Group on Enhanced Disclosure (a joint venture of four international organizations that regulate financial services) has also recommended that financial intermediaries such as banks disclose the measures of their relevant financial risk management. The group's final report urged both qualitative and quantitative disclosures, stressing that the information should be expressed in ways "consistent with firms' own risk-management practices". The group also advocated that banks disclose efficacy of those practices.

Estimating the Capital Impact of Basel II in the United States by George French
A study has been conducted on the capital impact of Basel-2 (based on advanced internal ratings approach) on the US banks. Following are the conclusions of this study:

. Contrary to descriptions of Basel-2 not significantly changing overall capital requirements, the study expects large percentage reductions in risk-based capital requirements.
. During most of a typical economic cycle, risk-based capital requirements for Basel-2 banks would be far below the levels needed for current Prompt Corrective Action (PCA) purposes.
. Consequently, US regulators will have to choose between ignoring the output of Basel-2 formulas or significantly weakening the current PCA framework.
. Extremely wide cyclical swings in capital requirements for wholesale lending are likely unless banks' risk inputs are actively managed by supervisors to an extent not currently contemplated.
. Unless PCA is significantly weakened, the already wide disparity in core capital requirements between US banks and other banks will be widened.

Monetary Policy and Interest Rates by Katuri Nageswara Rao
US has followed low interest rate policy during the period 2003-04. Fed rate has touched its lowest level of one percent on 25th June 2003. It has started rising at the rate of 25 basis points each time during 10 revisions that took place between 30th June 2004 to 9th August 2005, to reach a level of 3.5 percent.

The key currency status of the dollar is under threat. American monetary policy needs to address the challenges of excessive consumption, low savings and low investments.

The Corporate Governance of Banks by Jonathan R Macey and Maureen O'Hara
Corporate governance acquires additional significance for banks, which are highly leveraged financial institutions that thrive on public trust. In the US, congress has passed the Banking Act of 1933, establishing the Federal Deposit Insurance Corporation (FDIC). However, deposit insurance causes moral hazard problems. The presence of a federal insurance fund also increases the risk of fraud and self-dealing in the banking industry by reducing incentives for monitoring.

Under the Federal Deposit Insurance Corporation Improvement Act, regulatory agencies were required to issue guidelines or regulations creating standards for safety and soundness in the following areas:
. Internal controls, information system and internal audit systems
. Loan documentation
. Credit underwriting
. Interest rate exposure
. Asset growth
. Compensation, fees, and benefits, and
. Asset quality, earnings, and stock valuation.

Regulators have five main enforcement tools: cease and desist powers, removal powers, civil money penalty powers, withdrawal or suspension of federal deposit insurance powers, and prompt corrective-action powers. The special nature of banking dictates that the duty of care owed by bank directors is more extensive than that of other directors.

A clear case can be made for bank directors being held to a broader, if not a higher standard of care than other directors. Bank directors should owe fiduciary duties to fixed claimants as well as to equity claimants. The importance of banks to the stability of the financial system also speaks to a broader public role of banks in the payments system and to interest claims on banks. The existence of the federally sponsored deposit insurance program administered by the FDIC provides further support for this position. Banking institutions face particularly acute moral hazard problems. Historically, double liability for banks' shareholder mitigated these problems. Government deposit insurance has reduced the political demand for expanded duties of bank directors, but the policy justification for imposing such duties remains.