The banking and finance industries have existed for thousands of years, and lie at the heart of the modern economy. One of the leading service-economy industries, banks and financial institutions have gained employment and revenue steadily for decades. Yet even in the midst of an American transition from a manufacturing economy to a service economy, the industry faces substantial challenges and is undergoing a major transition. Advancements in computer and information technology have allowed financial transactions and services to be carried out faster than ever before. Changes in state and national regulation have opened new horizons for American banks, but have also brought firms in close competition. Globalization and changes in state and national regulation have allowed new market opportunities for banks, but have also brought new international competitors. As banks and financial institutions adjust to the new rules of competition, new players will emerge to push the industry forward.
Description of the Industry
The banking and finance industries, also known collectively as the financial services industry, includes firms and institutions that are responsible for carrying out financial transactions or facilitating financial transactions through services provided. A financial transaction, in this context, is defined as the "creation, liquidation, or change in ownership of financial assets."1 Firms involved include commercial banks, investment banks, mortgage brokers, securities brokers, asset management firms, securities exchanges and trusts, as well as other unique types of financial organizations and vehicles.
Firms in the industry generally carry out two different types of financial transactions, or provide services for these transactions:2
- Raising funds by taking deposits and/or issuing securities and using those funds to make loans and/or purchase securities. Firms engaged in these activities generally seek to channel funds from lenders to borrowers and transform or repackage the funds with respect to maturity, scale and risk. This activity is known as financial intermediation.
- Pooling risk by underwriting insurance and annuities. Establishments engaged in this activity collect fees, insurance premiums, or annuity considerations; build up reserves; invest those reserves; and make contractual payments. Fees are based on the expected incidence of the insured risk and the expected return on investment.
- Providing specialized services to individuals and firms to facilitate or support either of the above types of transactions.
Subsectors of the industry are defined by which of the major financial activities are carried out, as well as the means. For example, while insurance companies and investment banks both pool risk, insurance companies underwrite insurance while investment banks underwrite security offerings, and so these types of firms are often subcategorized into different industry groups.
According to government classification, the industry contains five distinct subsectors:3
- Monetary authorities (NAICS 521), including the Federal Reserve and its branches
- Credit intermediation (NAICS 522), including commercial banks, credit unions, consumer lending, mortgage bankers and brokers.
- Securities and commodities intermediation (NAICS 523), including investment banks, securities brokers, commodities traders.
- Insurance carriers (NAICS 524)
- Funds, trusts, and other financial vehicles (NAICS 525), including real estate investment trusts (REITs)
Much of our subsequent discussion focuses on a few of these subsectors, including institutions carrying out credit intermediation, securities & commodities intermediation, and funds, trust and other financial vehicles.
Banks and Finance in North Carolina
The banking and finance industry in North Carolina has experienced a skyrocketing growth rate in the last decade, growing by 25.5% since 2002 and at an average of more than 9% per year since 1997.4 As of 2006, finance was the third largest economic sector by gross state product in North Carolina, after manufacturing and government. An indication of North Carolina's growing role in this industry is the growth in the number of firms and employees. Since 1998, the number of banking offices has increased from just over 5,000 to more than 8,200, while employment has grown from just under 75,000 to nearly 104,000.5 In addition, average wages in the industry have more than doubled over this period, hinting at productivity increases and shifts in the stages of the industry North Carolina participates in, and industrial upgrading both into higher value-added niches in existing activities as well as higher value activities within the banking and finance value chain.
North Carolina has become a major player in the national banking field. Of the 52 banks licensed to operate in the state, 24 are headquartered here, including several major national and regional players like Wachovia, Bank of America and BB&T.6 In addition, banks like First Citizens Bank & Trust and RBC Centura have substantial interstate operations throughout the Southeast and Mid-Atlantic regions.
Geography of Banking and Finance in North Carolina
Geographically, North Carolina contains four major financial clusters, centered on the Asheville, Charlotte, Triad and Triangle metro areas. Each of these clusters contains the headquarters of several North Carolina banks. Together, they constituted roughly two-thirds of North Carolina's employment in the industry in 2005: 39.1% in Mecklenburg County (Charlotte); 10.5% in Wake County (Raleigh); 9.4% in Guilford County (Greensboro); and 8.1% in Forsyth County (Winston-Salem). Interestingly, these employment percentages are generally higher than the corresponding percentages of statewide establishments. Mecklenburg County contains 17.0% of all establishments in this sector for the state, while Wake County contains 11.4%, Guilford 7.2%, and Forsyth 5.0%. Thus firms are, on average, larger in these centers than across the rest of the state. The particular strength of Mecklenburg County is not surprising, given the fact that Charlotte is a national, as well as a statewide, financial center.7
Key Industry Players
With five of the nation's top 150 financial institutions headquartered in Charlotte, including the nation's top two largest banks based on deposits (Bank of America and Wachovia Corp., which hold a combined deposit total of over half a trillion dollars), Charlotte has placed the NC financial industry on the map. The combined financial assets headquartered in Charlotte total over $2 trillion, second only to New York City. In response to the interstate and international banking deregulation of the 1980's and 1990's, Charlotte-based banks and financial holding companies actively seek to establish strong regional, national, and international financial networks. They presently operate in 31 states plus the District of Columbia, 45 foreign countries, and hold foreign deposits that total more than $89 billion.8
North Carolina's banking and finance sector contains institutions of every size. As North Carolina's major players seek to expand beyond the state's borders, opportunities arise for smaller banks to fill in local rolls that bigger banks leave behind in order to grow nationally. North Carolina state laws allow much more flexibility in geographic diversity and service opportunities for community banks. Big banks, however, still thoroughly dominate financial services in the state. In 2000, the eight largest North Carolina banks controlled 98% of deposits in the state.9
Recent Industry Trends and Developments
Increasing Mergers and Acquisitions
The US banking industry faced unprecedented deregulation with the 1997 amendment to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, permitting interstate branches to be set up by state and national banks, which spurred a national peak of large interstate banking mergers in 1998. Most of these mergers involved financial institutions headquartered in different states that aimed to expand market share to reap the benefits of economic scale derived from consolidating individual state charters and streamlining management and operations. The passage of the Gramm-Leach-Bliley Act in 1999, which allows banks to expand their service offerings to include securities and insurance intermediation, further propelled interstate banking mergers between institutions specialized in different financial activities, thus promoting economies of scale in operating costs of complementary financial activities.
Aside from reducing operating costs, these interstate market and product expansion strategies significantly diversified the risk of losses from product or location shocks. According to the American Financial Services Association (AFSA), massive financial mergers, such as the 2004 megadeals between J.P. Morgan Chase with Bank One and Bank of America with Fleet Boston, which added two new financial institutions holding assets in excess of $1 trillion, signal a much larger trend that will eventually lead to a truly national banking franchise.
North Carolina's financial industry has been at the forefront of the merger trend, as illustrated by Bank of America's recent purchases and mergers with Fleet Boston, MBNA, U.S. Trust and LaSalle Bank. In addition, Wachovia's acquisitions of several regional banks, including SouthTrust (southeastern US) and Golden West Financial (West Coast), its product expansion merger with Prudential Securities, and the purchase of securities broker A. G. Edwards, announced in May 2007, all benefit the NC banking industry, as the newly formed financial giants retain their headquarters in Charlotte.10
Differences between Types of Banks
In recent years, as larger banks have sought to expand into new services and have sought to expand nationally, a division has occurred between several different types of banks and their divergent corporate strategies.
- Large banks (including Wachovia and Bank of America) rely on their scale and expertise to offer clients a gamut of products and services, seeking to provide clients with a "one-stop shop" for all of their financial needs. These banks seek to standardize the customer service experience across branches, and bundle services together. As such, they lack a specific "customer profile," as they target all banking consumers and their service needs. These banks have been among the most aggressive in expanding across the former commercial bank/investment bank divide. These bank operations are clustered in urban areas.11 Their major competition comes from other large banks, both domestic and international, and (to some degree) from regional and smaller banks that could capture depositors or securities business.
- Small banks can be divided into community banks and specialty banks.
- Community banks, which still compose the vast majority of financial institutions in the United States (94%), are defined as regionally-located depository institutions with assets less than $1 billion. These can be focused on a region (as in the Bank of Granite in western North Carolina) or on a portion of the population (as in Mechanics & Farmers Bank in Durham, which serves the African-American community). These banks generally provide basic depository and loan services, and compete with larger banks by providing superior customer service. They provide more individual attention, often including better returns on deposits and loans whose terms incorporate more "soft data." These banks thrive on building strong ties to the community, and thus tend to thrive or wither along with the area.12 They are located in both rural and urban areas. Major competition comes from larger banks (who may attract customers with the services provided or the geographic scope of operations).13
- Specialized banks are banks that either provide a small subset of products or services, or serve a subset of the population. These banks can choose to provide internet banking, for example, or corporate finance advisory services; they may serve individuals with a high credit-risk, for example, or mid-market firms. Firms in this niche include Charlotte's ICG Capital Partners or Greensboro's Soles Brower Smith.
- U.S. Census Bureau. "North Carolina: 2002 - 2002 Economic Census, Finance and Insurance, Geographic Area Series." Washington, DC: U.S. Census Bureau, August 2005. Last accessed July 3, 2007. [http://www.census.gov/prod/ec02/ec0252anc.pdf]
- Bureau of Economic Analysis. "Gross State Product." Bureau of Economic Analysis: Regional Economic Accounts. Online database downloaded July 29, 2007. Note: NAICS Code 52 was used to define this industry. [http://www.bea.gov/bea/regional/gsp.htm]
- North Carolina Employment Security Commission. Employment and Wages by Industry. Downloaded July 29, 2007. In this case, the banking part of the industry was defined as NAICS codes 522, 523 and 525. [http://www.ncesc.com]
- Office of North Carolina Commissioner on Banks, "Banks And Nondepository Trust Companies Licensed To Act As Fiduciary Without Bond In North Carolina." Last accessed July 29, 2007. [https://www.nccob.org/Online/BRTS/TrustLicensees.aspx]
- United States Census Bureau. County Business Patterns. Annual survey, 2005. Downloaded July 29, 2007 [http://www.census.gov/epcd/cbp/view/cbpview.html]
- Charlotte Chamber of Commerce. Financial Center. Last accessed July 29, 2007. [http://www.charlottechamber.com/content.cfm?category_level_id=133&content_id=127]
- Elizabeth Jordan, The State of Working: North Carolina 2004. Raleigh, NC: North Carolina Budget and Tax Center; North Carolina Justice and Community Development Center. 2004 [http://www.ncjustice.org/media/library/41_swnc04.pdf]
- Michael E. Staten, and Robert W. Johnson, "Merger Activity in the U.S. Banking Industry." Spotlight on Financial Services, September 2004 [http://www.spotlightonfinance.org/2004/September/industry-story4.htm]
- Tom Dorsey, Wachovia Corporation. Phone interview by Ana Maria Barton. November 28, 2006.
- M.C. Neely and D.C. Wheelock. "Why Does Bank Performance Vary Across States?" St. Louis, MO: Federal Reserve Bank of St. Louis, March-April 1997. p. 27, 40. Last accessed December 3, 2006. [http://research.stlouisfed.org/publications/review/97/03/9703mn.pdf]
- Tim Critchfield, Tyler Davis, Lee Davison, Heather Gratton, George Hanc, and Katherine Samolyk. "Community Banks: Their Recent Past, Current Performance, and Future Prospects." FDIC Banking Review, Vol. 16, No. 3-4 (2004). pp. 1-31. Last accessed July 3, 2007. [http://www.fdic.gov/bank/analytical/banking/2005jan/br16n34full.pdf]
INDUSTRY SECTION LAST UPDATED: August 8, 2007