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.
In this section we introduce the key sections of the website, including the structure of the industry using a value chain framework, an overview of the industry from both the labor market and policy perspective, and the key trends and dynamics that are shaping this industry now and in the future. In each section the past and present trends in the industry are analyzed from the perspective of North Carolina, the United States and North Carolina’s footprint compared to other states.
Banks & Finance Value Chain
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:
- 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 the major financial activities carried out, as well as the means. Discussion on the website focuses on three main subsectors, including institutions carrying out credit intermediation, securities & commodities intermediation, and funds, trust and other financial vehicles.
Overview of the Industry
North Carolina has a rich history in the financial industry, with banks such as First Union, Wachovia and North Carolina National Bank serving as the forerunners for current leading firms Wells Fargo and Bank of America. The development of the state’s banking center can be traced to a number of advantages, some of which were structural in nature and some of which were the results of the actions of individual firms. Historically, North Carolina was the last of the original 13 states to charter a private bank, only doing so in 1804. A decade later, North Carolina became one of the few states to allow its banks to have multiple branches; as a result, North Carolina banks accumulated more capital than many of their peers. The success of the region’s textile and tobacco industries helped North Carolina’s banks grow their reserves before a Federal Reserve Board branch opened in Charlotte in 1927, helping establish that city as a regional banking center.
Throughout the 20th century, North Carolina biggest banks pursued an aggressive strategy of acquisitions and mergers. Competition between rivals such as First Union and North Carolina National Bank pushed both to expand at a rapid pace, especially after inter-state banking was legalized by the U.S. Supreme Court in the 1980s (1). The move toward bigger banks continued in the 2000s—First Union merged with Wachovia before Wells Fargo purchased Wachovia; North Carolina National Bank changed its name to NationsBank and eventually merged with BankAmerica to become Bank of America. Those and other organizations continue to thrive—Wells Fargo and Bank of America were state’s fourth and fifth largest private employers in 2013 (2), employing more than 46,200 people between the two of them (B&F T1a). In total, there are more than 100,000 workers in North Carolina’s banks and finance value chain.
The banking and finance industry remains a significant component of North Carolina’s economy, posting consistent growth in the number of establishments, employment and wage figures from 1992 to 2002 and then from 2002 to 2012. The industry is heavily concentrated in North Carolina’s two largest cities—Charlotte and Raleigh—although there also is a significant cluster in Winston-Salem and Greensboro. The largest segment is depository credit intermediation, which accounts for 63.4% of the employment in the industry; moreover, the growth rate of the depository credit intermediation sector in NC (67.8%) was the second largest in the US from 1992 to 2012, trailing only Arizona’s. North Carolina’s banking and finance industry is competitive with most other states in the country—the only states that have more workers and a higher number of physical sites are those that also have a higher overall population.
The state’s strong university system produces 8,500 graduates each year, with 3,500 of them having a degree in a field that is related to the banks and finance sector (3). Some of the more notable individual programs focused on banking are included in the Resources section of the website.
The financial industry is an important component of the North Carolina economy for a number of reasons. Historically, the state’s liberal banking laws put its banks in a favorable position to expand when intra-state banking was legalized by the U.S. Supreme Court. Aggressive competition between the antecedents of Wells Fargo and Bank of America also allowed both organizations to grow through consolidations and mergers and assume a leading position in the US banking industry. As the 21st century has progressed, a number of financial organizations—Fidelity, Credit Suisse, Royal Bank of Canada/PNC— have targeted North Carolina for regional headquarters, taking advantage of the state’s generous Job Development Investment Grant program as well as the strong university system that also figured prominently into Bank of America’s and Wells Fargo’s ascension.
Trends & Developments
Increasing Mergers and Acquisitions
The U.S. 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 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 purchases and mergers with Fleet Boston, MBNA, U.S. Trust and LaSalle Bank. In addition, Wells Fargo'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 (4).
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 Wells Fargo 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. 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 (5). 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)(6).
- 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.
- Rothacker, R. (2010). Banktown: The Rise and Struggles of Charlotte’s Big Banks. Blair Publishing: Winston-Salem, NC.
- NC Department of Commerce. (2013). “North Carolina’s Largest Private Employers.” Retrieved February 20, 2014.
- NC Department of Commerce. “North Carolina’s Distinct Business and Financial Services Advantages.” Retrieved February 20, 2014.
- Staten, M. & and R. Johnson. (2004, September). "Merger Activity in the U.S. Banking Industry." Spotlight on Financial Services.
- Neely, M. & D.C. Wheelock. (1997, March-April). "Why Does Bank Performance Vary Across States?" St. Louis, MO: Federal Reserve Bank of St. Louis, p. 27,40. Last accessed December 3, 2006.
- Critchfield, T., Davis, T., Davison, L, Gratton, H., Hanc, G. & K.Samolyk. (2004). "Community Banks: Their Recent Past, Current Performance, and Future Prospects." FDIC Banking Review, 16(3-4), pp. 1-31. Last accessed July 3, 2007.