Banc One Corporation



Banc One Corporation

Introduction

Banc One Corporation, headquartered in Columbus, Ohio, truly epitomized the spirit of regional banking. With $76.5 billion in assets, it was the largest bank holding company based in Ohio and the eighth largest in the country. Unlike the more traditional bank holding company structure, in which the parent corporation controlled subsidiary banks, Banc One had a three-tiered organizational structure operating across 12 states. The parent, Banc One Corporation, controlled 5 state bank holding companies (in Arizona, Indiana, Ohio, Texas, and Wisconsin), which in turn owned 42 subsidiary banks, or “affiliates.” Through its Regional Affiliate Group, Banc One owned another 36 subsidiary banks—for a total of 78 banking affiliates. In addition to its banking affiliates, Banc One controlled 10 nonbanking organizations in various businesses ranging from insurance to venture capital to data processing.

Analysis

Asset and Liability Management

A typical U.S. bank's liabilities consisted of floating-rate liabilities (such as federal funds borrowings) and long-term fixed-rate liabilities (such as certificates of deposit, or CDs). Assets included floating-rate assets (such as variable-rate mortgages and loans, as well as floating-rate investments) and long-term fixed-rate assets (such as fixed-rate mortgages and securities). Asset and liability management involved matching the economic characteristics of a bank's inflows and outflows. For example, a bank could match the maturity of its assets and liabilities. It also could look at the duration, the contractual fixed/floating nature of its commitments, or an estimate of the period in which its commitments would be repriced in response to changes in market rates as the basis upon which to judge just how well it was matched.

Banks' needs to match assets to liabilities arose from their strategic decisions regarding interest rate exposure. If their assets and liabilities were perfectly matched, then a rise or fall in interest rates would have equal and offsetting impacts on both sides of the balance sheet. In principle, perfect matching would leave a bank's earnings or market value unaffected by changes in interest rates. Alternatively, a bank could adjust its portfolio of assets and liabilities to profit when rates rose, but lose when they fell. It could also position itself to make the opposite bet.

Measuring Interest Rate Exposure

Banc One, like other banks, defined its exposure to interest rate risk by calculating its earnings sensitivity, or the impact of interest rate changes on reported earnings. For example, if a gradual 1% upward shift in interest rates during the year increased that year's base earnings by 5%, the bank would have an earnings sensitivity of 5%. If earnings sensitivity was positive, the bank was said to be asset sensitive (i.e., the interest rate on assets reset more quickly than liabilities, resulting in increased income if rates rose). If earnings sensitivity was negative, the bank was said to be liability sensitive (i.e., liabilities reset more quickly than assets, resulting in a decrease in income if rates rose). If the bank had a 0% earnings sensitivity, then an upward or downward shift in interest rates would have ...