Money and BankingEconomicsChapter 10 Section 2 & 3 Notes
Alexander Hamilton: Shaping a Banking System The First Bank of the United States
In 1789, became first Secretary of the Treasury; proposed national bank
Against strong opposition, First Bank of the United States chartered in 1791 issued national currency controlled money supply by refusing state bank
money not backed loaned money to federal government, state
banks, businesses
20th-Century DevelopmentsA New Central Bank
1913, Federal Reserve System created; consists of 12 regional banks, one decision-making boardprovides financial services to federal
governmentmakes loans to banks that serve the publicissues Federal Reserve notes as national
currencyregulates money supply
20th-Century Developments
The Great Depression and the New Deal 1929, many banks failed due to bank
runs Banking Act of 1933 part of President
Franklin Roosevelt’s New Dealregulated interest rates banks paid;
prohibited sale of stocks by banks Federal Deposit Insurance Corporation
(FDIC) insured people’s savings
Financial Institutions in the United StatesType 1: Commercial Banks
Privately owned commercial banks are oldest type of banksinitially created to provide business
loanstoday, checking and savings accounts,
loans, investments, credit cards All national, about 16 percent of state
commercial banks belong to the Fed
Financial Institutions in the United States Type 2: Savings Institutions
S&Ls first chartered by states in 1830s took savings deposits; provided home mortgage
loans today, provide many of same services as
commercial banks Since 1933, federal government also charters
S&Ls many federally chartered S&Ls call selves
savings banks
Financial Institutions in the United States Type 3: Credit Unions
In 1909, first credit union chartered; 1934, federal system created offer savings and checking accounts; specialize
in auto, mortgage loans deposits insured by National Credit Union
Association (NCUA) Credit unions have membership requirements
cooperatives: nonprofit organizations owned by, operated for members
Section 3Innovations in Modern Banking
What Services Do Banks Provide?Service 1: Customers Can Store
Money Banks store currency in vaults; insured
against theft, other loss Customers also store
money in bank accounts; insured against bank failure
papers and valuables in safe deposit boxes
What Services Do Banks Provide?Service 2: Customers Can Earn
Money Savings accounts, some checking
accounts pay interest Money market accounts, CDs pay higher
interest rate
What Services Do Banks Provide?
Service 3: Customers Can Borrow Money Banks lend money through fractional reserve
bankingpercent of deposit banks must keep is set by Fed
Banks make loans to customers it approvesloans have set time period and interest rate;
property is collateral Credit card purchases are loans; interest charged
after one month
Banking Deregulation Bank Mergers
Deregulation led to mergers; no more restrictions on interstate banking
Advantages: more competition meant low interest rates, more services also more branches; economies of scale,
especially for technology Disadvantages: fewer banks to choose
from fear larger banks uninterested in small
customers, local communities
Banking Deregulation Banking Services
Financial Services Act of 1999 lifted last restriction on banks
Banks, insurance companies, investment companies compete sell stocks, bonds, insurance, traditional
banking services Customers continue to use different
companies for different services
Housing Boom and BustFrom 2000 to 2006, house prices in
the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role.
Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.
Housing Boom and BustBanks became less interested in
verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.
Housing Boom and BustWhat’s The Issue?
How did bank lending practices contribute to the real estate boom? Study the sources on pages 312 – 313 of the text.
Use the information to answer questions 1 - 3