The Development of Modern Banking

Constitution makes no mention of banking--

banking rules come from Congress’ commerce

powers

Revising the Banking System

• National Bank Act (1863): strengthened the nation’s financial system by creating a system of national banks

• By 1907 the NSB needed further reforms as the nation expeirenced financial crises and recessions

The Federal Reserve System

• AKA: The FED • 1st true central bank

– A bank that lends to other banks in need

• All national banks were required to join – State chartered banks were eligible – Had to purchase stock in the

system

•Created by Congress in 1913•Purpose: to establish uniform

banking rules for all banks•Also serves as a central bank

that can lend money to member banks

The Federal Reserve System

• Privately owned banks own the FED not the government – Banks buy in to the FED and the FED tells

them what to do. • FED is publically controlled • President and Congress approves the

FED’s Board of governor • Federal Reserve notes

– Paper currency issued by the Fed that eventually replaced all types of federal currency

– 1914: notes were back by gold – 1934: became fiat

The Federal Reserve System

Banking during the Great Depression

• Banks were overextended during 1920’s • Many failed after the Great Depression • Banks did not have deposit insurance for

their depositors – Run on the bank: a rush by depositors to

withdraw their funds from a bank before it failed

– March 5, 1933: Roosevelt declares a bank holiday (every bank was required to close)

• Banking Act of 1933 (Glass-Stegall Act) – Created the FDIC ( Federal Deposit

Insurance Corporation) – Insured customers deposits in the

event of bank failure – Max. covered today $100,000 per

customer– Today also protects from fraudulent

banks

Banking during the Great Depression

Other Depository Institutions

• Savings Bank– Mutual Savings Bank (MSB): a

depositor-owned financial organization owned and operated only for the benefit of its depositors

– Transformed into Savings Bank

•Credit Union: – non-profit– pay no taxes– lesser fees– only serve member owners

Other Depository Institutions

•Savings & Loan Association: – a financial institution that

invested the majority of its funds in home mortgages

–1930’s Federal Home Loan Bank Board began supervising and regulating savings and loan associations •Similar to the FDIC

Other Depository Institutions

Crisis and Reform

• Federal regulations– Set maximum rates of interest – Restricted how institutions could

lend their funds – Reagan Admin. Deregulated the

financial system •Brought a period of competition, crisis,

and reform

• Deregulation led to more competition – Could offer NOW accounts

• checking account that pays interest

– All depositories could borrow from the FED, not just commercial banks

– Led to crisis among savings and loans associations

– Bad loans = S&L out of business – Fewer federal inspections = fraud

Crisis and Reform

• The Financial Institution Reform, Recovery, and Enforcement Act– Abolished savings and loan industry – FSLIC (Federal Savings and Loan

Insurance Corporation) was dissolved

– FDIC took over – S&L survived the crisis

Crisis and Reform

• 1980’s – More bank failures due to poor

management – Made loans w/o adequate collateral – Others failed to keep expenses

under control – Some fell victim to the weak

economy

Crisis and Reform

• 1990’s – Years of caution after the 80’s – Stronger federal regulations – All financial institutions were

required to strengthen their capital reserves

– Banks merged with stock and sercurity brokerage firms

• 2000– Financial institutions were healthier

Crisis and Reform