BANKING SYSTEMS

By Quinn Molteni

What is a Bank?

A Unique Business
o

Money is a medium of exchange, an agreedupon system for measuring of goods &

services

A bank is a financial intermediary for the

safeguarding, transferring, exchanging, or
lending of money.

Types of Banks
o

Commercial banks
Institutions commonly thought as banks.

Retail banks
& other thrift institutions such as mutual savings
banks, savings & loans, & credit unions developed
to help individuals not served by commercial
banks save money, acquire loans, & invest.

Central banks
Governmental banks that manage, regulate, &
protect both the money supply & the banks
themselves.

Banking today

Mergers
o

occurs when one or more banks join to acquire

another bank or banks

Increase size of banks, giving more resources

Competition
o

Banking is a business, and as with any

business, competition is the heart of the
matter.

Bank

Country

Citigroup

United States

Mizuho Financial
Group

Japan

UBS

Switzerland

Sumitomo Mitsui
Financial Group

Japan

Deutsche Bank
Group

Germany

Mitsubishi Tokyo
Financial Group

Japan

HSBC Group

United Kingdom

JP Morgan Chase &

Co.

United States

BNP Paribas

France

Bayer

Germany

Banks &
Economics

Keeping your money safe

o

Record keeping is an important part of

securing your money.

Identification is an important security function

of banking too.

Enforcement is a part of safeguarding money

that evolves catching those who attempt to
take it.

Transfer security is important to banks, too.

Spreading the Wealth

Transferring
o They move it:
between banks,
between banks &
individual
customers,
between banks &
industry, between
banks &
governments, &
sometimes
between
governments.
o The sums involved
may be huge

Creditworthine Guaranteeing
ss
the money
Evaluating the In the US,
banks & the
creditworthines
government
s of customers,
work together
whether large
to form the
industries or
banking
governments
system & to
or individual
make sure the
customers, is
money supply
another
is adequate,
banking
appropriate, &
function that

The substance of
society
Banking
institutions
perform more
than moving
money through
the economy,
they also provide
a common
system that
people will trust.

Money at Work
The Spread

Other Funds

People who put

In addition to
money into banks
loan income,
are called
including credit
depositors
card interest,
The difference in
banks charge
interest between
for various
what a bank pays
& what it receives
services, such
is the spread.
as rental of
Profit is whats
safe-despite
left of revenue
boxes &
after expenses
account for
are deducted.

Assets &
Liabilities

Tests of Bank
Profitability

An asset is anything of
value.
A liquid asset is anything
that can readily be changed,
like cash
A liability, in financial terms,
is a cash obligation.
A banks liabilities exceed its
reserves.

o Return on assets (ROA)

is the ratio of net
income total assets.

o The money is loaned out, &

the reserves dont match the
total deposits (liabilities).

A banks liabilities are more

liquid that its assets.
o a bank must give depositors
their money if they request it
o The banks assets, however,
may be less than liquid
because they are tied up in
longer-term loans, so the bank
cant get them quickly

Net income Total assets

= Return on assets

o Return of equity

(ROE), which
measures how well a
bank is using equity
(also called
stockholders equity).
Net income Total equity
= Return on equity

Banks Working for You

Changes in Traditional
Services

New Services
Credit cards

Banks are more customeroriented than they traditionally

were
Banks also now offer more
checking accounts

o Banks (or their holding companies) are facilitators in the

credit card business in a big way.
o Credit cards are a more profitable way for banks to lend
money to people.

Innovative lending
o New types of lending are also available to consumers

Technology tools
o Automated teller machines (ATMs)
The first of the high-tech revolutions for consumers

o Smart cards
Credit, debit, or other types of cards that have embedded
microchips.

o Online banking
Whether called Internet banking, electronic banking, home
banking , or PC banking, online banking allows customers
to perform transaction from their home computers.

Depository Intermediaries
Commercial Banks
A big distinction between
commercial banks & other
depository institutions is
that commercial banks are
owned by stockholders
who expect a profit on
their investments. Today
commercial banks may
work with both businesses
& individuals. Commercial
banks that specialize only
in business banking are
sometimes called
wholesale banks.

Savings & Loans

Associations
o Savings & loan associations
(S&Ls) may go by various
names. Building & loan
associations, homestead
banks, & cooperative banks
are all names for savings &
loan associations.
o They receive most of their
deposits from individuals.
o chartered by either state or
federal government, these
banks grew by focusing on real
estate for people, but today
they offer most of the same
services as commercial banks.

Credit Unions
o These are also owned
by depositors, but
there are a couple of
key differences
1. Users of credit unions
must be members,
which is usually based
on some type of
association
2. Credit unions are notfor-profit financial
institutions that exist to
benefit the members

Nondepository Intermediaries
Insurance
Companies
o Surprisingly
insurance
companies are
financial
intuitions, you
might not think
so, but they are
o Insurance
companies
make money on
the policies
they sell, which
protect against
financial loss
and/or build
income for later
use.

Trust
Companies/
Pension Funds

Companies
that administer
pension or
retirement funs
also perform
financial
services. These
companies
manage
money for a
fee and
promise in
return to
provide future
income.

Loan
Currency
Brokerage
companies exchanges
houses
o Loan companies,
o Currency
Brokers are
sometimes
exchanges do not
called finance
make loans or
people who
companies, are
receive deposits.
execute orders
not banks.
o Currency
o They don't
exchanges are
to buy and sell
receive deposits,
private
stocks & other
& they should
companies that
not be confused
cash checks, sell
securities.
with banks,
money orders, or
savings & loan
They are paid
perform other
associations, or
exchange
commissions.
credit unions.
services.
o they are private
o They charge a
Their service is
companies who
fee, usually a
to help
lend money &
percentage of the
make a profit on
amount
investors do as
interest.
exchanged.

What is currency?
Classifying currency:
o Some economists make some
other distinctions, dividing the
term currency between coin, called
metallic currency, and paper
money or credit instruments, called
paper currency.
o other terms for paper currency are:
government currency is money
printed by a government
in some countries banks issue
notes against their reserves
called bank notes, which are
referred to as bank currency
checks are also a form of
currency, and they are called
deposit currency, because of
how their value is redeemed

The growth of
American
currency

Colonial cash
o

Coins were the most common medium of

exchange

Some British-type coins were minted on

American soil as early as the 1650s but almost
no-one trusted them

though the colonies did use English pounds &

shillings, a Spanish dollar called the real was
the most popular.

Early American coins were imitations of reals.

Currency in the united states

o

After the revolutionary war, the US decided to

replace the many colonial coins then
circulating
The mint act of April 19792 authorized $10, $5,
and $2.50 gold coins; $1, 50, 25, 10, & 5
silver coins; & 1 & copper coins.

US Government Paper Currency Today

Amount

Portrait on front

One dollar note

George Washington

Two dollar note

Thomas Jefferson

Five dollar note

Abraham Lincoln

Ten dollar note

Alexander Hamilton

Twenty dollar note

Andrew Jackson

Fifty dollar note

Ulysses S. Grant

One hundred dollar note

Benjamin Franklin

Banks in the
Young United
States

The first bank of the untied states

o

Alexander Hamilton believed that with no

strong central government & a strong bank the
new nation would eventually fail

Alexander encouraged his new government to

not only accept & pay with interest the debts o
the revolutionary war, but also assume
responsibility for debts of individual state
incurred in the struggle

Also he encouraged creation of a bank of the

united states

The bank wasnt an institution of government,

it was privately held

The second bank of the united states

o

Within 5 years, conflicting state bank policies &

changing economic conditions caused
congress to reconsider

Banking in different
countries

Australia

Austria

Bangladesh

Canada

China

US.

Australia

History

First bank in Australia was the Bank of New South Wales Bank
of New South Wales opened these branches:
o

Moreton bay (Brisbane) 1850

Victoria (1851)

New Zealand (1861)

South Australia (1877)

Western Australia (1883)

Fiji (1901)

Papua new guinea (1910)

Tasmania (1910)

1835: a London based bank called the Bank of Australasia that

would soon become the ANZ bank
o

1951: merged with the union bank of Australasia (formed in 1837)

1970: merged with English, Scottish, & Australian bank Limited

(formed in 1852) the largest merger in Australian banking history,
forming the Australia & new Zealand banking group limited

A risky boom in the Australian property market in 1880 led to

Australian banking crisis of 1893

1911 Common wealth bank established by the federal

government

1913 had branches in all six states

1912 took over state savings bank in Tasmania

1920 same thing

1931 took over 2 faltering state banks: the government savings

bank of new south wales & state savings bank of western Australia

1991 took over failing state bank of Victoria

Until 1980s, it was virtually impossible for foreign bank to

establish branches in Australia

Four pillars
Currently, Australian banking sector
is dominated by four major banks:
o Australia & new Zealand banking
group
o Commonwealth bank of Australia
o National Australia bank
o Westpac banking corporation
1990: commonwealth government
of Australia announced the
adoption of a four pillars policy &
would reject any mergers between
the four banks
A number of leading commentators
have argued that the four pillars
policy is built upon economic
fallacies & works against the
nations better interest.

Mutual banking in
Australia

The customer owned banking

association (formerly known as Abacus
Australian Mutuals) is the industry body
representing the more than 100 credit
unions, building societies & mutual
banks that constitute the Australian
mutual or cooperative banking sector
Heritage bank is Australias largest
customer-owned bank, having changed
its name from heritage building society
in December 2011
Three teachers credit unions have
become know as the banks; namely:
o QT mutual bank (formerly the
Queensland teachers credit union)
o Victoria teachers mutual bank
(formerly the Victoria teacher credit
union)
o Teachers mutual bank limited
(formerly teachers credit union
limited)
The police & nurses credit union began

Foreign banks
Foreign banks wishing to have a branch in
Australia must obtain a banking authority
issued by APRA under banking act, either
to operate as a wholesale bank through an
Australian branch or to conduct business
through an Australian-incorporated
subsidiary
According tot eh foreign investment review
board, foreign investment in the Australian
banking sector needs to be consistent with
the banking act, the financial sector (share
holdings) act 1998 & banking policy
including prudential requirements
There are a number of foreign subsidiary
banks how ever only a few have a retail
banking presence:
o HSBC bank Australia
o Bank of Cyprus Australian limited
o Beirut Hellenic bank
o & Citibank Australia

Regulation
Australia's banking regulation is
extensive and detailed. It is split
mainly between the Australian
Prudential Regulation Authority
(APRA) and Australian Securities
and Investments Commission
(ASIC).
APRA is responsible for the licensing
and prudential supervision of
Authorized Deposit-Taking
Institution (ADIs) (banks, building
societies, credit unions, friendly
societies and participants in certain
credit card schemes and certain
purchaser payment facilities), life
and general insurance companies
and superannuation funds.

Austria

Banking system
The two largest joint-stock banks are
the Creditanstalt-Bankverein & the
sterreichische Lnderbank
o nationalized 1946
o Shares representing 40% of the
nominal capital of the two were
sold to public in 1957
o January 12, 1997: coalition partners
agreed to sell CreditanstaltBankverein to indirectly stateowned bank Austria, which is
dominated by the Social
Democratic Party (SPO)
International monetary fund reports
that in 2001 currency & demand
deposits were equal to $52.9 billion;
same year, M2 & M1 savings deposits,
small time deposits, & market money
mutual funds was $171.2 billion

Bangladesh

History
The Pakistani banking system at
independence (august 14, 1947)
contained of 2 branch offices of the
previous State Bank of Pakistan as well
as 17 commercial banks, 2 of them
controlled by Bangladeshi interest & 3 by
outsiders other than West Pakistanis
All banking systems were focused in
urban areas
The recently independent government
instantly assigned the Dhaka branch of
the State Bank of Pakistan as the central
bank & renamed it the Bangladesh Bank
o Responsible for:
regulating currency
Controlling credit & monetary policy
Administering exchange control &
official foreign exchange reserves

Canada

Origins

With the founding of the Bank of

Montreal in 1817, banking in Canada
became to travel in sincereness
from colonial foreign banking
operation to a local banking system
with other banks following
In 1871 came the form of the
Canadian dollar, superseding the
money form of individual banks

Recent history
1980s & 1990s: largest banks
acquire almost all significant trust
& brokerage companies in Canada.
o Also started their own mutual
fund & insurance businesses
o Consequently, Canadian banks
broadened out to become
supermarkets of economic
services
2 other famous developments in
Canadian banking are:
o presentation of ING Bank of
Canada (which mostly depends
on a branchless banking model)
o Non-bank mortgage origination
companies

Canadian banks

In ordinary commerce, the banks in Canada

are generally referred to in 2 groups:
1. The five largest national banks
2. Smaller tier banks (notwithstanding that a
large national bank & a smaller tier bank may
share the same legal status & regulatory
classification)

The five largest banks are:

o. Royal Bank of Canada
o. Toronto Dominion Bank
o. Bank of Nova Scotia
o. Bank of Montreal
o. Canadian Imperial Bank of Commerce

Dignified second tier banks include:

o. ATB Financial
o. Canadian Western Bank
o. National Bank of Canada
o. Laurentian Bank
o. The Desjardins Group (technically not a bank
but an alliance of credit unions)
o. HSBC Bank Canada
o.

Regulation

There are 3 parts of the bank act (S.C. 1991, c.46)

o

Schedule I: Banks allowed to accept deposits and

which are NOT subsidiaries of a foreign bank.
Examples include The Big Five banks (as mentioned
above) and smaller second tier banks such as ING
Bank of Canada, National Bank of Canada, Laurentian
Bank of Canada, President's Choice Financial and
Canadian Western Bank. Because the Schedule I
banks are not subsidiaries of any foreign bank, they
are the true domestic banks and are the only banks
allowed to receive, hold and enforce a special security
interest described and provided for under the Bank
Act and known to Canadian lawyers and bankers as
the Bank Act security.

Schedule II: Banks allowed to accept deposits and

which are subsidiaries of a foreign bank. Examples
include AMEX Bank of Canada, Citibank Canada, HSBC
Bank Canada, and Walmart Canada Bank. Like the
Schedule I banks, the Schedule II banks are
incorporated under the Bank Act.

Schedule III: Foreign banks permitted to carry on

business in Canada. Examples include Bank of
America, Capital One, Credit Suisse and Deutsche
Bank AG. Unlike the Schedule I and Schedule II banks,
the Schedule III banks are NOT incorporated under the
Bank Act and they operate in Canada, usually within
the country's largest cities (being Toronto, Montreal,
Calgary and Vancouver), under certain restrictions
mentioned in the Act.

China

Supervisory
bodies

The Peoples Bank of China (PBOC) is chinas

head bank
o

It oversees the State Administration of Foreign

Exchange (SAFE) for setting foreign exchange
policies

China Banking Regulatory Commission (CBRC)

was officially founded on April 28, 2003, to
take over the role of the PBOC.

Domestic key players

State-owned commercial
banks-The Big Four

1995: china introduced Commercial

Bank Law to commercialize operations of
the big four banks:

o the Bank of
China (BOC)
o the China
Construction
Bank (CCB)
o the Agricultural
Bank of China
(ABC)
o the Industrial &
Commercial Bank
of China (ICBC).

Policy banks
The three new policy banks
that were established to take
over the governmentdirected spending functions
of the four state-owned
commercial banks are:
o The Agricultural Development
Bank of China (ADBC)
o The China Development Bank
(CDB)
o The Export-Import Bank of
China (Chexim)

ADBC provides funds for

agricultural development
projects in rural areas
CDB specializes in
infrastructure financing
Chexim specializes in trade
financing

Second tier
commercial
banks
Surprisingly there arent just
the big four state-owned
commercial banks, there are
additional smaller
commercial banks. The
largest ones in this group
include:
o The Bank of Communications
o The China CITIC Bank
o The China Everbright Bank
o The Hua Xia Bank
o The China Minsheng Bank
o The Guangdong Development
Bank
o The Shenzhen Development
Bank
o The China Merchants Bank
o The Shanghai Pudong
Development Bank &
Industrial Bank

Trust &
Investment
Corporations

Many of the 240 or so international

trust & investment corporations
(ITICs) established by government
agencies & provincial authorities
experienced severe liquidity
problems after the bankruptcy of
the Guangdong International Trust
& investment corporation (GITIC) in
late 1998.

The largest running ITIC is China

International Trust & Investment
Corporation (CITIC), which has a
banking subsidiary known as China
CITIC Bank

Credit & Debit

Cards

At the end of 2008, China had approximately

1.84 million POS machines and 167,500 ATMs.
About 1.18 million merchants in China accept
banking cards.

At the end of 2008, there were 196 issuers in

China that issue China UnionPay-branded
cards. These issuers include the big four
banks (Industrial and Commercial Bank of
China, the Bank of China, China Construction
Bank, and the Agricultural Bank of China), as
well as fast growing second tier banks and
city commercial banks, and even some
foreign banks with local operations.

Most of China's state-owned commercial

banks now issue dual-currency cards, allowing
cardholders to purchase goods within China in
RMB and overseas in US dollars
(Visa/MasterCard/AmEx/JCB), Euros
(Visa/MasterCard), Australian dollars
(MasterCard), or Japanese yen (JCB).

United states

Regulatory agencies:

Federal reserve
system
Its the central banking system of the US

Created in 1913 by passing of the Federal

Reserve Act

Over time, the tasks & accountabilities has

expanded & its shape has grown

The duties it has today are:

o

Conduct the nations monetary policy

Supervise & regulate banking institutions

Maintain the stability of the financial system

Provide financial services to:

Depository institutions
The US government
Foreign official insitutions

The federal reserve systems shape is

composed of:
o

The presidentially appointed Board of

Governors (of federal reserve board)

The federal open market committee (FOMC)

Twelve regional federal reserve banks located

in cities throughout the nation

Numerous privately owned US member banks

Federal deposit
insurance
corporation

The Federal Deposit Insurance Corporation

(FDIC) is a united states government
corporation created by the Glass-Steagall act
of 1933

This corporation

Provides deposit insurance which guarantees

the safety of deposits in member banks, up to
$250,000 per depositor per bank

Safety & soundness

Performs certain consumer-protection functions

Manages banks in receiverships

As of November 18, 2010, the FDIC insures

deposits at 6,800 institutions

From the beginning of FDIC insurance on

January 1, 1934, no account holder has lost
any insured funds as a result of bank failure

Office of the comptroller of

the currency

This office is a US federal agency established

by the national currency act of 1863 & serves
to:
o

Charter

Regulate

Supervise
all national banks & the federal branches &
agencies of foreign banks in the United States.

Office of thrift
supervision

This is a united states federal agency under

the department of the treasury

Created in 1989 as a retitled form of another

federal agency

Like other US federal bank supervisors, it is

paid by the banks it regulates

Bank mergers &

closures

Bank mergers happen for many reasons in

normal business, for example:
o

To create a single larger bank in which

operations of both banks can be streamlined

To acquire another banks brands

Due to regulators closing the institution due to

unsafe & unsound business practices or
inadequate capitalization & liquidity

Banks may not go bankrupt in the United

States
o

Depositor accounts are insured up to $250,000

as of October 2008 per individual per bank by
the FDIC

Banks that are in danger of failing are either:

o

Taken over by the FDIC

Administered temporarily

Then sold or merged with other banks

Antebellum history

Early attempts to
create a national bank

1781: the congress of the confederation

established the bank of North America in
Philadelphia, where it replaced the statechartered bank of Pennsylvania, founded in
1780, to help fund the American
Revolutionary War.
o

It was granted a monopoly on the subject of

bills of credit as money at the national level

1791: congress chartered the First Bank of

the United States to succeed the Bank of
North America under article one of the United
States constitution, Section 8.
o

But, congress failed to renew the contract for

the Bank of the United States, which expired in
1811

Jacksonian era

January 1817: the second bank of the United

States opened
o

6 years after the First Bank of the United

States lost in contract

War of 1812: US experienced harsh inflation &

had trouble in financing military operations
o

Afterwards, the credit & borrowing standing

was at its lowest level since founding

1837-1863: free
banking era

History & the Beginning of Free Banking:

o

Provisions of the New York Banking Law 1838:

o

Bond security provision that did not limit a number of banks regulated by this
law, but all notes the bank issued had to be backed by state bonds deposited at
the state auditor's office and meet certain capital requirements Prior to opening
a bank, subscriptions for a minimum amount of capital funds were required.
Person subscribing for a stock commonly paid in some of the funds and promised
to provide additional funds up to the amount subscribed.

2. Any bond security provision was to be deposited with the state on a dollar-fordollar basis as a condition for the issuance of banknotes. In effect this means
that all the notes issued by a particular banks were backed and redeemable by a
specific quantity of specie gold or silver, and used as checks in transactions
nowadays. Hence the banknote value was the value of the bank assets. In a case
of a bank failure, the state representing auditor would close the bank, sell the
bonds, and use the proceeds to reimburse bondholders.

The experience of Free Banking:

o

Because Free Banking was a predecessor and natural alternative to monetary

interventions, the theory and practice have been a subject to a great attention
over the past centuries. Prior to 1837, establishing a banking institution in the US
was a difficult and often politicized process as every bank needed a charter from
the legislature of the state in which it was being founded and the number of
available franchises were limited.

The free banking reforms were seen as a part of a greater struggle for liberty
and hence much was expected from them. Free banking replaced special interest
legislation with a systematic rule of law,in a form of highly idiosyncratic,
flexible, personalized charter conditions. It was expected that the elimination of
the privilege associated with the Safety Fund System 1929 would decrease
legislative corruption and log rolling, the number of banks would increase and
they would be more rationally located, and the end effect of more available
credit would encourage commercial and manufacturing businesses.

Wildcat banking & the failure of the Free Banking system:

o

Numerous banks that started during this period proved to be unstable, and many
shut. It is widely believed that as a result of light governmental regulation, many
dishonest bankers appeared and created a phenomenon called "wildcat
banking, which is believed to be the main cause of the downfall of Free Banking.
Wildcat banking saw institutions defraud the public by issuing notes they could
not redeem in specie (gold or silver).

National bank act

To correct such conditions, Congress passed

(1863) the National Bank Act, which provided
for a system of banks to be chartered by the
federal government.

The National Banking Acts of 1863 and 1864

were two United States federal laws that
established a system of national charters for
banks, and created the United States National
Banking System.

They encouraged development of a national

currency backed by bank holdings of U.S.
Treasury securities and established the Office
of the Comptroller of the Currency as part of
the Department of the Treasury and
authorized the Comptroller to examine and
regulate nationally-chartered banks.

Rise of
investment
banks- Civil War

During the war, banks were syndicated to

help the government with their money issue
because of war efforts.

Jay cooke was the first to launch a mass

securities selling operation in US history
o

By doing this, he employed thousands of

salesmen & made $830 million for the
government

He then reached out to the public, as an agent

of the treasury department, & individually led a
war bond drive that got approximately $1.5
billion for treasury

Sugring demand for

capital in the gilded age

The rise of the commercial banking sector coincided

with the growth of early factories, since
entrepreneurs had to rely on commercial banks in
order to fund their own projects.

Because of this need for capital, many banks began

to arise by the late 19th century. By 1880, New
England became one of the most heavily banked
areas in the world.

Lance Davis has demonstrated that the process of

capital formation in the nineteenth century was
markedly different between the British capital market
and the American capital market.

British industrialists were readily able to satisfy their

need for capital by tapping a vast source of
international capital through British banks such as
Westminster's, Lloyds and Barclays.

In contrast, the dramatic growth of the United States

created capital requirements that far outstripped the
limited capital resources of American banks.

Investment banking in the United States emerged to

serve the expansion of railroads, mining companies,
and heavy industry.

Unlike commercial banks, investment banks were not

authorized to issue notes or accept deposits.

Bimetallism & the

gold standard

Toward the end of the nineteenth century,

bimetallism became a center of political
conflict during the civil war, to finance the
war the U.S. switched from bimetallism to a
flat greenback currency.

In 1873, the government passed the Fourth

Coinage Act and soon resumption to specie
payments began without the free and
unlimited coinage of silver.

This put the U.S. on a mono-metallic gold

standard.

Early 20 century
th

The panic of 1907

& the Pujo
committee

In 1913, the Pujo Committee unanimously determined that a

small cabal of financiers had gained consolidated control of
numerous industries through the abuse of the public trust in the
United States.

The chair of the House Committee on Banking and Currency,

Representative Arsne Pujo, (DLa. 7th) convened a special
committee to investigate a money trust, the de facto
monopoly of Morgan and New York's other most powerful
bankers.

The committee issued a scathing report on the banking trade

that concluded that a community of influential financial leaders
had gained control of major manufacturing, transportation,
mining, telecommunications and financial markets of the United
States.

The report revealed that no less than eighteen different major

financial corporations were under control of a cartel led by:

J.P Morgan

George F. Baker

James Stillman.

These three men, through the resources of seven banks and

trust companies (listed below) controlled an estimated $2.1
billion.
o

Banker's Trust Co.

Guaranty Trust Co.

Astor Trust Co.

National Bank of Commerce

Liberty National Bank

Chase National Bank

Farmer's Loan and Trust Co.

McFadden Act

The McFadden Act of 1927 was based on

recommendations made by the Comptroller of
Currency Henry May Dawes.

The Act sought to give national banks

competitive Equality with state-chartered
banks by letting national banks branch to the
extent permitted by state law.

The McFadden Act specifically prohibited

interstate branching by allowing each
national bank to branch only within the state
in which it is located.

Although the Riegle-Neal Interstate Banking

and Branching Efficiency Act of 1994 repealed
this provision of the McFadden Act, it specified
that state law continues to control intrastate
branching, or branching within a state's
borders, for both state and national banks.

Credit unions

The first credit union in the United States was

established in 1908 in New Hampshire.

At the time, banks were unwilling to lend to

many poor laborers, who then turned to
corrupt moneylenders and loan sharks.

Businessman and philanthropist Edward

Filene spearheaded an effort to secure
legislation for credit unions first in
Massachusetts and later throughout the
United States.

With the help of the Credit Union National

Extension Bureau and an army of volunteers,
states began passing credit union legislation
in the 1920s.

Credit unions were formed based on a bond of

association, often beginning with a small
group of employees.

Despite opposition from the banking industry,

President Franklin D. Roosevelt signed the
Federal Credit Union Act into law in 1934 as
part of the New Deal, allowing the creation of
federally chartered credit unions in the United

Savings & loan

associations

The savings and loan association became a

strong force in the early 20th century through
assisting customers with home ownership,
through mortgage lending, and further
assisting their members with basic saving and
investing outlets, typically through passbook
savings accounts and term certificates of
deposit.

Congress passed the Federal Home Loan Bank

Act in 1932, during the Great Depression.

It established the Federal Home Loan Bank

and associated Federal Home Loan Bank
Board to assist other banks in providing
funding to offer long term, amortized loans for
home purchases.

New deal-era
reforms

During the 1930s, the U.S. and the rest of the world
experienced the Great Depression.

During the height of the Depression in the U.S., the official

unemployment rate was 25% and the stock market had
declined 75% since 1929.

Bank runs were common because deposits were not insured

and banks kept only a fraction of deposits in reserve.

Also, many state governments favored local unit banks over

statewide or nation-wide banks.

By the beginning of 1933, the banking system in the United

States had effectively ceased to function.

The incoming Roosevelt administration and the incoming

Congress took immediate steps to pass legislation to
respond to the Great Depression.

Roosevelt entered office with enormous political capital.

Americans of all political persuasions demanded immediate

action, and Roosevelt responded with a remarkable series of
new programs in the first hundred daysof his
administration, in which he met with Congress for 100 days.

During that period of lawmaking, Congress granted every

request Roosevelt made, and passed some programs, such
as the FDIC, that he opposed.

A major component of Roosevelt's New Deal was reform of

the nation's banking system.

Emergency
Banking Act

Roosevelt closed all banks in the country and

kept them all closed until he could pass new
legislation.

On March 9, Roosevelt sent to Congress the

Emergency Banking Act, drafted in large part
by Herbert Hoover's top advisors.

The act, passed and signed into law the same

day, provided for a system of reopening
sound banks under Treasury Department
supervision, with federal loans available if
needed.

Three-quarters of the banks in the Federal

Reserve System reopened within the next
three days.

Billions of dollars in hoarded currency and

gold flowed back into them within a month,
thus stabilizing the banking system.

By the end of 1933, 4,004 small local banks

were permanently closed and merged into
larger banks.

Creation of FDIC
& FSLIC

Established the FDIC as a temporary

government corporation

Gave the FDIC authority to provide deposit

insurance to banks

Gave the FDIC the authority to regulate and

supervise state nonmember banks

Funded the FDIC with initial loans of $289

million through the U.S. Treasury and the
Federal Reserve

Extended federal oversight to all commercial

banks for the first time

Separated commercial and investment

banking (GlassSteagall Act)

Prohibited banks from paying interest on

checking accounts

Allowed national banks to branch statewide, if

allowed by state law.

Abandonment of
the gold standard

To deal with deflation, the nation abandoned

the gold standard.

In March and April in a series of laws and

executive orders, the government suspended
the gold standard for the U.S. dollar.

Anyone holding significant amounts of gold

coinage was mandated to exchange it at the
existing fixed price of US dollars, after which
the US would no longer pay gold on demand
for the dollar, and gold would no longer be
considered valid legal tender for debts in
private and public contracts.

The dollar was allowed to float freely on

foreign exchange markets with no guaranteed
price in gold, only to be fixed again at a
significantly lower level a year later with the
passage of the Gold Reserve Act in 1934.

Glass-Steagall act
of 1933

The GlassSteagall Act of 1933 was passed in

reaction to the collapse of a large portion of
the American commercial banking system in
early 1933.

One of its provisions introduced the

separation of bank types according to their
business (commercial and investment
banking).

To comply with the new regulation, most large

banks split into separate entities.

For example, JP Morgan split into three

entities:
o

JP Morgan continued to operate as a

commercial bank

Morgan Stanley formed to operate as an

investment bank

Morgan Grenfell operated as a British merchant

bank.

Banking act of
1935

The Banking Act of 1935 strengthened the

powers of the Federal Reserve Board of
Governors in the area of credit management,
tightened existing restrictions on banks
engaging in certain activities, and expanded
the supervisory powers of the FDIC.

Together, the increased regulations of the

New Deal era ushered in a period of stability
in retail banking.

The term 3-6-3 Rule (paying 3 percent

interest on deposits, lending money out at 6
percent, and being able to tee off at the golf
course by 3 p.m.) has been used to describe
the post-World War II period until the
deregulation of the 1980s.

Bretton woods
system

The Bretton Woods system of monetary

management established the rules for
commercial and financial relations among the
world's major industrial states in the mid-20th
century.

The Bretton Woods system was the first

example of a fully negotiated monetary order
intended to govern monetary relations among
independent nation-states.

Setting up a system of rules, institutions, and

procedures to regulate the international
monetary system, the planners at Bretton
Woods established the International Monetary
Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD),
which today is part of the World Bank Group.

The chief features of the Bretton Woods

system were an obligation for each country to
adopt a monetary policy that maintained the
exchange rate by tying its currency to the
U.S. dollar and the ability of the IMF to bridge
temporary imbalances of payments.

Automated teller
machines

On September 2, 1969, Chemical Bank

installed the first ATM in the U.S. at its branch
in Rockville Centre, New York.

The first ATMs were designed to dispense a

fixed amount of cash when a user inserted a
specially coded card.

A Chemical Bank advertisement boasted On

Sept. 2 our bank will open at 9:00 and never
close again.

Nixon shock

In 1971, President Richard Nixon took a series

of economic measures that collectively are
known as the Nixon Shock.

These measures included unilaterally

cancelling the direct convertibility of the
United States dollar to gold that essentially
ended the existing Bretton Woods system of
international financial exchange.

Deregulation of
the 1980s & the
1990s
Legislation passed by the federal government
during the 1980s, such as the Depository
Institutions Deregulation and Monetary
Control Act of 1980 and the GarnSt. Germain
Depository Institutions Act of 1982, reduced
the distinctions between banks and other
financial institutions in the United States.

This legislation is frequently referred to as

deregulation, and it is often blamed for the
failure of over 500 savings and loan
associations between 1980 and 1988, and the
subsequent failure of the Federal Savings and
Loan Insurance Corporation (FSLIC) whose
obligations were assumed by the FDIC in
1989.

However, some critics of this viewpoint,

particularly libertarians, have pointed-out that
the federal government's attempts at
deregulation granted easy credit to federally
insured financial institutions, encouraging
them to overextend themselves and (thus)
fail.

Savings & loan

crisis

The savings and loan crisis of the 1980s and

1990s was the failure of 747 of the 3,234
savings and loan associations in the United
States.

As of December 31, 1995, RTC estimated that

the total cost for resolving the 747 failed
institutions was $87.9 billion.

The remainder of the bailout was paid for by

charges on savings and loan accounts which
contributed to the large budget deficits of the
early 1990s.

The concomitant slowdown in the finance

industry and the real estate market may have
been a contributing cause of the 19901991
economic recession.

Between 1986 and 1991, the number of new

homes constructed per year dropped from 1.8
million to 1 million, which was at the time the
lowest rate since World War II.

Expansion of FDIC
insurance 1989

Until 1989, national banks (those with

national charters) were required to participate
in the FDIC, while state banks either were
required to obtain FDIC insurance by state law
or could join voluntarily (usually in an attempt
to bolster their appearance of solvency).

After enactment of the Federal Deposit

Insurance Corporation Improvement Act of
1989 (FDICIA), all commercial banks that
accepted deposits were required to obtain
FDIC insurance and to have a primary federal
regulator (the Fed for state banks that are
members of the Federal Reserve System, the
FDIC fornonmemberstate banks, and the
Office of the Comptroller of the Currency for
all National Banks).

Note: Federal credit unions are regulated by

National Credit Union Administration (NCUA).

Savings & Loan Associations (S&L) and

Federal savings banks (FSB) are regulated by
the Office of Thrift Supervision (OTS)

Interstate banking

The Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994 amended the
laws governing federally chartered banks in
order to restore the laws' competitiveness
with the recently relaxed laws governing state
chartered banks.

Repeal of the
glass-steagall Act

Provisions of the Glass-Steagall Act that

prohibit a bank holding company from owning
other financial companies were repealed on
November 12, 1999, by the GrammLeach
Bliley Act.

The repeal of the GlassSteagall Act of 1933

effectively removed the separation that
previously existed between Wall Street
investment banks and depository banks.

Some political commentators on the

American political left have claimed that this
repeal directly contributed to the severity of
the Financial crisis of 20072010, but
government reports and academic analyses
of the crisis largely reject this claim.

Late-2000s
financial crisis

The late-2000s financial crisis is considered by many economists

to be the worst financial crisis since the Great Depression.

It was triggered by a liquidity shortfall in the United States

banking system and has resulted in the collapse of large
financial institutions, the bailout of banks by national
governments, and downturns in stock markets around the world.
In many areas, the housing market has also suffered, resulting in
numerous evictions, foreclosures and prolonged vacancies.

It contributed to the failure of key businesses, declines in

consumer wealth estimated in the trillions of U.S. dollars, and a
significant decline in economic activity, leading to a severe
global economic recession in 2008.

The collapse of the U.S. housing bubble, which peaked in 2006,

caused the values of securities tied to U.S. real estate pricing to
plummet, damaging financial institutions globally.

Questions regarding bank solvency, declines in credit availability

and damaged investor confidence had an impact on global stock
markets, where securities suffered large losses during 2008 and
early 2009.

Economies worldwide slowed during this period, as credit

tightened and international trade declined.

Critics argued that credit rating agencies and investors failed to

accurately price the risk involved with mortgage-related
financial products, and that governments did not adjust their
regulatory practices to address 21st-century financial markets.

Governments and central banks responded with unprecedented

fiscal stimulus, monetary policy expansion and institutional
bailouts.

Expansion of FDIC
insurance 2008-2010

Due to the 2008 financial crisis, and to

encourage businesses and high-net-worth
individuals to keep their cash in the largest
banks (rather than spreading it out), Congress
temporarily increased the insurance limit to
$250,000.

With the passage of the Dodd-Frank Wall

Street Reform and Consumer Protection Act,
this increase became permanent as of July 21,
2010.

Dodd-Frank Act

The DoddFrank Wall Street Reform and

Consumer Protection Act is the most
sweeping change to financial regulation in the
United States since the Great Depression, and
represents a significant change in the
American financial regulatory environment
affecting all Federal financial regulatory
agencies and affecting almost every aspect of
the nation's financial services industry.

In the years following its implementation

many Republicans wanted the law revoked,
however President Obama in July 2014
remained in support of the regulation, while
saying more reform was necessary,
particularly in terms of the internal
structuring of individual banks.

Test
1. What is a bank?
2. How is banking done today?
3. How do banks spread the wealth?
4. How do bank work for you?

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