Chapter 8 Banking Industry

History  First currency were called continentals Printed too many and became worthless  Bank of North America in Phil. (1782) by Alexander Hamilton  Centralized Bank of the United States in Philadelphia (1791) By Alexander Hamilton Charter expired in 1811 Opposed by Jefferson and Madison as unconstitutional  Second Bank of the United States (1816) Charter expired in 1836 by President Andrew Jackson  States took over bank supervision Loans were 30 to 60 days No federal government in banking from – 10,000 different bank notes  exchanged for gold and silver  counterfeiting  Bank failures

 National Banking Act (1863) – established national banks State banks prior to this The National Banking Act of 1863 established the current dual banking system in the United States, in which banks are chartered by either the federal government or a state government.  Federally chartered banks, known as national banks, are supervised by the Office of the Comptroller of the Currency (OCC) and were originally allowed to issue bank notes as currency.  To eliminate the ability of state-chartered banks, known as state banks, to issue bank notes, Congress imposed a prohibitive tax on state bank notes in the National Banking Act of State banks came up with the demand deposit, or account against which checks convertible to currency could be written, as a substitute for bank notes.

Beginning of one currency  National bank notes were the money supply until 1914 when Federal Reserve notes were used  To finance the war  Branching restrictions, geographic limitations on banks’ ability to open more than one office or branch, have been imposed. Restrictions on banking industry competition take the form of geographic branching restrictions and restrictions on permissible activities of banks.  Banks attempted to get around branching restrictions through the use of nonbank offices, which did not take demand deposits but made loans, nonbank banks, which took demand deposits but did not make loans, and recently automated teller machines. Since the mid-1970s, limits imposed by branching restrictions have faded significantly

 During the National Banking Period (from 1863 to 1913) at least five major banking panics, or waves of severe bank runs, reduced the availability of credit to borrowers. Panic of 1907  Federal Reserve Act of 1913 (Owens Glass Act) Established Federal Reserve System in 1914 (FED)  Independent of the U.S. government (Wilson) Created on December 23, 1913 Began operating in 1914 Did not define their role or purpose  McFadden Act (1927) – prevented branch banking across state lines  Securities Act (1933) Required disclosure of financial information  Securities Exchange Act (1934) Created the SEC

 Banking Act (Glass-Stegall) of 1933 and 1935 – set up FDIC and separated the banking and securities industries Roosevelt’s Reforms  Set up Board of Governors  Set up OMC  Established lines of authority  Defined the functions and organization of the FED The Banking Act of 1933 authorized Regulation Q, which placed ceilings on allowable interest rates for time and saving deposits and prohibited the payment of interest on demand deposits  Roosevelt took over FED in 1937 until 1951

 Monetary Control Act of 1980: beginning of modern banking: banks could offer more services at competitive prices In response to the financial system’s circumvention of Regulation Q, Congress enacted two pieces of legislation: the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Garn-St. Germain Act of The DIDMCA phased out Regulation Q, eliminated interest rate ceilings on mortgage loans and certain types of commercial loans, provided uniform reserve requirements and access to Fed services for all depository institutions, authorized NOW and ATS accounts, and allowed S&Ls to broaden their lending beyond mortgages. The Garn-St.Germain Act permitted depository institutions to offer federally insured money market deposit accounts (MMDAs). Expanded Fed loaning to all depository institutions  Now we have multiple regulatory agencies – FED, SEC, FDIC (Govt safety net), Office of the Comptroller

Structure of the Banking Industry  8178 commercial banks mostly small few large dominant banks  Restrictions on branches by each state have created Bank holding companies Nonbank banks – either made loans or accepted deposits Automated Teller machines

Recent Legislation  Reigle-Neal Interstate Banking Act of 1994 Reduction in the number of banks  Due to Bank failures in the late 1980’s  Relaxing branch banking rules in some states  Bank consolidation  Super Regional Banks  Bank One of Columbus  Bank of America in Charlotte Banks are getting larger  Gramm-Leach-Briley Financial Services Act of 1999 – “do all” financial centers Gramm-Leach-Bliley Act of 1999, banks, securities firms, and insurance companies have been able to affiliate under common ownership and to offer the public a vast array of financial services under one umbrella since early The Gramm Leach-Bliley Act (GLBA) has removed barriers between banking and other financial services by authorizing financial holding companies that can engage in insurance, securities underwriting, banking, and merchant banking

Why are banks regulated?  The government’s concern for the health of banking institutions has focused on information problems and liquidity risk associated with unanticipated withdrawals of deposits.  In a bank run many depositors attempt to withdraw their deposits and the bank’s liquid funds are exhausted.  The spreading of bad news about one bank to include other banks is known as contagion.

Regulation  Commercial Banks- FED  Savings and Loans – regulated by the Federal Home Loan Bank System  Mutual Savings Bank – FDIC  Credit Unions – National Credit Union Administration

International Banking – growing since 1960  Eurodollar – U.S. deposits moved outside the U.S. To get higher interest To conduct international trade  U.S. Banking overseas  Foreign Banks in the U.S.

Decline of traditional banking  Financial Innovation Money Market Accounts and Mutual Funds – pays interest and you can write checks  Money is invested in CD’s, T-bills, commercial paper, etc. Telephone banking ATM Debit and credit cards Internet banking  Information - technology has enabled us to find out more and invest wisely  Commercial Paper market is growing  Securitization – moving from illiquid funds (mortgages on homes to more liquid funds (marketable securities)  Decline in cost advantages in obtaining funds (more than just checking and savings of the 1960’s)

Recent Mergers  Chase and Bank One  Capital One and Hibernia  Bank of America and MBNA  Wachovia and Capital One  Regions and Union Planters