The Development of Modern Banking

1. The Development of Modern Banking Constitution makes no mention of banking--banking rules come from Congress’ commerce powers

2. 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

3. 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

4. The Federal Reserve 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

5. 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

6. 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)

7. Banking during the Great Depression • 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

8. 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

9. Other Depository Institutions • Credit Union: • non-profit • pay no taxes • lesser fees • only serve member owners

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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