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 1 st 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