Copyright © 2002 Pearson Education, Inc. Slide 14-1 Origins of Today’s Banking Industry The National Banking Act of 1863 created the banking system of federal and state banks. Federally chartered banks were originally allowed to issue bank notes as currency. State banks came up with the demand deposit as a substitute for bank notes. The Federal Reserve System was created in 1914 in response to waves of bank failures.
Copyright © 2002 Pearson Education, Inc. Slide 14-2 Table 14.1 Regulation and Supervision of U.S. Depository Institutions
Copyright © 2002 Pearson Education, Inc. Slide 14-3 Why the Banking Industry Is Regulated The government has focused on information problems and liquidity risk. Bank run: many depositors withdraw their deposits and the bank’s funds are exhausted. Contagion: spreading of bad news about one bank to include other banks. Bankers’ private information limits depositors’ ability to sort out weak banks.
Copyright © 2002 Pearson Education, Inc. Slide 14-4 Figure 14.1 Bank Runs and Bank Failures
Copyright © 2002 Pearson Education, Inc. Slide 14-5 Government Intervention in the Banking Industry Federal Reserve was created to serve as a lender of last resort and issue currency. In the 1930s, the federal government started to guarantee certain types of bank deposits. Since 1863 limits on banks’ ability to open branches have been imposed.
Copyright © 2002 Pearson Education, Inc. Slide 14-6 Federal Deposit Insurance Corporation Numerous bank failures led to the creation of the Federal Deposit Insurance Corporation. When a bank fails, the FDIC either pays off depositors or assumes control of the bank. The Bank Insurance Fund has the implicit guarantee of the U.S. Treasury and the Fed. Moral hazard problems caused by bank insurance increased the need for monitoring.
Copyright © 2002 Pearson Education, Inc. Slide 14-7 Restrictions on Bank Industry Competition Banks were restricted on geographic branching and permissible activities. Banks avoided branching restrictions with nonbank offices, nonbank banks, and ATMs. Branching restrictions have now eased. The Glass-Steagall Act prohibited banks from investment bank activities. Glass-Steagall restrictions have weakened.
Copyright © 2002 Pearson Education, Inc. Slide 14-8 Figure 14.2 The Glass-Steagall Wall
Copyright © 2002 Pearson Education, Inc. Slide 14-9 Figure 14.3 Breaking Down the Glass-Steagall Wall
Copyright © 2002 Pearson Education, Inc. Slide The Banking Industry in Japan Until recently, firms turned to banks for financing because of regulations. Many large firms are affiliated with industrial groups called keiretsu. Due to deregulation, Japanese banks have lost many of their large-firm customers.
Copyright © 2002 Pearson Education, Inc. Slide The Banking Industry in Germany Germany is one of only a few countries that allow universal banking. Close alliance between banking and industry may have helped growth. German banking may have higher costs due to limited competition.