Economics Chapter 10 Section 2 & 3 Notes Money and Banking Economics Chapter 10 Section 2 & 3 Notes

Alexander Hamilton: Shaping a Banking System The First Bank of the United States In 1789, became first Secretary of the Treasury; proposed national bank Against strong opposition, First Bank of the United States chartered in 1791 issued national currency controlled money supply by refusing state bank money not backed loaned money to federal government, state banks, businesses

20th-Century Developments A New Central Bank 1913, Federal Reserve System created; consists of 12 regional banks, one decision-making board provides financial services to federal government makes loans to banks that serve the public issues Federal Reserve notes as national currency regulates money supply

20th-Century Developments The Great Depression and the New Deal 1929, many banks failed due to bank runs Banking Act of 1933 part of President Franklin Roosevelt’s New Deal regulated interest rates banks paid; prohibited sale of stocks by banks Federal Deposit Insurance Corporation (FDIC) insured people’s savings

Financial Institutions in the United States Type 1: Commercial Banks Privately owned commercial banks are oldest type of banks initially created to provide business loans today, checking and savings accounts, loans, investments, credit cards All national, about 16 percent of state commercial banks belong to the Fed

Financial Institutions in the United States Type 2: Savings Institutions S&Ls first chartered by states in 1830s took savings deposits; provided home mortgage loans today, provide many of same services as commercial banks Since 1933, federal government also charters S&Ls many federally chartered S&Ls call selves savings banks

Financial Institutions in the United States Type 3: Credit Unions In 1909, first credit union chartered; 1934, federal system created offer savings and checking accounts; specialize in auto, mortgage loans deposits insured by National Credit Union Association (NCUA) Credit unions have membership requirements cooperatives: nonprofit organizations owned by, operated for members

Section 3 Innovations in Modern Banking

What Services Do Banks Provide? Service 1: Customers Can Store Money Banks store currency in vaults; insured against theft, other loss Customers also store money in bank accounts; insured against bank failure papers and valuables in safe deposit boxes

What Services Do Banks Provide? Service 2: Customers Can Earn Money Savings accounts, some checking accounts pay interest Money market accounts, CDs pay higher interest rate

What Services Do Banks Provide? Service 3: Customers Can Borrow Money Banks lend money through fractional reserve banking percent of deposit banks must keep is set by Fed Banks make loans to customers it approves loans have set time period and interest rate; property is collateral Credit card purchases are loans; interest charged after one month

Banking Deregulation Bank Mergers Deregulation led to mergers; no more restrictions on interstate banking Advantages: more competition meant low interest rates, more services also more branches; economies of scale, especially for technology Disadvantages: fewer banks to choose from fear larger banks uninterested in small customers, local communities

Banking Deregulation Banking Services Financial Services Act of 1999 lifted last restriction on banks Banks, insurance companies, investment companies compete sell stocks, bonds, insurance, traditional banking services Customers continue to use different companies for different services

Housing Boom and Bust From 2000 to 2006, house prices in the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role. Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.

Housing Boom and Bust Banks became less interested in verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.

Housing Boom and Bust What’s The Issue? How did bank lending practices contribute to the real estate boom? Study the sources on pages 312 – 313 of the text. Use the information to answer questions 1 - 3