2 Alexander Hamilton: Shaping a Banking System The First Bank of the United StatesIn 1789, became first Secretary of the Treasury; proposed national bankAgainst strong opposition, First Bank of the United States chartered in 1791issued national currencycontrolled money supply by refusing state bank money not backedloaned money to federal government, state banks, businesses
3 20th-Century Developments A New Central Bank1913, Federal Reserve System created; consists of 12 regional banks, one decision-making boardprovides financial services to federal governmentmakes loans to banks that serve the publicissues Federal Reserve notes as national currencyregulates money supply
5 20th-Century Developments The Great Depression and the New Deal1929, many banks failed due to bank runsBanking Act of 1933 part of President Franklin Roosevelt’s New Dealregulated interest rates banks paid; prohibited sale of stocks by banksFederal Deposit Insurance Corporation (FDIC) insured people’s savings
6 Financial Institutions in the United States Type 1: Commercial BanksPrivately owned commercial banks are oldest type of banksinitially created to provide business loanstoday, checking and savings accounts, loans, investments, credit cardsAll national, about 16 percent of state commercial banks belong to the Fed
7 Financial Institutions in the United States Type 2: Savings InstitutionsS&Ls first chartered by states in 1830stook savings deposits; provided home mortgage loanstoday, provide many of same services as commercial banksSince 1933, federal government also charters S&Lsmany federally chartered S&Ls call selves savings banks
8 Financial Institutions in the United States Type 3: Credit UnionsIn 1909, first credit union chartered; 1934, federal system createdoffer savings and checking accounts; specialize in auto, mortgage loansdeposits insured by National Credit Union Association (NCUA)Credit unions have membership requirementscooperatives: nonprofit organizations owned by, operated for members
10 What Services Do Banks Provide? Service 1: Customers Can Store MoneyBanks store currency in vaults; insured against theft, other lossCustomers also storemoney in bank accounts; insured against bank failurepapers and valuables in safe deposit boxes
11 What Services Do Banks Provide? Service 2: Customers Can Earn MoneySavings accounts, some checking accounts pay interestMoney market accounts, CDs pay higher interest rate
12 What Services Do Banks Provide? Service 3: Customers Can Borrow MoneyBanks lend money through fractional reserve bankingpercent of deposit banks must keep is set by FedBanks make loans to customers it approvesloans have set time period and interest rate; property is collateralCredit card purchases are loans; interest charged after one month
13 Banking Deregulation Bank Mergers Deregulation led to mergers; no more restrictions on interstate bankingAdvantages: more competition meant low interest rates, more servicesalso more branches; economies of scale, especially for technologyDisadvantages: fewer banks to choose fromfear larger banks uninterested in small customers, local communities
15 Banking Deregulation Banking Services Financial Services Act of 1999 lifted last restriction on banksBanks, insurance companies, investment companies competesell stocks, bonds, insurance, traditional banking servicesCustomers continue to use different companies for different services
16 Housing Boom and BustFrom 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.
17 Housing Boom and BustBanks 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.
18 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 questions1 - 3