1. The Development of Modern Banking
Chapter 11
Section 3

2. Development of Modern Banking
Banks fulfill two distinct needs:
They provide a safe place for people to deposit their money, and they lend excess funds to individuals and businesses temporarily in need of cash.
This can only happen if the nation has a strong banking system.
The Constitution makes no mention of banking--banking rules come from Congress’ commerce powers

3. Revising the Banking System
National Banking 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 experienced financial crises and recessions

4. The Federal Reserve System
AKA: “the Fed”
The nation’s 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
Created by Congress in 1913

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 publicly controlled
The president appoints and Congress approves the FED’s Board of Governors
Federal Reserve notes
Paper currency issued by the Fed that eventually replaced all types of federal currency
1914: notes were back by gold
1934: notes became inconvertible fiat money

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
A 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)
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
Credit Union:
non-profit
service cooperative
lesser fees
share draft accounts

9. Other Depository Institutions
Savings & Loan Association:
a depository 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

10. Crisis and Reform Deregulation led to more competition
Could offer NOW accounts
a checking account that pays interest
All depositories could borrow from the FED, not just commercial banks
Led to crisis among savings and loans associations
Several bad loans = S&L out of business
Fewer federal inspections = increased fraud

11. Crisis and Reform
The Financial Institution Reform, Recovery, and Enforcement Act
Abolished independence of the S&L industry
FSLIC (Federal Savings and Loan Insurance Corporation) was dissolved
FDIC took over
S&L survived the crisis

12. 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
1990’s
Years of caution after the 80’s
Stronger federal regulations were enacted
All financial institutions were required to strengthen their capital reserves
Banks merged with stock and security brokerage firms
2000
Financial institutions were healthier