Banking in the United States
Encyclopedia
Banking in the United States is regulated by both the federal and state governments.
The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the gross domestic product
(GDP) of the United States or 43% of its national debt, and the average bank leverage
ratio (assets divided by net worth) is 12 to 1.
is highly fragmented compared with other G10
countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.
U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury
lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation
laws (for example, defining what constitutes usurious lending).
Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act of 1989 (FDICIA), all commercial banks that accept deposits are required to obtain FDIC insurance and to have a primary federal regulator (the Fed for state banks that are members of the Federal Reserve System, the FDIC for "nonmember" state banks, and the Office of the Comptroller of the Currency for all National Banks).
Federal credit unions are regulated by National Credit Union Administration (NCUA); Savings & Loan Associations (S&L) and Federal savings banks (FSB) are regulated by the Office of Thrift Supervision (OTS).
ing system of the United States, called the Federal Reserve system
, was created in 1913 by the enactment of the Federal Reserve Act
, largely in response to a series of financial panics, particularly a severe panic in 1907
. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression
were major factors leading to changes in the system. Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institution
s, the U.S. government, and foreign official institutions.
The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee
(FOMC), twelve regional Federal Reserve Bank
s located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The responsibilities of the central bank are divided into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury
, creates the currency used.
According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government." However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President
and confirmed by Congress. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects. The U.S. Government receives all of the system's annual profits, after a statutory dividend
of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.
, which guarantees the safety of deposits in member banks, up to $250,000 per deposit
or per bank. , the FDIC insures deposits at 7,723 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks).
Since the start of FDIC insurance on January 1, 1934, no depositor has lost any insured funds as a result of a bank failure.
s and the federal branches and agencies of foreign banks in the United States
. The acting Comptroller of the Currency is John Walsh.
). Like other U.S. federal bank regulators, it is paid by the banks it regulates.
is listed here along with non-members who are also insured by the FDIC. This list does not include banks and investments that are not FDIC-insured.
Banks are not allowed to go bankrupt in the United States. Accounts are insured up to $250,000 as of Oct 2008 per individual per bank by the FDIC. Banks that are in danger of failing are either taken over by the FDIC, administered temporarily and eventually sold off or merged with other banks. A list of banks seized by regulators and the assuming institutions can be obtained at Federal Deposit Insurance Corp - Failed Bank list.
ing saw an increase in opportunities for wealthy individuals to become involved in entrepreneurial projects they would not involve themselves in without someone to guarantee a return on their investment. These early banks acted as intermediaries for entrepreneurs who did not have enough wealth to fund their own investment projects and for those who did have wealth but did not want to bear the risk of investing in projects. Thus, this private banking sector witnessed an array of insider lending, due primarily to low bank leverage and an information quality correlation, but many of these banks actually spurred early investment and helped spur many later projects. Despite what some may consider discriminatory practices with insider lending, these banks actually were very sound and failures remained uncommon, further encouraging the financial evolution in the United States.
established the Bank of North America
in Philadelphia, where it superseded the state-chartered Bank of Pennsylvania
founded in 1780 to help fund the American Revolutionary War
. The Bank of North America was granted a monopoly on the issue of bills of credit as currency at the national level. Prior to the ratification of the Articles of Confederation
& Perpetual Union, only the States had sovereign power to charter a bank authorized to issue their own bills of credit. Afterwards, Congress also had that power.
Robert Morris, the first Superintendent of Finance appointed under the Articles of Confederation, proposed the Bank of North America as a commercial bank
that would act as the sole fiscal and monetary agent for the government. He has accordingly been called "the father of the system of credit, and paper circulation, in the United States." He saw a national, for-profit, private monopoly following in the footsteps of the Bank of England as necessary, because previous attempts to finance the Revolutionary War, such as continental currency issued by the Continental Congress
, had led to depreciation of such an extent that Alexander Hamilton
considered them to be "public embarrassments." After the war, a number of state banks were chartered, including in 1784: the Bank of New York
and the Bank of Massachusetts.
In 1791, Congress chartered the First Bank of the United States
to succeed the Bank of North America under Article One of the United States Constitution
, Section 8. However, Congress failed to renew the charter for the Bank of the United States, which expired in 1811. Similarly, the Second Bank of the United States
was chartered in 1816 and shuttered in 1836.
opened in January 1817, six years after the First Bank of the United States
lost its charter. The predominant reason that the Second Bank of the United States was chartered was that in the War of 1812
, the U.S. experienced severe inflation and had difficulty in financing military operations. Subsequently, the credit
and borrowing status of the United States was at its lowest level since its founding.
The charter of the Second Bank of the United States (BUS) was for 20 years and therefore up for renewal in 1836. Its role as the depository of the federal government's revenues made it a political target of banks chartered by the individual states who objected/envied the B.U.S.'s relationship with the central government. Partisan politics came heavily into play in the debate over the renewal of the charter. President
Andrew Jackson
strongly opposed the renewal of its charter, and built his platform for the election of 1832 around doing away with the Second Bank of the United States.
Apart from a general hostility to banking and the belief that specie
(gold and/or silver) were the only true money, Jackson's reasons for opposing the renewal of the charter revolved around his belief that bestowing power and responsibility upon a single bank was the cause of inflation and other perceived evils.
During September 1833, President Jackson issued an executive order that ended the deposit of government funds into the Bank of the United States. After September 1833, these deposits were placed in the state chartered banks.
s, interest rate
s for loans and deposits, the necessary capital ratio etc. Free banking spread rapidly to other states, and from 1840 to 1863 all banking business was done by state-chartered institutions.
Numerous banks that were started during this period ultimately proved to be unstable. In many Western states, the banking industry degenerated into “wildcat” banking because of the laxity and abuse of state laws. Bank notes were issued against little or no security, and credit was overexpanded; depressions brought waves of bank failures. In particular, the multiplicity of state bank notes caused great confusion and loss. The real value of a bank bill was often lower than its face value, and the issuing bank's financial strength generally determined the size of the discount.
Congress passed the National Bank Act in an attempt to retire the greenbacks that it had issued to finance the North's effort in the American Civil War
. This opened up an option for chartering banks nationally. As an additional incentive for banks to submit to Federal supervision, in 1865 Congress began taxing any of state bank notes (also called "bills of credit" or "scrip
") a standard rate of 10%, which encouraged many state banks to become national ones. This tax also gave rise to another response by state banks—the widespread adoption of the demand deposit
account, also known as a checking account. By the 1880s, deposit accounts had changed the primary source of revenue for many banks. The result of these events is what is known as the "dual banking system." New banks may choose either state or national charters (a bank also can convert its charter from one to the other).
launched the first mass securities selling operation in U.S. history employing thousands of salesmen to float what ultimately amounted to $830 million worth of government bonds to a wide group of investors. Cooke then reached out to the general public, acting as an agent of the Treasury Department, personally led a war bond drive that netted approximately $1.5 billion for Treasury.
Lance Davis has demonstrated that the process of capital formation in the nineteenth century was markedly different between the British capital market and the American capital market. British industrialists were readily able to satisfy their need for capital by tapping a vast source of international capital through British banks such as Westminster's, Lloyds and Barclays. In contrast, the dramatic growth of the United States created capital requirements that far outstripped the limited capital resources of American banks. Investment banking in the United States emerged to serve the expansion of railroads, mining companies, and heavy industry. Unlike commercial banks, investment banks were not authorized to issue notes or accept deposits. Instead, they served as brokers or intermediaries, bringing together investors with capital and the firms that needed that capital.
of financiers had gained consolidated control of numerous industries through the abuse of the public trust in the United States. The chair of the House Committee on Banking and Currency, Representative Arsène Pujo
, (D
–La.
7th
) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade that concluded that a community of influential financial leaders had gained control of major manufacturing, transportation, mining, telecommunications and financial markets of the United States. The report revealed that no less than eighteen different major financial corporations were under control of a cartel led by J.P Morgan, George F Baker and James Stillman. These three men, through the resources of seven banks and trust companies (Banker’s Trust Co., Guaranty Trust Co., Astor Trust Co., National Bank of Commerce, Liberty National Bank, Chase National Bank, Farmer’s Loan and Trust Co.) controlled an estimated $2.1 billion. The report revealed that a handful of men held manipulative control of the New York Stock Exchange and attempted to evade interstate commerce laws.
The findings of the committee inspired public support for ratification of the Sixteenth Amendment
in 1913, passage of the Federal Reserve Act
that same year, and passage of the Clayton Antitrust Act
in 1914.
was headed off by a private conglomerate, who set themselves up as "lenders of last resort" to banks in trouble. This effort succeeded in stopping the panic, and led to calls for a Federal agency to do the same thing. In response, the Federal Reserve System was created by the Federal Reserve Act
of 1913, establishing a new central bank intended serve as a formal "lender of last resort" to banks in times of liquidity crisis—panics where depositors tried to withdraw their money faster than a bank could pay it out.
The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.
The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the Federal Reserve (a quasi-governmental entity), creating the twelve regional Federal Reserve Bank
s which are supervised by the Federal Reserve Board.
s. Businessman and philanthropist Edward Filene
spearheaded an effort to secure legislation for credit unions first in Massachusetts and later throughout the United States. With the help of the Credit Union National Extension Bureau
and an army of volunteers, states began passing credit union legislation in the 1920s. Credit unions were formed based on a bond of association
, often beginning with a small group of employees. Despite opposition from the banking industry, the Federal Credit Union Act
was signed into law in 1934 as part of the New Deal
, allowing the creation of federally chartered credit unions in the United States. The Credit Union National Association
(CUNA) was formed and by 1937, 6400 credit unions with 1.5 million members were active in 45 states. Today there are over 9500 credit unions in the United States and they are regulated by the National Credit Union Administration
(NCUA).
lending, and further assisting their members with basic saving and investing outlets, typically through passbook
savings accounts and term certificates of deposit.
The U.S. Congress passed the Federal Home Loan Bank Act
in 1932, during the Great Depression
. It established the Federal Home Loan Bank and associated Federal Home Loan Bank Board
to assist other banks in providing funding to offer long term, amortized
loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes.
Savings and loan associations sprang up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
. In the U.S. during the height of the Great Depression, the official unemployment rate was 25% and the stock market had declined 75% since 1929. Bank run
s were common because there wasn't insurance on deposits at banks, banks kept only a fraction of deposits in reserve, and customers ran the risk of losing the money that they had deposited if their bank failed.
By the beginning of 1933, the banking system in the United States had effectively ceased to function. The incoming Roosevelt administration and the incoming Congress
took immediate steps to pass legislation to respond to the Great Depression
.
Roosevelt entered office with enormous political capital
. Americans of all political persuasions were demanding immediate action, and Roosevelt responded with a remarkable series of new programs in the “first hundred days” of the administration, in which he met with Congress for 100 days. During those 100 days of lawmaking, Congress granted every request Roosevelt asked, and passed a few programs (such as the FDIC to insure bank accounts) that he opposed.
A major component of Roosevelt's New Deal was reform of the nation's banking system. With strident language Roosevelt took credit for dethroning the bankers he alleged had caused the debacle.}}
, drafted in large part by Hoover's top advisors. The act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury Department supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks. (Their depositors eventually received on average 86 cents on the dollar of their deposits; it is a common myth that they received nothing back.)
(FDIC), which insured deposits for up to $2,500 beginning January 1, 1934. On June 16, 1933, President Franklin D. Roosevelt
signed the Banking Act of 1933. This legislation:
The FSLIC was created as part of the National Housing Act of 1934
in order to insure deposits in savings and loans, a year after the FDIC was created to insure deposits in commercial banks. It was administered by the Federal Home Loan Bank Board
(FHLBB).
for United States currency
. Anyone holding significant amounts of gold coinage was mandated to exchange it for the existing fixed price of US dollars, after which the US would no longer pay gold on demand for the dollar, and gold would no longer be considered valid legal tender
for debts in private and public contracts. The dollar was allowed to float freely on foreign exchange market
s with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act
in 1934. Markets immediately responded well to the suspension, in the hope that the decline in prices would finally end.
and investment banking). In order to comply with the new regulation, most large banks split into separate entities. For example, JP Morgan split into three entities: JP Morgan continued to operate as a commercial bank, Morgan Stanley was formed to operate as an investment bank, and Morgan Grenfell operated as a British merchant bank.
in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development
(IBRD), which today is part of the World Bank Group
. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy
that maintained the exchange rate
by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments
.
. The first ATMs were designed to dispense a fixed amount of cash when a user inserted a specially coded card. A Chemical Bank advertisement boasted "On Sept. 2 our bank will open at 9:00 and never close again."
took a series of economic measures that collectively are known as the Nixon Shock
. These measures included unilaterally cancelling the direct convertibility of the United States dollar
to gold
that essentially ended the existing Bretton Woods system of international financial exchange.
of 1980 and the Garn–St. Germain Depository Institutions Act of 1982, diminished the distinctions between banks and other financial institutions in the United States. This legislation is frequently referred to as "deregulation," and it is often blamed for the failure of over 500 savings and loan association
s between 1980 and 1988, and the subsequent failure of the Federal Savings and Loan Insurance Corporation
(FSLIC) whose obligations were assumed by the Federal Deposit Insurance Corporation
(FDIC) in 1989. However, some critics of this viewpoint, particularly libertarians
, have pointed out that the federal government's attempts at deregulation granted easy credit to federally insured financial institutions, encouraging them to overextend themselves and (thus) fail.
s in the United States. "As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion." The remainder of the bailout was paid for by charges on savings and loan accounts—which contributed to the large budget deficits of the early 1990s.
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II
.
Note: Federal credit unions are regulated by National Credit Union Administration (NCUA). Savings & Loan Associations (S&L) and Federal savings banks (FSB) are regulated by the Office of Thrift Supervision (OTS)
The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. This repeal directly contributed to the severity of the Financial crisis of 2007–2010.
since the Great Depression
of the 1930s. It was triggered by a liquidity shortfall in the United States banking system and has resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous eviction
s, foreclosure
s and prolonged vacancies. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.
The collapse of the U.S. housing bubble, which peaked in 2006, caused the values of securities
tied to U.S. real estate pricing
to plummet, damaging financial institutions globally. Questions regarding bank solvency
, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Critics argued that credit rating agencies
and investors failed to accurately price the risk
involved with mortgage
-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Governments and central bank
s responded with unprecedented fiscal stimulus
, monetary policy
expansion and institutional bailouts.
There is some debate as to what role the repeal of Glass–Steagall had on the late 2000s financial crisis.
Although there have been aftershocks, the financial crisis itself ended sometime between late 2008 and mid-2009. While many causes for the financial crisis have been suggested, with varying weight assigned by experts, the United States Senate issuing the Levin–Coburn Report found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
Both market-based and regulatory solutions have been implemented or are under consideration.
, and represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation's financial services industry.
The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) of the United States or 43% of its national debt, and the average bank leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
ratio (assets divided by net worth) is 12 to 1.
Regulatory agencies
Bank regulation in the United StatesBank regulation in the United States
Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its...
is highly fragmented compared with other G10
Group of Ten (economic)
The Group of Ten or G-10 refers to the group of countries that have agreed to participate in the General Arrangements to Borrow...
countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.
U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
laws (for example, defining what constitutes usurious lending).
Since the enactment of the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
Improvement Act of 1989 (FDICIA), all commercial banks that accept deposits are required to obtain FDIC insurance and to have a primary federal regulator (the Fed for state banks that are members of the Federal Reserve System, the FDIC for "nonmember" state banks, and the Office of the Comptroller of the Currency for all National Banks).
Federal credit unions are regulated by National Credit Union Administration (NCUA); Savings & Loan Associations (S&L) and Federal savings banks (FSB) are regulated by the Office of Thrift Supervision (OTS).
Federal Reserve system
The central bankCentral bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
ing system of the United States, called the Federal Reserve system
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, was created in 1913 by the enactment of the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
, largely in response to a series of financial panics, particularly a severe panic in 1907
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
were major factors leading to changes in the system. Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institution
Depository institution
A depository institution is a financial institution in the United States that is legally allowed to accept monetary deposits from consumers...
s, the U.S. government, and foreign official institutions.
The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee
Federal Open Market Committee
The Federal Open Market Committee , a committee within the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations . It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money...
(FOMC), twelve regional Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
s located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The responsibilities of the central bank are divided into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, creates the currency used.
According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government." However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
and confirmed by Congress. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects. The U.S. Government receives all of the system's annual profits, after a statutory dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insuranceDeposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
, which guarantees the safety of deposits in member banks, up to $250,000 per deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
or per bank. , the FDIC insures deposits at 7,723 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks).
Since the start of FDIC insurance on January 1, 1934, no depositor has lost any insured funds as a result of a bank failure.
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a U.S. federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national bankNational bank
In banking, the term national bank carries several meanings:* especially in developing countries, a bank owned by the state* an ordinary private bank which operates nationally...
s and the federal branches and agencies of foreign banks in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. The acting Comptroller of the Currency is John Walsh.
Office of Thrift Supervision
The Office of Thrift Supervision is a United States federal agency under the Department of the Treasury. It was created in 1989 as a renamed version of another federal agency (that was faulted for its role in the Savings and loan crisisSavings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
). Like other U.S. federal bank regulators, it is paid by the banks it regulates.
Active banks of the United States
A list of many commercial banks in the United States can be found at the website of the FDIC. According to the FDIC, there were 8,430 FDIC-insured commercial banks in the United States as of August 22, 2008. Every member of the Federal Reserve SystemFederal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
is listed here along with non-members who are also insured by the FDIC. This list does not include banks and investments that are not FDIC-insured.
Bank mergers and closures
Bank mergers happen for many reasons in normal business, for example, to create a single larger bank in which operations of both banks can be streamlined; to acquire another bank's brands; or due to regulators closing the institution due to unsafe and unsound business practices or inadequate capitalization and liquidity.Banks are not allowed to go bankrupt in the United States. Accounts are insured up to $250,000 as of Oct 2008 per individual per bank by the FDIC. Banks that are in danger of failing are either taken over by the FDIC, administered temporarily and eventually sold off or merged with other banks. A list of banks seized by regulators and the assuming institutions can be obtained at Federal Deposit Insurance Corp - Failed Bank list.
Antebellum history
In the first half of the 19th century, many of the smaller commercial banks within New England were easily chartered as laws allowed to do so (primarily due to open franchise laws). The rise of commercial bankCommercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
ing saw an increase in opportunities for wealthy individuals to become involved in entrepreneurial projects they would not involve themselves in without someone to guarantee a return on their investment. These early banks acted as intermediaries for entrepreneurs who did not have enough wealth to fund their own investment projects and for those who did have wealth but did not want to bear the risk of investing in projects. Thus, this private banking sector witnessed an array of insider lending, due primarily to low bank leverage and an information quality correlation, but many of these banks actually spurred early investment and helped spur many later projects. Despite what some may consider discriminatory practices with insider lending, these banks actually were very sound and failures remained uncommon, further encouraging the financial evolution in the United States.
Early attempts to create a national bank
In 1781, an act of the Congress of the ConfederationCongress of the Confederation
The Congress of the Confederation or the United States in Congress Assembled was the governing body of the United States of America that existed from March 1, 1781, to March 4, 1789. It comprised delegates appointed by the legislatures of the states. It was the immediate successor to the Second...
established the Bank of North America
Bank of North America
The Bank of North America was a private business chartered on December 31, 1781 by the Congress of the Confederation and opened on January 7, 1782, at the prodding of Superintendent of Finance Robert Morris. This was thus the nation's first de facto central bank. It was succeeded in its role as...
in Philadelphia, where it superseded the state-chartered Bank of Pennsylvania
Bank of Pennsylvania
The Bank of Pennsylvania was established on July 17, 1780, by Philadelphia merchants to provide funds for the Continental Army during the American Revolutionary War...
founded in 1780 to help fund the American Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...
. The Bank of North America was granted a monopoly on the issue of bills of credit as currency at the national level. Prior to the ratification of the Articles of Confederation
Articles of Confederation
The Articles of Confederation, formally the Articles of Confederation and Perpetual Union, was an agreement among the 13 founding states that legally established the United States of America as a confederation of sovereign states and served as its first constitution...
& Perpetual Union, only the States had sovereign power to charter a bank authorized to issue their own bills of credit. Afterwards, Congress also had that power.
Robert Morris, the first Superintendent of Finance appointed under the Articles of Confederation, proposed the Bank of North America as a commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
that would act as the sole fiscal and monetary agent for the government. He has accordingly been called "the father of the system of credit, and paper circulation, in the United States." He saw a national, for-profit, private monopoly following in the footsteps of the Bank of England as necessary, because previous attempts to finance the Revolutionary War, such as continental currency issued by the Continental Congress
Continental Congress
The Continental Congress was a convention of delegates called together from the Thirteen Colonies that became the governing body of the United States during the American Revolution....
, had led to depreciation of such an extent that Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
considered them to be "public embarrassments." After the war, a number of state banks were chartered, including in 1784: the Bank of New York
Bank of New York
The Bank of New York was a global financial services company established in 1784 by the American Founding Father Alexander Hamilton. It existed until its merger with the Mellon Financial Corporation on July 2, 2007...
and the Bank of Massachusetts.
In 1791, Congress chartered the First Bank of the United States
First Bank of the United States
The First Bank of the United States is a National Historic Landmark located in Philadelphia, Pennsylvania within Independence National Historical Park.-Banking History:...
to succeed the Bank of North America under Article One of the United States Constitution
Article One of the United States Constitution
Article One of the United States Constitution describes the powers of Congress, the legislative branch of the federal government. The Article establishes the powers of and limitations on the Congress, consisting of a House of Representatives composed of Representatives, with each state gaining or...
, Section 8. However, Congress failed to renew the charter for the Bank of the United States, which expired in 1811. Similarly, the Second Bank of the United States
Second Bank of the United States
The Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...
was chartered in 1816 and shuttered in 1836.
Jacksonian Era
The Second Bank of the United StatesSecond Bank of the United States
The Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...
opened in January 1817, six years after the First Bank of the United States
First Bank of the United States
The First Bank of the United States is a National Historic Landmark located in Philadelphia, Pennsylvania within Independence National Historical Park.-Banking History:...
lost its charter. The predominant reason that the Second Bank of the United States was chartered was that in the War of 1812
War of 1812
The War of 1812 was a military conflict fought between the forces of the United States of America and those of the British Empire. The Americans declared war in 1812 for several reasons, including trade restrictions because of Britain's ongoing war with France, impressment of American merchant...
, the U.S. experienced severe inflation and had difficulty in financing military operations. Subsequently, the credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
and borrowing status of the United States was at its lowest level since its founding.
The charter of the Second Bank of the United States (BUS) was for 20 years and therefore up for renewal in 1836. Its role as the depository of the federal government's revenues made it a political target of banks chartered by the individual states who objected/envied the B.U.S.'s relationship with the central government. Partisan politics came heavily into play in the debate over the renewal of the charter. President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Andrew Jackson
Andrew Jackson
Andrew Jackson was the seventh President of the United States . Based in frontier Tennessee, Jackson was a politician and army general who defeated the Creek Indians at the Battle of Horseshoe Bend , and the British at the Battle of New Orleans...
strongly opposed the renewal of its charter, and built his platform for the election of 1832 around doing away with the Second Bank of the United States.
Apart from a general hostility to banking and the belief that specie
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
(gold and/or silver) were the only true money, Jackson's reasons for opposing the renewal of the charter revolved around his belief that bestowing power and responsibility upon a single bank was the cause of inflation and other perceived evils.
During September 1833, President Jackson issued an executive order that ended the deposit of government funds into the Bank of the United States. After September 1833, these deposits were placed in the state chartered banks.
1837–1863: "Free Banking" Era
Prior to 1838 a bank charter could be obtained only by a specific legislative act, but in that year New York adopted the Free Banking Act, which permitted anyone to engage in banking, upon compliance with certain charter conditions. The Michigan Act (1837) allowed the automatic chartering of banks that would fulfill its requirements without special consent of the state legislature. These banks could issue bank notes against specie (gold and silver coins) and the states regulated the reserve requirementReserve requirement
The reserve requirement is a central bank regulation that sets the minimum reserves each commercial bank must hold of customer deposits and notes...
s, interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s for loans and deposits, the necessary capital ratio etc. Free banking spread rapidly to other states, and from 1840 to 1863 all banking business was done by state-chartered institutions.
Numerous banks that were started during this period ultimately proved to be unstable. In many Western states, the banking industry degenerated into “wildcat” banking because of the laxity and abuse of state laws. Bank notes were issued against little or no security, and credit was overexpanded; depressions brought waves of bank failures. In particular, the multiplicity of state bank notes caused great confusion and loss. The real value of a bank bill was often lower than its face value, and the issuing bank's financial strength generally determined the size of the discount.
National Bank Act
To correct such conditions, Congress passed (1863) the National Bank Act, which provided for a system of banks to be chartered by the federal government. The National Banking Acts of 1863 and 1864 were two United States federal laws that established a system of national charters for banks, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S. Treasury securities and established the Office of the Comptroller of the Currency as part of the Department of the Treasury and authorized the Comptroller to examine and regulate nationally-chartered banks.Congress passed the National Bank Act in an attempt to retire the greenbacks that it had issued to finance the North's effort in the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. This opened up an option for chartering banks nationally. As an additional incentive for banks to submit to Federal supervision, in 1865 Congress began taxing any of state bank notes (also called "bills of credit" or "scrip
Scrip
Scrip is an American term for any substitute for currency which is not legal tender and is often a form of credit. Scrips were created as company payment of employees and also as a means of payment in times where regular money is unavailable, such as remote coal towns, military bases, ships on long...
") a standard rate of 10%, which encouraged many state banks to become national ones. This tax also gave rise to another response by state banks—the widespread adoption of the demand deposit
Demand deposit
Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country.-History:...
account, also known as a checking account. By the 1880s, deposit accounts had changed the primary source of revenue for many banks. The result of these events is what is known as the "dual banking system." New banks may choose either state or national charters (a bank also can convert its charter from one to the other).
Civil War
During the Civil War, banking houses were syndicated to meet the federal government's need for money to fund its war efforts. Jay CookeJay Cooke
Jay Cooke was an American financier. Cooke and his firm Jay Cooke & Company were most notable for their role in financing the Union's war effort during the American Civil War...
launched the first mass securities selling operation in U.S. history employing thousands of salesmen to float what ultimately amounted to $830 million worth of government bonds to a wide group of investors. Cooke then reached out to the general public, acting as an agent of the Treasury Department, personally led a war bond drive that netted approximately $1.5 billion for Treasury.
Surging demand for capital in the Gilded Age
The rise of the commercial banking sector coincided with the growth of early factories, since entrepreneurs had to rely on commercial banks in order to fund their own projects. Because of this need for capital, many banks began to arise by the late 19th century. By 1880, New England became one of the most heavily banked areas in the world.Lance Davis has demonstrated that the process of capital formation in the nineteenth century was markedly different between the British capital market and the American capital market. British industrialists were readily able to satisfy their need for capital by tapping a vast source of international capital through British banks such as Westminster's, Lloyds and Barclays. In contrast, the dramatic growth of the United States created capital requirements that far outstripped the limited capital resources of American banks. Investment banking in the United States emerged to serve the expansion of railroads, mining companies, and heavy industry. Unlike commercial banks, investment banks were not authorized to issue notes or accept deposits. Instead, they served as brokers or intermediaries, bringing together investors with capital and the firms that needed that capital.
Bimetallism and the gold standard
Toward the end of the nineteenth century, bimetallism became a center of political conflict During the civil war, to finance the war the U.S. switched from bimetallism to a flat greenback currency. In 1873, the government passed the Fourth Coinage Act and soon resumption to specie payments began without the free and unlimited coinage of silver. This put the U.S. on a mono-metallic gold standard.Early 20th century
During the period from 1890–1925, the investment banking industry was highly concentrated and dominated by an oligopoly that consisted of JP Morgan & Co.; Kuhn, Loeb & Co.; Brown Brothers; and Kidder, Peabody & Co. There was no legal requirement to separate the operations of commercial and investment banks; as a result deposits from the commercial banking side of the business constituted an in-house supply of capital that could be used to fund the underwriting business of the investment banking side.The Panic of 1907 and the Pujo Committee
In 1913, the Pujo Committee unanimously determined that a small cabalCabal
A cabal is a group of people united in some close design together, usually to promote their private views and/or interests in a church, state, or other community, often by intrigue...
of financiers had gained consolidated control of numerous industries through the abuse of the public trust in the United States. The chair of the House Committee on Banking and Currency, Representative Arsène Pujo
Arsène Pujo
Arsène Paulin Pujo , was a member of the United States House of Representatives best known for chairing the "Pujo Committee", which sought to expose an anticompetitive conspiracy among some of the nation's most powerful financial interests.-Biography:Pujo practiced law in Louisiana, and was elected...
, (D
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
–La.
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...
7th
Louisiana's 7th congressional district
Louisiana's 7th congressional district is a congressional district in the U.S. state of Louisiana located in the southwestern part of the state. It contains the cities of Crowley, Eunice, Jennings, Lafayette, Lake Charles, Opelousas, Sulphur and Ville Platte....
) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade that concluded that a community of influential financial leaders had gained control of major manufacturing, transportation, mining, telecommunications and financial markets of the United States. The report revealed that no less than eighteen different major financial corporations were under control of a cartel led by J.P Morgan, George F Baker and James Stillman. These three men, through the resources of seven banks and trust companies (Banker’s Trust Co., Guaranty Trust Co., Astor Trust Co., National Bank of Commerce, Liberty National Bank, Chase National Bank, Farmer’s Loan and Trust Co.) controlled an estimated $2.1 billion. The report revealed that a handful of men held manipulative control of the New York Stock Exchange and attempted to evade interstate commerce laws.
The findings of the committee inspired public support for ratification of the Sixteenth Amendment
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
in 1913, passage of the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
that same year, and passage of the Clayton Antitrust Act
Clayton Antitrust Act
The Clayton Antitrust Act of 1914 , was enacted in the United States to add further substance to the U.S. antitrust law regime by seeking to prevent anticompetitive practices in their incipiency. That regime started with the Sherman Antitrust Act of 1890, the first Federal law outlawing practices...
in 1914.
The Federal Reserve System
The Panic of 1907Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
was headed off by a private conglomerate, who set themselves up as "lenders of last resort" to banks in trouble. This effort succeeded in stopping the panic, and led to calls for a Federal agency to do the same thing. In response, the Federal Reserve System was created by the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
of 1913, establishing a new central bank intended serve as a formal "lender of last resort" to banks in times of liquidity crisis—panics where depositors tried to withdraw their money faster than a bank could pay it out.
The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.
The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the Federal Reserve (a quasi-governmental entity), creating the twelve regional Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
s which are supervised by the Federal Reserve Board.
McFadden Act
The McFadden Act was enacted in 1927 based on recommendations made by the Comptroller of Currency Henry May Dawes. The Act sought to give national banks competitive equality with state-chartered banks by letting national banks branch to the extent permitted by state law. The McFadden Act specifically prohibited interstate branching by allowing each national bank to branch only within the state in which it is situated. Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed this provision of the McFadden Act, it specified that state law continues to control intrastate branching, or branching within a state's borders, for both state and national banks.Credit unions
Credit unions originated in Europe in the mid-19th century. The first credit union in the United States was established in 1908 in New Hampshire. At the time, banks were unwilling to lend to many poor laborers, who then turned to corrupt moneylenders and loan sharkLoan shark
A loan shark is a person or body that offers unsecured loans at illegally high interest rates to individuals, often enforcing repayment by blackmail or threats of violence....
s. Businessman and philanthropist Edward Filene
Edward Filene
Edward Albert Filene was an American businessman, social entrepreneur and philanthropist...
spearheaded an effort to secure legislation for credit unions first in Massachusetts and later throughout the United States. With the help of the Credit Union National Extension Bureau
Credit Union National Extension Bureau
The Credit Union National Extension Bureau was the organization that advocated for and fostered credit unions in the United States from 1921 until 1934. CUNEB laid the foundation for the Credit Union National Association and the Federal Credit Union Act...
and an army of volunteers, states began passing credit union legislation in the 1920s. Credit unions were formed based on a bond of association
Bond of association
The bond of association or common bond is the social connection among the members of credit unions and co-operative banks. Common bonds substitute for collateral in the early stages of financial system development...
, often beginning with a small group of employees. Despite opposition from the banking industry, the Federal Credit Union Act
Federal Credit Union Act
The Federal Credit Union Act is an Act of Congress enacted in 1934. The purpose of the law was to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions...
was signed into law in 1934 as part of the New Deal
New Deal
The New Deal was a series of economic programs implemented in the United States between 1933 and 1936. They were passed by the U.S. Congress during the first term of President Franklin D. Roosevelt. The programs were Roosevelt's responses to the Great Depression, and focused on what historians call...
, allowing the creation of federally chartered credit unions in the United States. The Credit Union National Association
Credit Union National Association
The Credit Union National Association, commonly known as CUNA , is a national trade association for both state- and federally-chartered credit unions located in the United States. CUNA provides member credit unions with trade association services, such as lobbying, professional development, and...
(CUNA) was formed and by 1937, 6400 credit unions with 1.5 million members were active in 45 states. Today there are over 9500 credit unions in the United States and they are regulated by the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
(NCUA).
Savings and loan associations
The savings and loan association became a strong force in the early 20th century through assisting people with home ownership, through mortgageMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
lending, and further assisting their members with basic saving and investing outlets, typically through passbook
Passbook
A passbook or bankbook is a paper book used to record bank transactions on a deposit account. Depending on the country or the financial institution, it can be of the dimensions of a chequebook or a passport....
savings accounts and term certificates of deposit.
The U.S. Congress passed the Federal Home Loan Bank Act
Federal Home Loan Bank Act
The Federal Home Loan Bank Act, , is a United States federal law passed under President Herbert Hoover in order to lower the cost of home ownership.It established the Federal Home Loan Bank Board to charter and supervise federal savings and loan institutions...
in 1932, during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. It established the Federal Home Loan Bank and associated Federal Home Loan Bank Board
Federal Home Loan Bank Board
The Federal Home Loan Bank Board was a board created by the Federal Home Loan Bank Act of 1932 that created and oversaw the Federal Home Loan Banks also created by the act. It was superseded by the Federal Housing Finance Board and the Office of Thrift Supervision in the Financial Institutions...
to assist other banks in providing funding to offer long term, amortized
Amortization (business)
In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of intangible assets.-Amortization of loans:...
loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes.
Savings and loan associations sprang up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
New Deal-era reforms
During the 1930s, the U.S. and the rest of the world experienced a severe economic contraction that is now called the Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. In the U.S. during the height of the Great Depression, the official unemployment rate was 25% and the stock market had declined 75% since 1929. Bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s were common because there wasn't insurance on deposits at banks, banks kept only a fraction of deposits in reserve, and customers ran the risk of losing the money that they had deposited if their bank failed.
By the beginning of 1933, the banking system in the United States had effectively ceased to function. The incoming Roosevelt administration and the incoming Congress
73rd United States Congress
The Seventy-third United States Congress was a meeting of the legislative branch of the United States federal government, composed of the United States Senate and the United States House of Representatives. It met in Washington, DC from March 4, 1933 to January 3, 1935, during the first two years...
took immediate steps to pass legislation to respond to the Great Depression
Great Depression in the United States
The Great Depression began with the Wall Street Crash of October, 1929 and rapidly spread worldwide. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement...
.
Roosevelt entered office with enormous political capital
Political capital
Political capital is primarily based on a public figure's favorable image among the populace and among other important factors in or out of the government. Political capital is essentially the opinion of another person, group of people, or nation about you, your organization, or your government...
. Americans of all political persuasions were demanding immediate action, and Roosevelt responded with a remarkable series of new programs in the “first hundred days” of the administration, in which he met with Congress for 100 days. During those 100 days of lawmaking, Congress granted every request Roosevelt asked, and passed a few programs (such as the FDIC to insure bank accounts) that he opposed.
A major component of Roosevelt's New Deal was reform of the nation's banking system. With strident language Roosevelt took credit for dethroning the bankers he alleged had caused the debacle.}}
Emergency Banking Act
Roosevelt closed all the banks in the country and kept them all closed until he could pass new legislation. On March 9, Roosevelt sent to Congress the Emergency Banking ActEmergency Banking Act
The Emergency Banking Act was an act of the United States Congress spearheaded by President Franklin D. Roosevelt during the Great Depression. It was passed on March 9, 1933...
, drafted in large part by Hoover's top advisors. The act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury Department supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks. (Their depositors eventually received on average 86 cents on the dollar of their deposits; it is a common myth that they received nothing back.)
Creation of the FDIC and FSLIC
In June 1933, over Roosevelt's objections, Congress created the Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC), which insured deposits for up to $2,500 beginning January 1, 1934. On June 16, 1933, President Franklin D. Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
signed the Banking Act of 1933. This legislation:
- Established the FDIC as a temporary government corporation
- Gave the FDIC authority to provide deposit insurance to banks
- Gave the FDIC the authority to regulate and supervise state nonmember banks
- Funded the FDIC with initial loans of $289 million through the U.S. Treasury and the Federal Reserve
- Extended federal oversight to all commercial banks for the first time
- Separated commercial and investment banking (Glass–Steagall Act)
- Prohibited banks from paying interest on checking accounts
- Allowed national banks to branch statewide, if allowed by state law.
The FSLIC was created as part of the National Housing Act of 1934
National Housing Act of 1934
The National Housing Act of 1934, , also called the Capehart Act, was part of the New Deal passed during the Great Depression in order to make housing and home mortgages more affordable. It created the Federal Housing Administration and the Federal Savings and Loan Insurance Corporation.It was...
in order to insure deposits in savings and loans, a year after the FDIC was created to insure deposits in commercial banks. It was administered by the Federal Home Loan Bank Board
Federal Home Loan Bank Board
The Federal Home Loan Bank Board was a board created by the Federal Home Loan Bank Act of 1932 that created and oversaw the Federal Home Loan Banks also created by the act. It was superseded by the Federal Housing Finance Board and the Office of Thrift Supervision in the Financial Institutions...
(FHLBB).
Abandonment of the gold standard
To deal with deflation, the nation went off the gold standard. In March and April in a series of laws and executive orders, the government suspended the gold standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
for United States currency
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
. Anyone holding significant amounts of gold coinage was mandated to exchange it for the existing fixed price of US dollars, after which the US would no longer pay gold on demand for the dollar, and gold would no longer be considered valid legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
for debts in private and public contracts. The dollar was allowed to float freely on foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
s with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act
Gold Reserve Act
The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury....
in 1934. Markets immediately responded well to the suspension, in the hope that the decline in prices would finally end.
Glass-Steagall Act of 1933
The Glass–Steagall Act of 1933 was passed in reaction to the collapse of a large portion of the American commercial banking system in early 1933. One of its provisions introduced the separation of bank types according to their business (commercialCommercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
and investment banking). In order to comply with the new regulation, most large banks split into separate entities. For example, JP Morgan split into three entities: JP Morgan continued to operate as a commercial bank, Morgan Stanley was formed to operate as an investment bank, and Morgan Grenfell operated as a British merchant bank.
Banking Act of 1935
The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the area of credit management, tightened existing restrictions on banks engaging in certain activities, and enlarged the supervisory powers of the FDIC.Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial statesDeveloped country
A developed country is a country that has a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue...
in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) and the International Bank for Reconstruction and Development
International Bank for Reconstruction and Development
The International Bank for Reconstruction and Development is one of five institutions that compose the World Bank Group. The IBRD is an international organization whose original mission was to finance the reconstruction of nations devastated by World War II. Now, its mission has expanded to fight...
(IBRD), which today is part of the World Bank Group
World Bank Group
The World Bank Group is a family of five international organizations that makes leveraged loans, generally to poor countries.The Bank came into formal existence on 27 December 1945 following international ratification of the Bretton Woods agreements, which emerged from the United Nations Monetary...
. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
that maintained the exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
.
Automated teller machines
On September 2, 1969, Chemical Bank installed the first ATM in the U.S. at its branch in Rockville Centre, New YorkRockville Centre, New York
Rockville Centre is a village located in Nassau County, New York, in the United States. As of the 2010 census, the village had a total population of 24,023. The town is made up of middle to upper middle class residents, most of the wealthier residents residing on the north side of town near the...
. The first ATMs were designed to dispense a fixed amount of cash when a user inserted a specially coded card. A Chemical Bank advertisement boasted "On Sept. 2 our bank will open at 9:00 and never close again."
Nixon shock
In 1971, President Richard NixonRichard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
took a series of economic measures that collectively are known as the Nixon Shock
Nixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
. These measures included unilaterally cancelling the direct convertibility of the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
to gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
that essentially ended the existing Bretton Woods system of international financial exchange.
Deregulation of the 1980s and 1990s
Legislation passed by the federal government during the 1980s, such as the Depository Institutions Deregulation and Monetary Control ActDepository Institutions Deregulation and Monetary Control Act
The Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks.* It forced all banks to abide by the Fed's rules....
of 1980 and the Garn–St. Germain Depository Institutions Act of 1982, diminished the distinctions between banks and other financial institutions in the United States. This legislation is frequently referred to as "deregulation," and it is often blamed for the failure of over 500 savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
s between 1980 and 1988, and the subsequent failure of the Federal Savings and Loan Insurance Corporation
Federal Savings and Loan Insurance Corporation
The Federal Savings and Loan Insurance Corporation was an institution that administered deposit insurance for savings and loan institutions in the United States...
(FSLIC) whose obligations were assumed by the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) in 1989. However, some critics of this viewpoint, particularly libertarians
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
, have pointed out that the federal government's attempts at deregulation granted easy credit to federally insured financial institutions, encouraging them to overextend themselves and (thus) fail.
Savings and loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of 747 out of the 3,234 savings and loan associationSavings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
s in the United States. "As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion." The remainder of the bailout was paid for by charges on savings and loan accounts—which contributed to the large budget deficits of the early 1990s.
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
.
Expansion of FDIC insurance - 1989
Until 1989, national banks (those with national charters) were required to participate in the FDIC, while state banks either were required to obtain FDIC insurance by state law or they could voluntarily join it (usually in an attempt to bolster their appearance of solvency). After enactment of the Federal Deposit Insurance Corporation Improvement Act of 1989 (FDICIA), all commercial banks that accepted deposits were required to obtain FDIC insurance and to have a primary federal regulator (the Fed for state banks that are members of the Federal Reserve System, the FDIC for "nonmember" state banks, and the Office of the Comptroller of the Currency for all National Banks).Note: Federal credit unions are regulated by National Credit Union Administration (NCUA). Savings & Loan Associations (S&L) and Federal savings banks (FSB) are regulated by the Office of Thrift Supervision (OTS)
Interstate banking
The Reigle-Neale Interstate Banking and Branching Act of 1994.Repeal of the Glass-Steagall Act
Provisions of the Glass-Steagall Act that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. This repeal directly contributed to the severity of the Financial crisis of 2007–2010.
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisisFinancial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
since the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s. It was triggered by a liquidity shortfall in the United States banking system and has resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous eviction
Eviction
How you doing???? Eviction is the removal of a tenant from rental property by the landlord. Depending on the laws of the jurisdiction, eviction may also be known as unlawful detainer, summary possession, summary dispossess, forcible detainer, ejectment, and repossession, among other terms...
s, foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
s and prolonged vacancies. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.
The collapse of the U.S. housing bubble, which peaked in 2006, caused the values of securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
tied to U.S. real estate pricing
Real estate pricing
Real estate pricing deals with the valuation of real estate and all the standard methods of determining the price of fixed assets apply....
to plummet, damaging financial institutions globally. Questions regarding bank solvency
Solvency
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...
, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Critics argued that credit rating agencies
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
and investors failed to accurately price the risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
involved with mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Governments and central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s responded with unprecedented fiscal stimulus
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
, monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
expansion and institutional bailouts.
There is some debate as to what role the repeal of Glass–Steagall had on the late 2000s financial crisis.
Although there have been aftershocks, the financial crisis itself ended sometime between late 2008 and mid-2009. While many causes for the financial crisis have been suggested, with varying weight assigned by experts, the United States Senate issuing the Levin–Coburn Report found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
Both market-based and regulatory solutions have been implemented or are under consideration.
Expansion of FDIC insurance - 2008-2010
Due to the 2008 financial crisis, and to encourage businesses and high-net-worth individuals to keep their cash in the largest banks (rather than spreading it out), Congress temporarily increased the insurance limit to $250,000. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this increase became permanent as of July 21, 2010.Dodd–Frank Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act is the most sweeping change to financial regulation in the United States since the Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, and represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation's financial services industry.