Money, Banking & Financial Mar
Money, Banking & Financial Mar FIN 312
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This 7 page Class Notes was uploaded by Marcella Senger on Friday October 30, 2015. The Class Notes belongs to FIN 312 at Texas A&M University - Commerce taught by Dale Funderburk in Fall. Since its upload, it has received 19 views. For similar materials see /class/232415/fin-312-texas-a-m-university-commerce in Finance at Texas A&M University - Commerce.
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Date Created: 10/30/15
US Banking Legislation Erecting barriersrestricting competition McFadden 1927 prohibited banks from branching across state lines forced all national banks to conform to the branching restrictions of the state in which they were located Note The McFadden Act was an effort by the Comptroller of the Currency to revitalize the national banking system To escape restrictions imposed on them by the national banking laws national banks converted to state banksichanged their chartersiduring the mid1920s Before McFadden national banks could not establish branches or purchase investment properties McFadden permitted national banks to establish branches under the rules that applied to statechartered banks in the state of domicile This effectively prevented the spread of interstate and in many cases intrastate banking for more than fifty years funtil RiegleNeal GlassSteagall 1933 prohibited the payment of interest on checking accounts and limited the interest that banks could pay on savingstime deposits Regulation Q Prohibited commercial banks from underwriting or dealing in corporate securities requiring commercial banks to sell off their investment banking operations Prohibited investment banks from engaging in commercial banking activitieseffectively erecting a wall between commercial banking and the securities industry Aim to keep banks from doing business on Wall Street and vice versa Created FDIC Taking down the Walls Depository Institutions Deregulation and Monetary Control Act 1980 provided for phasing out of Reg Q interest rate ceiling provisions of GlassSteagall Allowed for nationwide spread of NOW accounts interest bearing checking accounts Gave thrifts wider latitude allowing them to compete more directly with commercial banks Raised deposit insurance to 100000 Passing thought wonder what impact that had on risktaking in banking GarnStGermain 1982 increased freedom of thrifts to make consumer and commercial loansthereby increasing direct competition with banks One step back toward reregulalion Financial Institutions Reform Recovery and Enforcement Act 1991 reimposed restrictions on SampL activities FIRREA was passed in the wake of the savings and loan crisis brought on by the failure of some institutions who made imprudent loans used poor judgment invested in junk bonds and management who conducted fraudulent schemes The purpose of this Act was to promote a safe and affordable system of housing finance improve the supervision of savings associations curtail unacceptable investments by savings associations quot Interstate Banking and Branching Ef ciency Act aka RiegleNeal 1994 eliminated prohibition against interstate banking allowed branching across state lines In effect repealed McFadden Passing thought wonder why they would be doing that now Financial Services Modernization Act aka Gramm LeachBliley 1999 repealed GlassSteagall separation of banking and securities operations Allowed banks to underwrite securities Allowed securities rms and insurance companies to purchase banks Allowed banks to engage in insurance and real estate activities on wider basis A bit about bank failures There seems to be a widely held assumption that the first really serious round of bank failures in the United States started with and in fact was caused by the stock market collapse of 1929 That is hardly the case Consider the following There were roughly 31000 commercial banks in the United States in 1921 The number had nearly tripled during the first two decades of the twentieth century The vast majority of these were relatively small unit single office banks Illinois alone had nearly 2000 banks and Nebraska with a population of some 13 million had one bank for every 1000 residents During the period 1900 1920 bank failures averaged about 70 per year or one of every 300 banks The agricultural slump of the 19205 raised the failure rate to more than 600 per year or one in 50 Between 1921 and 1930 half of all small banks in agricultural regions failed Without doubt the US banking system entered the Great Depression in a less than strong robust state The following table re ects FDIC estimates of bank failures per year leading up to its creation with the GlassSteagall Act of 1933 Year Number Deposits Losses to Depositors of Suspensions in thousands of dollars as of deposits ofsuspended banks 1921 506 172806 347 1922 366 91182 419 1923 646 149601 415 1924 775 210150 378 1925 617 166937 364 1926 975 260153 319 1927 669 199332 304 1928 498 142386 308 1929 659 230643 332 1930 1350 837096 284 1931 2293 1690232 231 1932 1453 706187 238 1933 4000 3596708 152 When one considers that between 1929 and 1933 some 40 of the commercial banks in the United States failed is it surprising that the FDIC was created in 1934 Following that 13a anges 13a anges 1934 9 1938 74 1935 26 1939 60 1936 69 1940 43 1937 77 1941 15 1942 20 After 1942 the number of bank failures did not hit doubledigits again until 1975 when it hit 13 From 1960 through 1975 the average number of bank failures per year was 6 And between 1975 and 1981 it averaged 11 per year Then look Year failures Year failures 1982 42 1988 279 1983 48 1989 207 1984 80 1990 189 1985 120 1991 127 1986 145 1992 122 1987 203 1993 41 1994 13 You may wish to consult the following for more detailsanalysis htt wwwfdic 0V bank historical reshandbook ch1intro df See especially Chart 1 1 Chart dramatizes the era htt www2fdic 0V hsob HSOBSummar R tas Be Year1934 ampEndYear2007ampState1 For the numbers What do you suppose happened to cause the raft of bank failures that occurred during the 19805 and early 19905 Many of the politicians of the time attributed the phenomenon to greed and incompetence on the part of bankers Sound familiar The implication would seem to be that bankers were competent and not greedy from 1940 through 1980 From 1995 2007 the number of failures averaged 45 per year with no failures in 2005 and 2006 Apparently we had selfless competent bank management during that period The late Harry G Johnson former economics professor of the University of Chicago is often quoted actually paraphrased as having asserted things are the way they are for very good reasons If he was right then it would seem to follow that the creation of deposit insurance around 1934 was not a random or randomly timed event It would also seem to suggest that perhaps bankers did not suddenly become greedy and incompetent in 1982 Wonder what happened Passing thought have you ever heard the word iatrogenic Note Looking at numbers of bank failures can sometimes be a bit confusing Different sources may give quite different numbers There are at least a couple of reasons for this First there were few really solid banking statistics in the early pre FDIC days so many of the numbers are estimates Second many of the sets of data post FDIC relate only to commercial banks narrowly defined andor to those insured by the FDIC Prior to 1980 savings and loans were not covered by FDIC and were not considered banks in most studies The DIDMCA of 1980 started to change all that By 1989 as a result of FIRREA the FSLIC which insured savings and loans was abolished and the term bank tended to be used in a broader more inclusive sense Thus the more recent statistics relative to quotbank failures are not strictly compatible with earlier definitions and numbers
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