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Unformatted text preview: 7/17/2009 1 COMMERCIAL BANKING COMMERCIAL BANKING JULY 17 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b History of Commercial Banking in the U.S. b Financial Innovation Responses to: b Interest Rate Volatility b Information Technology b Government Regulation b The Commercial Banking Industry b Homework #7 Questions Commercial Banking in the U.S. b In the U.S., about 7,500 commercial banks serve the business and consumer needs. b In most other developed nations, only a handful of banks dominate the landscape. b Why did banking develop this way in the United States? b Does this mean there is more competition? b Lets examine the history and structure of the industry to find out History of U.S. Commercial Banking b U.S. commercial banking began with the Bank of North America b Chartered in Philadelphia in 1782. b Early history of tension between states rights and federal power. History of U.S. Commercial Banking History of U.S. Commercial Banking b There were also some major events post-1933 b In 1999, Glass-Steagall was repealed. b Commercial banks previously had to sell off investment banking arms b Now enabled to engage again in securities activities. 7/17/2009 2 History of U.S. Commercial Banking b This history had one other significant outcome: Multiple Regulatory Agencies 1. Federal Reserve 2. FDIC 3. Office of the Comptroller of the Currency 4. State Banking Authorities b U.S. Treasury proposed legislation to centralize bank regulation under one independent agency b Hasnt survived Congress. More regulation soon? Financial Innovation b Innovation is result of search for profits. b A change in the financial environment will stimulate a search for new products and ideas. b There are generally three types of changes we can examine: b Response to Changes in Demand Conditions b Response to Changes in Supply Conditions b Avoidance of Regulation Financial Innovation b Responses to Changes in Demand Conditions b Huge increase in interest-rate risk starting in 1960s b Adjustable-Rate Mortgages b An example of the reply to interest-rate volatility b Banks also started using derivatives to hedge risk b Futures contracts for financial instruments b Intermediaries (like the Chicago Board of Trade) started developing extensive interest rate products....
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- Summer '08