Ch 18 - Commercial Banking Industry History: Modern...

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Commercial Banking Industry History : Modern commercial banking (CB) has its start in 1782, when the Bank of North America was chartered in Philadelphia. Due to fear of centralized control, how much influence and control should be exerted by the federal government has always been controversial. The Bank of the United States was chartered in 1791, with responsibility for the quantity of money and credit to be supplied to the economy; its charter was not renewed in 1811. Another try was made in 1816 when the Second Bank of the United States was chartered. Its charter was not renewed either so it went out of business in 1836. There was no national currency until 1863 – various banks issued “banknotes”, and that was the currency in circulation; banknotes were redeemable for gold. Aside from fraudulent cases or lack of sufficient gold for redemption, the system worked pretty well. .. In 1863 Congress passed the National Banking Act to issue federally chartered banks, called “national” banks, and created the Comptroller of the Currency (part of the US Treasury) to supervise them. But states could also charter banks, “state” banks. Thus dual system continues to this day. The Federal Reserve System was created in 1913 (refer to the chapter on the Fed for further detail). During the Depression of the 1930s some 9000 banks failed; people lost confidence in banks and hesitated deposited funds with banks (instead they deposited funds with mutual banks , financial institutions where depositors where owners – these FIs were very conservative in their investment and survived the Depression). The FDIC was established in 1933 to insure accounts. Because the investment activities of banks was blamed for bank failure, the Galss- Steagall Act of 1933 separated commercial banking activities from investment banking activities (CB could no longer underwrites or deal in corporate securities; and investment banks could no longer engage in commercial banking activities). This Act was repealed in 1999. Regulation : Various agencies supervise and regulate CBs. The Office of the Comptroller of the Currency supervises the 1,800 or so national banks. The Fed and state authorities have primary responsibility for the 900 state banks that are Fed members. The FDIC and states supervise the nearly 5000 state banks that are not Fed members. Those state banks without FDIC insurance (around 500) are under state supervision. The Fed has authority over firms that own one or more banks (“bank holding” companies). Financial Innovation and Banks
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Ch 18 - Commercial Banking Industry History: Modern...

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