Depository Financial Institutions:
Bullion: Uncoined gold or silver used as money.
Fractional Reserve Banking: system in
which banks hold reserves equal to less than the amount of total deposits. Goldsmiths were the first “banks”, followed by
merchant bankers in Italy. Europe copied.
Three things: maintained deposit accounts for, processed payments on behalf of,
and made loans to their customers.
Early American Banking: Financed revolution from governments and bankers in France,
Holland and Spain. Continentals issued, by 1783, worth 1/500
of face value. Alexander Hamilton proposed First Bank of
the United States. Authorized twenty-year charter, set precedent of dual banking system. Either fed gov or state gov can
issue bank charter. First Bank charter expired 1811. 1816 twenty year charter of Second Bank, not renewed. Andrew Jackson
removed all federal gov deposits from Second Bank and placed in state banks 1832.
Free banking period. 1837-1863. Banks
operated by or on behalf of state gov or private banks operated under free banking laws.
National Banking Act 1863 granted
fed charters to many banks, imposed fed tax on all notes issued by state banks, prohibited state chartered banks from branch
banking, and required national banks to back notes by posting gov bonds. Ended free banking, fed gov became directly
involved, and laid groundwork for two-tiered system.
Glass-Steagall Act 1933 separated commercial and investment banking
and no interest on checking deposits, regulated interest on savings deposits, and FDIC.
Federal Credit Union Act 1934
authorized fed charters for credit unions.
Commercial and Industrial Loans-Loans that commercial
banks and other dep. inst. make to businesses, most require collateral.
Installment Credit: Loans to individual consumers
that entail periodic repayments of principal and interest.
Revolving Credit: Loans to individuals that permit them to borrow
automatically up to specified limits and to repay balance at any time (credit cards).
Noncontrollable bank liabilities are
demand deposits, other checkable deposits, savings deposits, and small denomination time deposits.
liabilities are large denomination time deposits such as large CDs, purchased funds including sales of repurchase agreements,
federal funds borrowings, borrowings from the Federal Reserve, and subordinated notes and debentures. The excess of assets
over liabilities is equity capital, or net worth.
Savings institutions: lost 50% of deposits 1989-2001. 1980s, congress relaxes
Credit unions: 1934 strict member rules. Relaxed since. Good depositors, good loan risks, no fed taxes.
ROA: (absolute profit/total assets) x 100
ROE: (absolute profit/equity capital) x 100
Net interest margin=(int income-int
Real Bills Doctrine: Make low risk loans with high liquidity, lend to finance shipment of goods
(paid of quickly to known buyer, earns low return), lend for production (self liquidating loans; repaid as sold, relatively low