Project2 - Introduction The purpose of this report is to...

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Introduction The purpose of this report is to present an overview of the banking industry as a whole. Banking has undergone numerous changes in the last century. This paper will explain how changes have affected banks and how they have done business. Regulations, new forms of competition, innovations, and technology, all have forced commercial banks to change and adapt. This report explains how the banking industry has adapted and the forces that caused it to change. Banks A commercial bank is a type of financial intermediary, which traditionally took in deposits and loaned out a large percentage of these deposits. The interest rate earned on these deposits, minus the costs of running the bank, equals the profits the bank earns. Today, traditional methods of banking have become obsolete as profit margins have declined for traditional deposit and loaning services. New technologies, deregulation, competition, and new services, have forced and facilitated banks to find new methods for accumulating profits. (See Appendix A) History of Regulations Before we can discuss the current condition of commercial banks and the new challenges the industry faces, we must understand the history of banking and the challenges that have been overcome. The banking industry has historically been one of the most regulated industries in our free-market economy. Banks have been highly regulated for 2 major reasons: 1) "Consumer protection, which concerns potential conflicts of interest when a bank has multiple roles." (Kroszner, p. 1) 2) "Safety and soundness, which concerns the possibility of bank panics and failures." (Kroszner, p. 1) These concerns were most evident in the 1930's during the Great Depression, where most commercial banking regulations began. These regulations were brought on because many of the failures in our economy during the 1930's were blamed on banks. As banks failed along with our economy, our trust in banks also failed. Panic subsided, and regulations were put into effect, and many of these regulations introduced in the 1930's are still with us today. The Great Depression In 1933, the depression was in full force and the entire financial and banking system was destroyed. Three massive runs on banks between 1929 and 1933 caused over 8,000 bank closures. FDR won the presidential election and took over just as the whole banking system in America was brought to its knees. In his inaugural address, FDR told the American people "the only thing we have to fear, is fear itself." Thus, FDR's "New Deal" began, including many changes and regulations to the American banking system. The first goal that FDR accomplished, was to stop the banking crisis and the run on banks. He declared a national bank holiday beginning on March 6, 1933. The public was told that every bank would close down to be inspected for one week, and only the financially sound banks would be allowed to reopen. More importantly, the Federal Deposit Insurance Corporation (FDIC) was established on January 1, 1934, to insure
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Project2 - Introduction The purpose of this report is to...

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