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Mishkin Chapter 10

Mishkin Chapter 10 - Mishkin Chapter 10 Banking Industry...

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Mishkin Chapter 10 - Banking Industry: Structure and Competition Preview: U.S. banking industry is very different from the rest of the world. In most countries (Canada, Germany, France, Japan, UK, etc.) four or five major banks dominate the banking industry with nationwide branches, (like other industries where a small group of large firms dominate the market: auto industry, software industry, discount chain stores, office supply stores, etc.). In contrast, U.S. has 8,100 commercial banks, 1200 S&Ls, and 12,000 credit unions! Compared to the rest of the world, we have 1) many more banks in general, we have 2) many more small banks and 3) many fewer large banks. See page 252. 91% of US banks have less than $500m in assets, and 32% have less than $50m in assets. The top ten largest banks have only 60% of total assets, compared to Canada or UK where 4 or 5 banks dominate the industry and have close to 90% of the assets. Why is U.S. banking system so unique compared to the rest of the world? Partly due to the McFadden Act (1927) - federal law prohibited branch banking across state lines - which was recently repealed (1994). Why did the U.S. prohibit branch banking when no other country has done so? Why did the U.S. separate commercial and investment banking when other countries allow banks to operate in both areas? Why did so many banks fail in the 1930s and 1980s/1990s in U.S. when other countries have had very few bank failures? Does the fact that we have the most regulated banking system in the world have anything to do with the fact that we have had the most bank failures? POINT: To understand the uniqueness of the U.S. banking system, we need to view the entire history of banking, going back to the beginning of the country, since the uniqueness can be traced to banking history all the way back to the 1700s. HISTORICAL DEVELOPMENT OF THE U.S. BANKING SYSTEM 1790 - First Administration. Washington (P), A_______(VP), ____________ (Sect of State), and ___________ (Sect of treasury) J H states rights federal rights strict constitution broad interpretation limit Fed power expand fed govt., centralize power at federal level no national or central bank national bank or central bank state control of banking federal control of banking Feud over the First National Bank of the U.S. - chartered in 1791 with 20 year charter and Jefferson resigned in 1793. First attempt at a central bank, although it had elements of both a private bank and a central bank. Owned partly by the US
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government, held all deposits of Fed government. Controlled the supply of money and supply of credit. Agricultural interests were skeptical of concentrated power of any kind, suspicious of a National Bank. Somewhat suspicious of concentrated financial power in large Eastern cities like DC and NYC. Favored state charted banking system. In 1811, the charter for the First National Bank was not renewed, defeated by
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Mishkin Chapter 10 - Mishkin Chapter 10 Banking Industry...

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