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Banking Regulation - healthy banks hurts the ability of...

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Banking Regulation From Last Time Under the independent treasury system, all payments to the government were put into government strong boxes constructed across the country. Government expenditures came out of these strong boxes. An IOU (I Owe You) is a written promise to pay a certain amount. There are, in fact, "Second National" banks. I know of the Second National Bank of Maryland. They have a branch office at Hilltop Plaza in Bowie, next to the McDonalds. Why Are Banks Regulated? The prevention of bankruptcy has been the most important objective of bank regulation since at least the 1930's. A bank run occurs when depositors rush to a bank to withdraw their funds. The fear is that bank runs can spread to other, financially healthy, banks. The failure of financially
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Unformatted text preview: healthy banks hurts the ability of less well-known borrowers to obtain loans. This impairs the efficiency of the savings-investment process. Lender of Last Resort The first type of banking regulation is the lender of last resort function. The lender of last resort is the ultimate source of credit to which banks can turn. The Federal Reserve was created to serve as the lender of last resort. The Fed failed to act as such during the Great Depression. recent episodes: • Penn Central Railroad, 1970 • Franklin National Bank, 1974 • Hunt Brothers' attempt to corner the silver market, early 1980's • 1987 stock market crash...
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