Question

Describe the development and functions of the U.S. banking system. Your answer should include, but not just be a catalog of, important legislation over time. Your answer should include the activities under taken by U.S. banks (as evidenced by their balance sheet and income statements).

Answer 1

BANKING IN UNITED STATES

United States follows dual banking system in which state banks and national banks are supervised at different levels. Under this system, national banks are regulated under federal law and supervised by a federal agency whereas State banks are regulated under state laws and supervised by a state supervisor.

DEVELOPMENT AND FUNCTIONS OF BANKING SYSTEM IN UNITED STATES

The dual banking system came into picture during the Civil War period. President Abraham Lincoln's Treasury Secretary, Salmon Chase, led to create the National Bank Act of 1863, with an objective to raise money for the North to defeat the South. This needed issuance of a common currency at the national level. At that point, state banknotes were in circulation. The 1863 Act created competition for state banks, and the legislators went a step further the next year by passing an amendment to tax the issuance of state banknotes.

Number of state banks dropped to extreme levels , but a key innovation by state banks was the demand deposits — in response to that existential threat led to a strong comeback in the number of state banks, so much so that within 10 years of the 1864 amendment to tax state banknotes, state banks claimed more customer deposits than national banks.

1) Federal Reserve system: central bank of the United States.

Federal reserve system is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, in response to a series of financial panics. The roles and responsibilities of the Federal Reserve System have expanded. Events like Great Depression were major factors leading to changes in the system.

At present, the Federal reserve system conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions and the U.S. government.

2) Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass–Steagall Act of 1933. It facilitates deposit insurance, which ensures the safety of deposits in member banks up to $250,000 per depositor per bank. FDIC also examines and supervises certain financial institutions for safety and soundness.

3) Office of the Comptroller of the Currency

The Office of the Comptroller of the Currency was established by the National Currency Act,1863. It regulate and supervise all national banks, federal branches and agencies of foreign banks in the United States.

4) Bank mergers and closures

In normal business, there can be many reasons for bank mergers such as, to create larger bank in which operations of both banks can be combined; to acquire another bank's brands; or due to regulatory requirements. Banks that vulnerable to failing are either taken over by the FDIC, administered temporarily, then sold or merged with other banks.

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