BFS Final Hardcopy

8/4/2019 BFS Final Hardcopy

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Group members

Names

Roll no.

Mithil Doshi

306

Vrajesh Karia

313

Hardik Malde

314

Ronak Metha316

Kirit Patel

324

Nilesh Prajapati

328Munjaal Raval

329


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Harshil Shah

333

Rushab Shah338

Smith Shah

340

Acknowledgement

I wish to express my gratitude to Professor Mrs. Kavita

madam who made us confident to choose this topic and

helped us in exploring ways to do the projects. She inspired

us to do it in practical way rather than just be theoretical. We

are very obliged to thank her for this and were very helpful to

us in knowing the working of banks.


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AMERICAN BANKING SYSTEM

The current banking system in the United States is one of

thousands of local banks, all of which are connected to state or

federal banks. The national banking system is the product of a

20th Century law called the Federal Reserve Act. Signed into law

in 1913, the act set up the Federal Reserve system, which

consists of one primary governing body, the Federal Reserve

Board, and 12 regional Federal Reserve Banks. A regional bankcan be found in Atlanta, Boston, Chicago, Cleveland, Dallas,

Kansas City, Minneapolis, New York, Philadelphia, Richmond, St.

Louis, and San Francisco.

Local banks are required to be members of the federal system insome way. The most common way is to join the Federal DepositInsurance Commission (FDIC), which, among other things,guarantees banks money in times of bank panics.

This was not always the case. The idea of a central bank for thenew United States was considered a good idea by many of theimportant Americans in colonial days, so much so that the Articlesof Confederation created a Bank of North America, which becamethe First Bank of the United States. Struggles over federalsupremacy in economic matters resulted in the closing of the FirstBank of the United States, the creation of the Second Bank of theUnited States, and the closing of that bank, all within a 40-year

period.

Calls for a national bank resumed after the Civil War, andIndustrial Revolution made necessary some sort of nationalfinancial system. The result was the Federal Reserve System.
http://www.kosmix.com/topic/Federal%20Reserve%20Act?as=clink2&ac=1429http://www.kosmix.com/topic/Federal%20Deposit%20Insurance%20Corporation?as=clink2&ac=1429http://www.kosmix.com/topic/Federal%20Deposit%20Insurance%20Corporation?as=clink2&ac=1429http://www.kosmix.com/topic/Bank%20of%20North%20America?as=clink2&ac=1429http://www.kosmix.com/topic/First%20Bank%20of%20the%20United%20States?as=clink2&ac=1429http://www.kosmix.com/topic/Second%20Bank%20of%20the%20United%20States?as=clink2&ac=1429http://www.kosmix.com/topic/Second%20Bank%20of%20the%20United%20States?as=clink2&ac=1429http://www.kosmix.com/topic/Federal%20Reserve%20Act?as=clink2&ac=1429http://www.kosmix.com/topic/Federal%20Deposit%20Insurance%20Corporation?as=clink2&ac=1429http://www.kosmix.com/topic/Federal%20Deposit%20Insurance%20Corporation?as=clink2&ac=1429http://www.kosmix.com/topic/Bank%20of%20North%20America?as=clink2&ac=1429http://www.kosmix.com/topic/First%20Bank%20of%20the%20United%20States?as=clink2&ac=1429http://www.kosmix.com/topic/Second%20Bank%20of%20the%20United%20States?as=clink2&ac=1429http://www.kosmix.com/topic/Second%20Bank%20of%20the%20United%20States?as=clink2&ac=1429


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The Suffolk System

The Suffolk System was the first effort to regulate private bankingin the United States. Although banking regulation later became agovernment activity, the Suffolk System was born of a privateinitiative that saw a need to regulate country banks.


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The Suffolk Bank of Boston first established the Suffolk System in1819 and in 1824 six other Boston banks joined the system. TheSuffolk System required country banks around Boston to depositreserve balances totaling $5,000 in one or more of the seven

Boston banks participating in the system. These reserve balancesacted as a guarantee that country banks could always redeemtheir bank notes in special.

In todays United States economy, only the Federal ReserveSystem can issue bank notes. Under the banking system in whichindividual banks issued their own bank notes, financially soundbanks could always redeem their bank notes in gold and silvercoinage; therefore their bank notes circulated at face value, andwere accepted in trade as equivalent to gold and silver coinage or

other bank notes. Bankers, however, often fell prey to thetemptation to issue more bank notes than was reasonable,considering the banks gold and silver coin reserves. This left thepublic holding bank notes that they could not be confident wouldbe redeemed in gold and silver coin. These bank notes circulatedbelow par and anyone accepting one of these bank notes in traderisked taking a loss.

The Suffolk System was designed to protect the public and Bostonbanks from country banks that issued more bank notes than they

could be counted on to redeem in gold and silver coin. The Suffolkbanks always accepted at par the bank notes of country banksthat maintained reserves in the Suffolk System.

Free Banking System


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Under this system anyone having the necessary securities mightopen a bank, and 133 new banks were organized within twoyears, many of them for the sole purpose of issuing notes. Ofthese, 26 failed between 1839 and 1844 and their notes were

redeemed at an average of seventy-six cents on the dollar. Thesefailures demonstrated that the securities deposited were notadequate to meet the notes. The law was then amended so thatonly the bonds of the United States and of the State of New Yorkwere acceptable as security and other faults were remedied aspertinence showed the weakness of the system. Under theamendment of 1840 country banks were required to redeem theirnotes in New York and Albany at a discount not exceeding one-half of 1 per cent. Even with this limitation many persons in thecities issued notes in the country towns, making a good profit by

redeeming them at a discount. Later, no one was allowed to do abanking business except at the place of his actual residence, andall banks issuing notes were required to become banks of deposit.

These changes in the law so strengthened the system that after1850, failures were infrequent and the notes of failed banks wereredeemed at par.

Bad management and lack of proper regulation led to failure and

disaster in many of these experiments. Before they could be

perfected the national banking system came in, superseding all

other systems of bank note issue.

National Banking Act

The National Banking Act of 1863, besides providing loans in theCivil War effort of the Union included provisions:

To create a system ofnational banks. They had higherstandards concerning reserves and business practices thanstate banks. The office ofComptroller of the Currency wascreated to supervise these banks.
http://chestofbooks.com/finance/banking/Money-And-Banking-Holdsworth/127-Discounts.htmlhttp://chestofbooks.com/finance/banking/Money-And-Banking-Holdsworth/182-Management.htmlhttp://en.wikipedia.org/wiki/National_Banking_Acthttp://en.wikipedia.org/wiki/American_Civil_Warhttp://en.wikipedia.org/wiki/Union_(American_Civil_War)http://en.wikipedia.org/wiki/National_bankhttp://en.wikipedia.org/wiki/State_bankhttp://en.wikipedia.org/wiki/Comptroller_of_the_Currencyhttp://chestofbooks.com/finance/banking/Money-And-Banking-Holdsworth/127-Discounts.htmlhttp://chestofbooks.com/finance/banking/Money-And-Banking-Holdsworth/182-Management.htmlhttp://en.wikipedia.org/wiki/National_Banking_Acthttp://en.wikipedia.org/wiki/American_Civil_Warhttp://en.wikipedia.org/wiki/Union_(American_Civil_War)http://en.wikipedia.org/wiki/National_bankhttp://en.wikipedia.org/wiki/State_bankhttp://en.wikipedia.org/wiki/Comptroller_of_the_Currency


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To create a uniform national currency. To achieve this, allnational banks were required to accept each other'scurrencies at par value. This eliminated the risk of loss incase of bank default. The notes were printed by the

Comptroller of the Currency to ensure uniform quality andprevent counterfeiting.

To finance the war. National banks were required to back uptheir notes withTreasury securities, enlarging the marketand raising its liquidity.

As described by Gresham's Law, soon bad money from state

banks drove out the new, good money; the government imposeda 10% tax on state bank bills, forcing most banks to convert tonational banks. By 1865, there were already 1,500 nationalbanks. In 1870, 1,638 national banks stood against only 325 statebanks. The tax led in the 1880s and 1890s to the creation andadoption ofchecking accounts. By the 1890s, 90% of the moneysupply was in checking accounts. State banking had made acomeback.

Two problems still remained in the banking sector. The first

was the requirement to back up the currency with treasuries.When the treasuries fluctuated in value, banks had to recallloans or borrow from other banks or clearinghouses. Thesecond problem was that the system created seasonalliquidity spikes. A rural bank had deposit accounts at a largerbank, that it withdrew from when the need for funds washighest, e.g., in the planting season. When combinedliquidity demands were too big, the bank again had to find alender of last resort.

These liquidity crises led to bank runs, causing severedisruptions and depressions, the worst of which was thePanic of 1907.
http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Counterfeitinghttp://en.wikipedia.org/wiki/Treasury_securityhttp://en.wikipedia.org/wiki/Gresham's_Lawhttp://en.wikipedia.org/wiki/1865http://en.wikipedia.org/wiki/1870http://en.wikipedia.org/wiki/1880shttp://en.wikipedia.org/wiki/1890shttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/1890shttp://en.wikipedia.org/wiki/Treasurieshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Clearinghousehttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Panic_of_1907http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Counterfeitinghttp://en.wikipedia.org/wiki/Treasury_securityhttp://en.wikipedia.org/wiki/Gresham's_Lawhttp://en.wikipedia.org/wiki/1865http://en.wikipedia.org/wiki/1870http://en.wikipedia.org/wiki/1880shttp://en.wikipedia.org/wiki/1890shttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/1890shttp://en.wikipedia.org/wiki/Treasurieshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Clearinghousehttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Panic_of_1907


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Aldrich-Vreeland Act

The Aldrich-Vreeland Act of May 30, 1908, was passed in

response to the Panic of 1907 and established the National

Monetary Commission, which recommended the Federal Reserve
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Act of 1913. It also provided for the issuance of emergency

currency. Congress modified and extended the law in 1914 when

British and other foreign creditors demanded immediate

payments, in gold, of amounts which would ordinarily have been

carried over and paid through exports ofcommodities.

Nelson W. Aldrich was largely responsible for theAldrich-Vreeland

Currency Law, and he became the Chairman of the National

Monetary commission. Furthermore, the law permitted Senators

and congressmen to become involved in the affairs of banks.The

Federal Reserve Act of December 23, 1913 took effect in

November, 1914 when the 12 regional banks opened for business.

Ultimately the emergency currency issued under the Aldrich-

Vreeland Law was entirely withdrawn.

On May 30, 1908, the Aldrich-Vreeland Act was passed in order to

provide emergency circulation, the need for which had been

severely felt during the panic the previous year. By this act ten or

more national banks, which individually had an unimpaired capital

and surplus of not less than 20 per cent and collectively an

aggregate capital and surplus of at least $5,000,000, were

permitted, with the approval of the Secretary of the Treasury, to

form voluntary associations known as "national currency

associations."

Not more than one such association could be formed in any city,

the uniting banks were to be located in a contiguous territory, and

no bank could belong to more than one association.

The AldrichVreeland Act was passed in response to the Panic of1907 and established the National Monetary Commission, whichrecommended the Federal Reserve Act of 1913.
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Federal Reserve Documentation

The Federal Reserve System (also known as the FederalReserve, and informally as the Fed) is the central banking

system of the United States. It was created in 1913 with theenactment of the Federal Reserve Act, and was largely a responseto a series of financial panics, particularly a severe panic in 1907.Over time, the roles and responsibilities of the Federal ReserveSystem have expanded and its structure has evolved.Events suchas the Great Depression were major factors leading to changes inthe system. Its duties today, according to official Federal Reservedocumentation, fall into four general categories.

1. Conducting the nation's monetary policy by influencing

monetary and credit conditions in the economy in pursuit ofmaximum employment, stable prices, and moderate long-term interest rates.

2. Supervising and regulating banking institutions to ensure thesafety and soundness of the nation's banking and financialsystem, and protect the credit rights of consumers.

3. Maintaining stability of the financial system and containingsystemic risk that may arise in financial markets.

4. Providing financial services to depository institutions, the

U.S. government, and foreign official institutions, includingplaying a major role in operating the nation's paymentssystem.

The Federal Reserve describes its structure as composedof five parts:

1. The presidentially appointed Board of Governors (or FederalReserve Board), an independent federal government agencylocated in Washington, D.C.

2. The Federal Open Market Committee (FOMC), composed ofthe seven members of the Federal Reserve Board and five ofthe twelve Federal Reserve Bank presidents, which overseesopen market operations, the principal tool of U.S. monetarypolicy.

3. Twelve regional privately-owned Federal Reserve Bankslocated in major cities throughout the nation, which divide
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the nation into twelve Federal Reserve districts. The FederalReserve Banks act as fiscal agents for the U.S. Treasury, andeach has its own nine-member board of directors.

4. Numerous other private U.S. member banks, which own

required amounts of non-transferable stock in their regionalFederal Reserve Banks.5. Various advisory councils.


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The Banking Act, 1933

Mutual Saving Banks having surplus and undivided profitswere allowed to become members of the Federal ReserveSystem.

Branch banking on the part of the National Banks waspermitting branches of State banks.

Member Banks were Prohibited from granting loans to anyperson in amounts exceeding 10 % of their unimpairedcapital and surplus.

The Federal Reserve Board was authorized to refuse theaccommodation to a bank found to be using facilities of theFederal reserve System for speculative purpose.

A Federal open market committee was created to coordinatethe open market operations of the individual Federal Reservebanks and give the federal Reserve Board.

The Act forbade private banks which conducted the businessof underwriting and promoting the sales of the securitiesfrom acting as banks of deposits.

The Federal Deposit Insurance Coorporation was establishedand all member were required to join the insurance scheme.


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The banking act, 1935

In 1935 a more comprehensive Act was passed. ThisAct was intended to simply to reform the Fedral ReserveSystem.

The following were the important provisions of Act:

1. The supervisory powers of Fedral deposit Insurance Co-

orporation were considerably enlarged.2. The Fedral Reserve Board was organized in to a seven

member Board of Governors. The secretary of the Treasuryand the comptroller of the Currency were eliminated fromex-officio membership in order to lessening politicalinfluence and making the board more impartial anddisinterested.

3. The Board of Governors was given undisputed power overrediscount rates, Open Market Operations and reserve

requirements.4. Federal Reserve banks were required to follow the

instructions given by the open market committee composedof a majority membership of the board of governors.

5. Certain technical changes were effected which enlarge thecredit facilities.

For eg. The board was given power to approve loans tomember banks on papers which were previously not eligible.

The authority of member banks to lend on real estate wasalso broadend.

6. The board of governors was given power to alter with certainlimits, the reserve requirements of member banks.


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Federal Notes Issues

A Federal Reserve Note is a type ofbanknote. Federal ReserveNotes are printed by the United States Bureau of Engraving andPrinting on paper made by Crane & Co. ofDalton, Massachusetts.

They are the only type of U.S. banknote that is still producedtoday and they should not be confused with Federal ReserveBank Notes.

Federal Reserve Notes "are authorized" by Section 411 of Title 12of the United States Code.]They are issued to the Federal ReserveBanks "at the discretion of the Board of Governors of the FederalReserve System".The notes are then issued into circulation by theFederal Reserve Banks. When the notes are issued into circulationthey become liabilities of the Federal Reserve Banks and"obligations of the United States.

Federal Reserve Notes are fiat currency, with the words "this noteis legal tenderfor all debts, public and private" printed on eachnote. They have replaced United States Notes, which were onceissued by theTreasury Department.

Central banking

In the terms of the Federal Reserve act of 1913, congress createdthe Federal Reserve System in 1913 to act as a central bank of

the U.S.A and to provide the country with safer and more flexibleand more stable monetary and financial system. The act called fora regional system of central bank under the supervision of FederalReserve Board, the predecessor to the present board ofGovernors.
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Over the years the role of Federal Reserve System has enlargedbut its focus on remained the same.

1) Conducting the countries monetary policy influencingthe money and credit condition in the economy.

2) Supervising and regulating banking institution to ensuresafety and soundness of the banking and financialsystem.

3) Maintaining stability of the financial system.4) Providing certain financial services to the US

government, financial institutions, the public andforeign official institutions , including the major role inoperating the payment system.

Board of Governors

In order to coordinate the affairs of different Federal Reserve

Banks and to achieve a centralized control over them, the act

originally provided for the appointment of Federal Reserve Boardconsisting of the secretary of the treasury, the comptroller of the

currency and the six additional members appointed by the

President of United States with the approval of senate.

Appointment of Board of governors is for a period of 14

years and not eligible for reappointment.

The board of governors is selected by President.

Enjoys extensive powers.

The board enjoys extensive powers it empowers to check book of

account of Federal Reserve Banks and to acquire such other


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statements and reports as it may think necessary .the banking

acts of 1933 and 1935 are important milestone in the history of

the board of governors.

The federal open market committee

The open market committee was established in terms of section 8

of the banking act, 1933. The act of 1935 enlarged the scope ofthe committee and gave it absolute power to control the open

market operations of the federal reserve Banks. The committee

establishes board policies as to when and in what general

directions the Federal Reserve banks shall deal in government

securities.

The committee consists of the seven member board of governors

and twelve Federal Reserve Presidents and it meets eight times in

a year. The governor and the president of Federal Reserve of New

York are permanent voting members. The other federal banks fill

the four voting member position in rotation, although the non-

voting members participate in the deliberations of the committee

department.


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Operations of the Federal Reserve System

Subject to the general supervision and control of the board of

governors, the Federal Reserve Banks carry on all the typical

central banking functions in the particular district in which they

are operating. They act as a bankers bank and lender of last

resort by purchasing/rediscounting commercial bills Granting

loans to members of the bank on the collateral securities of

government etc further they issue Federal Reserve notes

implement monetary policy act as a fiscal agents and act as a

clearance, settlement and transferor. In the terms of the originalact , they were not allowed to have direct dealing with individual

and business house . the act now amended and now they are

allowed .

Issues of Federal Reserve Notes

A Federal Reserve Bank has to make and application to the local

Federal Reserve agents for the requirements amounts of Federal

Reserve notes .the board of governors has the power to reject or

grant such an application. When such an application is made

proper securities should be offered in gold or gold certificates

notes, drafts and bills of exchange. The Federal Reserve agent


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has to notify the board of governors everyday of all issues and

withdrawals of federal reserve bank to which he is accredited.

Monetary policy

Monetary policy is a strategic means by which the federal bank

controls the supply of money and credit to achieve the price

stability and maintain a sustainable economic growth. The

primary mission of the Federal Reserve System is to ensure that

enough money and credit are available to sustain economic

growth without inflation. When there is an indication that the

inflation is threatening the purchasing power of the community

growth in money supply is slow down by the Federal Reserve

System by using three instruments .

1. Open market operations.

2. Discount rate.

3. Reserve requirements.


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Conclusion

The American banking system follows a very unique way tocontrol and works the commercial banks in U.S.A. the bankingsystem is a bit similar to banking system in India. This studyviews banking as a strong, competitive

Industry that continues to serve useful economic purposes. TheFederal Reserve System is the legitimate legal fiscal entity witha congressionally delegated mandate to coin and print money;

manage credit and the banking industry, to ensure the Americaneconomy maintains stability and health.

The laws, rules, checks and balances accrued to the Fed since itsinception in 1913 have, through two world wars and innumerableother disturbances, coincided with the greatest social, scientificand technological advances over any previous century. A purelyhuman and American trait innovation trumps predictability.

The Fed is pro-active and reactive. When it intuits a problem

ahead, it responds by reporting and recommending solutions.But the Fed is no tiger without claws and teeth. It is in thedriver's seat with powerful tools to drive the economy. Picturethe Fed as a bus driver, peering ahead, seeking truth in allquarters simultaneously and ready to apply the brakes or shiftgears at a moment's notice.


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Webliographyhttp://www.u-s-history.com/pages/h2049.html

www.Wikipedia .com

www.webology.ir/2004/v1n1/a2.htm

www.aliciagiron.com/2009/06/latin-american-banking-system

Bibliography

Banking theory and practices BMS section
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