Money and BankingEconomicsChapter 10 Section 2 & 3 Notes

Alexander Hamilton: Shaping a Banking System The First Bank of the United States

In 1789, became first Secretary of the Treasury; proposed national bank

Against strong opposition, First Bank of the United States chartered in 1791 issued national currency controlled money supply by refusing state bank

money not backed loaned money to federal government, state

banks, businesses

20th-Century DevelopmentsA New Central Bank

1913, Federal Reserve System created; consists of 12 regional banks, one decision-making boardprovides financial services to federal

governmentmakes loans to banks that serve the publicissues Federal Reserve notes as national

currencyregulates money supply

20th-Century Developments

The Great Depression and the New Deal 1929, many banks failed due to bank

runs Banking Act of 1933 part of President

Franklin Roosevelt’s New Dealregulated interest rates banks paid;

prohibited sale of stocks by banks Federal Deposit Insurance Corporation

(FDIC) insured people’s savings

Financial Institutions in the United StatesType 1: Commercial Banks

Privately owned commercial banks are oldest type of banksinitially created to provide business

loanstoday, checking and savings accounts,

loans, investments, credit cards All national, about 16 percent of state

commercial banks belong to the Fed

Financial Institutions in the United States Type 2: Savings Institutions

S&Ls first chartered by states in 1830s took savings deposits; provided home mortgage

loans today, provide many of same services as

commercial banks Since 1933, federal government also charters

S&Ls many federally chartered S&Ls call selves

savings banks

Financial Institutions in the United States Type 3: Credit Unions

In 1909, first credit union chartered; 1934, federal system created offer savings and checking accounts; specialize

in auto, mortgage loans deposits insured by National Credit Union

Association (NCUA) Credit unions have membership requirements

cooperatives: nonprofit organizations owned by, operated for members

Section 3Innovations in Modern Banking

What Services Do Banks Provide?Service 1: Customers Can Store

Money Banks store currency in vaults; insured

against theft, other loss Customers also store

money in bank accounts; insured against bank failure

papers and valuables in safe deposit boxes

What Services Do Banks Provide?Service 2: Customers Can Earn

Money Savings accounts, some checking

accounts pay interest Money market accounts, CDs pay higher

interest rate

What Services Do Banks Provide?

Service 3: Customers Can Borrow Money Banks lend money through fractional reserve

bankingpercent of deposit banks must keep is set by Fed

Banks make loans to customers it approvesloans have set time period and interest rate;

property is collateral Credit card purchases are loans; interest charged

after one month

Banking Deregulation Bank Mergers

Deregulation led to mergers; no more restrictions on interstate banking

Advantages: more competition meant low interest rates, more services also more branches; economies of scale,

especially for technology Disadvantages: fewer banks to choose

from fear larger banks uninterested in small

customers, local communities

Banking Deregulation Banking Services

Financial Services Act of 1999 lifted last restriction on banks

Banks, insurance companies, investment companies compete sell stocks, bonds, insurance, traditional

banking services Customers continue to use different

companies for different services

Housing Boom and BustFrom 2000 to 2006, house prices in

the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role.

Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.

Housing Boom and BustBanks became less interested in

verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.

Housing Boom and BustWhat’s The Issue?

How did bank lending practices contribute to the real estate boom? Study the sources on pages 312 – 313 of the text.

Use the information to answer questions 1 - 3