Banking in the United States: Wikis


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Banking in the United States is regulated by both the federal and state governments of the United States of America.

The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the GDP of the United States or 43% of its national debt, and the average bank leverage ratio (assets divided by net worth) is 12 to 1.[1]




Early history - 1700s and 1800s

In 1781, an act of the Congress of the Confederation established the Bank of North America in Philadelphia, where it superseded the state-chartered Bank of Pennsylvania founded in 1780 to help fund the American Revolutionary War. The Bank of North America was granted a monopoly on the issue of bills of credit as currency at the national level. Prior to the ratification of the Articles of Confederation & Perpetual Union, only the States had sovereign power to charter a bank authorized to issue their own bills of credit. Afterwards, Congress also had that power.

Robert Morris, the first Superintendent of Finance appointed under the Articles of Confederation, proposed the Bank of North America as a commercial bank that would act as the sole fiscal and monetary agent for the government. He has accordingly been called "the father of the system of credit, and paper circulation, in the United States."[2] He saw a national, for-profit, private monopoly following in the footsteps of the Bank of England as necessary, because previous attempts to finance the Revolutionary War, such as continental currency emitted by the Continental Congress, had led to depreciation of such an extent that Alexander Hamilton considered them to be "public embarrassments." After the war, a number of state banks were chartered, including in 1784: the Bank of New York and the Bank of Massachusetts.

After the US Constitution subsumed the Articles of Confederation, which still persist in the hard-copy edition of US Code Title 1 as a foundation stone of American government, Congress chartered in 1791 the First Bank of the United States to succeed the Bank of North America under Article One, Section 8. However, Congress failed to renew the charter for the Bank of the United States, which expired in 1811. Similarly, the Second Bank of the United States was chartered in 1816 and shuttered in 1836. Despite this (and more on the commercial banking side of the spectrum), in the early 1800s, up until around the mid-1800s, many of the smaller commercial banks within New England were easily chartered as laws allowed to do so (primarily due to open franchise laws). The rise of commercial banking saw an increase in opportunities for wealthy individuals to become involved in entrepreneurial projects they would not involve themselves in without someone to guarantee a return on their investment. These early banks acted as intermediaries for entrepreneurs who did not have enough wealth to fund their own investment projects and for those who did have wealth but did not want to bear the risk of investing in projects. Thus, this private banking sector witnessed an array of insider lending, due primarily to low bank leverage and an information quality correlation, but many of these banks actually spurred early investment and helped spur many later projects. Despite what some may consider discriminatory practices with insider lending, these banks actually were very sound and failures remained uncommon, further encouraging the financial evolution in the United States.

1837–1863: "Free Banking" Era

In this period, there was no central banks, and many states elected to adopt free banking laws.[3] These banks could issue bank notes against specie (gold and silver coins) and the states regulated the reserve requirements, interest rates for loans and deposits, the necessary capital ratio etc. The Michigan Act (1837) allowed the automatic chartering of banks that would fulfill its requirements without special consent of the state legislature. It is reported that numerous banks were allowed to begin during this period which ultimately proved to be unstable.[4] The real value of a bank bill was often lower than its face value, and the issuing bank's financial strength generally determined the size of the discount.

The dual banking system - 1860s

In 1863, Congress passed the National Bank Act in an attempt to retire the greenbacks that it had issued to finance the North's effort in the American Civil War.[5] This opened up an option for chartering banks nationally. As an additional incentive for banks to submit to Federal supervision, in 1865 Congress began taxing any issue of state bank notes (also called "bills of credit" or "scrip") a standard rate of 10%, which encouraged many state banks to become national ones. This tax also gave rise to another response by state banks—the invention of the demand deposit account, also known as a checking account. By the 1880s, deposit accounts had changed the primary source of revenue for many banks. The result of these events is what is known as the "dual banking system." New banks may choose either state or national charters (a bank also can convert its charter from one to the other).

This rise of the commercial banking sector coincided with the growth of early factories, since entrepreneurs had to rely on commercial banks in order to fund their own projects. Because of this need for capital, many banks began to arise by the late 19th Century. By 1880, New England became one of the most heavily banked areas in the world. Contrary to the belief that insider lending prevents growth because bad projects are funded from the inside, in this case lending to family and friends actually helped further the development of banks. This was mainly due to the fact that there was free entry into banking, insider projects were good, and few bank failures occurred because they were not highly leveraged.[6]

National Banks, are the bank that have the word "National" or "N.A." in the name of the bank (i.e. First National Bank, or Citibank N.A.) National Banks are regulated by the Office of the Comptroller of the Currency, Department of the Treasury.

The Federal Reserve System

The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the Federal Reserve (a quasi-governmental entity), creating the twelve regional Federal Reserve Banks which are supervised by the Federal Reserve Board. Notwithstanding the Glass-Steagall Act of 1932 and the Banking Act of 1933 and the Banking Act of 1935, which were attempts to reform various banking abuses, the Federal Reserve System has remained more or less unchanged through to the present day. The Glass-Steagall Act was repealed in 1999, whereas the Banking Act of 1933 simply strengthened the supervisory powers of federal authorities and created the Federal Deposit Insurance Corporation.

Rise of credit unions

Credit unions originated in Europe in the mid 19th century. The first credit union in the United States was established in 1908 in New Hampshire. At the time, banks were unwilling to lend to many poor laborers, who then turned to corrupt moneylenders and loan sharks.[7] Businessman and philanthropist Edward Filene spearheaded an effort to secure legislation for credit unions first in Massachusetts and later throughout the United States. With the help of the Credit Union National Extension Bureau and an army of volunteers, states began passing credit union legislation in the 1920s. Credit unions were formed based on a bond of association, often beginning with a small group of employees. Despite opposition from the banking industry, the Federal Credit Union Act was signed into law in 1934 as part of the New Deal, allowing the creation of federally chartered credit unions in the United States. The Credit Union National Association (CUNA) was formed and by 1937, 6400 credit unions with 1.5 million members were active in 45 states.[8] Today there are over 9500 credit unions in the United States and they are regulated by the National Credit Union Administration (NCUA).[9]

Deregulation - 1980s

Legislation passed by the federal government during the 1980s, such as the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn - St Germain Depository Institutions Act of 1982, diminished the distinctions between banks and other financial institutions in the United States. This legislation is frequently referred to as "deregulation," and it is often blamed for the failure of over 500 savings and loan associations between 1980 and 1988, and the subsequent failure of the Federal Savings and Loan Insurance Corporation (FSLIC) whose obligations were assumed by the FDIC in 1989. However, some critics of this viewpoint, particularly libertarians, have pointed out that the federal government's attempts at deregulation granted easy credit to federally insured financial institutions, encouraging them to overextend themselves and (thus) fail.

Expansion of FDIC insurance - 1989

Until 1989, banks with national charters (national banks) were required to participate in the FDIC, while State Banks either were required to obtain FDIC insurance by state law or they could voluntarily join it (usually in an attempt to bolster their appearance of solvency). After enactment of the Federal Deposit Insurance Corporation Improvement Act of 1989 ("FDICIA"), all commercial banks that accepted deposits were required to obtain FDIC insurance and to have a primary federal regulator (the Fed for state banks that are members of the Federal Reserve System, the FDIC for "nonmember" state banks, and the Office of the Comptroller of the Currency for all National Banks).

Note: Federal Credit Unions are regulated by National Credit Union Administration (NCUA). Savings & Loan Associations (S&L) and Federal Savings Banks (FSB) are regulated by the Office of Thrift Supervision (OTS)

Temporary expansion of FDIC insurance - 2008

In 2008, due to the financial crisis, and to encourage businesses and high-net-worth individuals to keep their cash in the largest banks (rather than spreading it out), Congress temporarily increased the insurance limit to $250,000.

Active banks of the United States

A list of many commercial banks in the United States can be found at the website of the Federal Deposit Insurance Corporation (FDIC).[10]. According to the FDIC, there were 8,430 FDIC-insured commercial banks in the United States as of August 22, 2008. Every member of the Federal Reserve System is listed here along with non-members who are also insured by the FDIC. This list does not include banks and investments that are not FDIC-insured.

Bank mergers and closures

Bank mergers happen for many reasons in normal business. For instance, to create a single larger bank in which operations of both banks can be streamlined or to acquire another banks brands. As well as due to regulators closing the institution due to unsafe and unsound business practices or inadequate capitalization and liquidity.

Banks are not allowed to go bankrupt in the United States. Accounts are insured up to $250,000 as of Oct 2008 per individual per bank by the Federal Deposit Insurance Corporation. Banks that are in danger of failing are either taken over by the Federal Deposit Insurance Corporation, administered temporarily and eventually sold off or merged with other banks. A List of banks seized by regulators and the assuming institutions can be obtained at Federal Deposit Insurance Corp - Failed Bank list.


  1. ^
  2. ^ Goddard, Thomas H. (1831). History of Banking Institutions of Europe and the United States. Carvill. pp. 48–50.  
  3. ^ "A lesson from the free banking era".  
  4. ^ "Wildcat Banking, Banking Panics, and Free Banking in the United States".  
  5. ^ [1]No Peace with Greenbacks, New York Times, May 9, 1879.
  6. ^ N. Lamoreaux, "The Great Merge Movement in American Business, 1895-1904" (Cambridge, 1985)
  7. ^ Teresed, Swen. Dictated But ---- Not Read. The Deseret News. 14 Dec. 1937.
  8. ^ Credit Union Head Tells of Expansion. The Deseret News. 14 Dec. 1937.
  9. ^ About NCUA. National Credit Union Administration.
  10. ^ Cookies must be enabled to use this interactive website. Choose the "Find Institutions" section. Then leave all of the fields with the default value then choose "find". Wait a few moments to be prompted to "save as". It will be a 3.4MB .csv file that will be downloaded. This file can be viewed with a spreadsheet program such as or Microsoft Excel.

Further reading

External links


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