Banking in the United States

Banking in the United States is regulated by both the federal and state governments. The five largest banks in the United States at December 31, 2011 were JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs.[1] In December 2011, the five largest banks' assets were equal to 56 percent of the U.S. economy, compared with 43 percent five years earlier.

The U.S. finance industry comprised only 10% of total non-farm business profits in 1947, but it grew to 50% by 2010. Over the same period, finance industry income as a proportion of GDP rose from 2.5% to 7.5%, and the finance industry's proportion of all corporate income rose from 10% to 20%. The mean earnings per employee hour in finance relative to all other sectors has closely mirrored the share of total U.S. income earned by the top 1% income earners since 1930. The mean salary in New York City's finance industry rose from $80,000 in 1981 to $360,000 in 2011, while average New York City salaries rose from $40,000 to $70,000. In 1988, there were about 12,500 U.S. banks with less than $300 million in deposits, and about 900 with more deposits, but by 2012, there were only 4,200 banks with less than $300 million in deposits in the U.S., and over 1,800 with more. American banking is closely linked to the UK; in 2014, the biggest US banks held almost 70 percent of their on and off-balance sheet foreign assets there.[2]

Regulatory agencies

Bank regulation in the United States is highly fragmented compared with other G10 countries. While most of these countries have only one bank regulator, in the U.S., banking is regulated at both the federal and state level. Depending on its type of charter and organizational structure, a banking organization may be subject to numerous federal and state banking regulations. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.[3]

U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation laws (for example, defining what constitutes usurious lending).

Since the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1989 (FDICIA), all commercial banks that accept deposits are 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 and Federal Savings Banks (FSB)).

Federal credit unions are regulated by National Credit Union Administration (NCUA).

Federal Reserve system

The central banking system of the United States, called the Federal Reserve system, was created in 1913 by the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.[4][5] Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.[6] Events such as the Great Depression were major factors leading to changes in the system.[7] Its duties today, according to official Federal Reserve documentation, are to 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, the U.S. government, and foreign official institutions.[8]

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.[5](See structure)[9][10] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time; its constitutionality was challenged by senator Riegle in Riegle v. FOMC, 656 US 873 (1981) cert. denied 454 US 1082 (1981), but the court refused to rule on the merits, declining jurisdiction on equity (contrast Free Ent. Fnd v. PCAOB). The responsibilities of the central bank are divided into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.[11]

According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government." However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by Congress. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects.[12][13][14][15] The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.[16]

Federal Deposit Insurance Corporation

The FDIC's satellite campus in Arlington, Virginia, is home to many administrative and support functions, though the most senior officials work at the main building in Washington

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank. As of November 18, 2010, the FDIC insures deposits at 6,800 institutions.[17] The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks).

Since the start of FDIC insurance on January 1, 1934, no depositor has lost any insured funds as a result of a bank failure.[18]

Office of the Comptroller of the Currency

The Office of the Comptroller of the Currency is a U.S. federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States. Thomas J. Curry was sworn in as the 30th Comptroller of the Currency on April 9, 2012.[19]

Office of Thrift Supervision

The Office of Thrift Supervision is a United States federal agency under the Department of the Treasury. It was created in 1989 as a renamed version of another federal agency (that was faulted for its role in the Savings and loan crisis). Like other U.S. federal bank regulators, it is paid by the banks it regulates. OTS Is Now Part of the Office of the Comptroller of the Currency. On July 21, 2011, the Office of Thrift Supervision became part of the Office of the Comptroller of the Currency.

Active banks of the United States

A list of many commercial banks in the United States can be found at the website of the FDIC. According to the FDIC, there were 6,799 FDIC-insured commercial banks in the United States as of February 11, 2014.[17] Every member of the Federal Reserve System is listed along with non-members who are also insured by the FDIC. The list does not include banks and investments that are not FDIC-insured; however, since the FDIC Improvement Act of 1989, all commercial banks accepting deposits must be FDIC-insured.

The five largest banks by assets in 2011 were JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs.[1]

Bank mergers and closures

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

Banks may not go bankrupt in the United States. Depositor accounts are insured up to $250,000 as of October 2008 per individual per bank by the FDIC. Banks that are in danger of failing are either taken over by the FDIC, administered temporarily, then sold or merged with other banks. The FDIC maintains a list of banks showing institutions seized by regulators and the assuming institutions.


Antebellum history

In the first half of the 19th century, many of the smaller commercial banks within New England were easily chartered under applicable laws (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 in which they would not otherwise involve themselves without a third party 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 ventures. 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.

Early attempts to create a national bank

In 1781, 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 ratification of the Articles of Confederation and Perpetual Union, only the States possessed 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."[20] 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 issued 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.

In 1791, Congress chartered the First Bank of the United States to succeed the Bank of North America under Article One of the United States Constitution, Section 8. However, Congress failed to renew the charter for the Bank of the United States, which expired in 1811. Similarly, Congress chartered the Second Bank of the United States in 1816 and allowed it to expire in 1836.

Jacksonian Era

The Second Bank of the United States opened in January 1817, six years after the First Bank of the United States lost its charter. The predominant reason that the Second Bank of the United States was chartered was that in the War of 1812, the U.S. experienced severe inflation and had difficulty in financing military operations. Subsequently, the credit and borrowing status of the United States was at its lowest level since its founding.

The charter of the Second Bank of the United States (BUS) had a term of 20 years and required renewal in 1836. Its role as the depository of the federal government's revenues made it a political target of banks chartered by the individual states who objected/envied the BUS's relationship with the central government. Partisan politics came heavily into play in the debate over the renewal of the charter. President Andrew Jackson strongly opposed the renewing the charter, and during election of 1832, based his campaign on abolishing the bank.

Apart from a general hostility to banking and the belief that specie (gold and/or silver) were the only true money, Jackson's reasons for opposing the renewal of the charter revolved around his belief that bestowing power and responsibility upon a single bank was the cause of inflation and other perceived evils.

During September 1833, President Jackson issued an executive order that ended the deposit of government funds into the BUS. After September 1833, these deposits were placed in the state-chartered banks.

1837–1863: "Free Banking" Era

The Free Banking era was a period characterized by the unrestrained entry of banks into the economy. Banks were not subject to any special regulations beyond those applicable to any other enterprise. The era spanned from 1836, after the BUS federal charter expired, to 1865 when the federal government imposed a tax on state banknotes.[21] The Independent Treasury System was established under President Martin Van Buren, who extended Andrew Jackson's banking policies. It was characterized by a monetary policy where each bank was allowed to issue its own currency and as a consequence control the overall supply and quantity of banknotes. There was an absence of governmental insurance that is in place nowadays to bailout depositors at the tax payers expense in case of a bank failure.

History and the Beginning of Free Banking

Because Free Banking was a predecessor and natural alternative to monetary interventions, the theory and practice have been a subject to a great attention over the past centuries. Prior to 1837, establishing a banking institution in the US was a difficult and often politicized process as every bank needed a charter from the legislature of the state in which it was being founded and the number of available franchises were limited.[22] The need for a new banking institutions appeared in 1836 when the Congress closed the Second Bank of the United States, a public institution with 25 branches across the country that helped to keep an adequate supply of money by limiting the number of notes issued. When its charter lapsed, there was a need for new financial establishments that would lend, invest, accept deposits, and issue money. New York state passed the first free banking statute in 1838, followed by Michigan. By 1860 some eighteen states had enacted a variant of the free banking law modeled by the New York law 1838.[23] The rapid introduction of the laws is ascribed to the populist, anti-Mason, egalitarian Jacksonian politics combined with an inflationary policy that was mistakenly believed to be a solution to deflation induced by the Panic of 1837.[24]

Provisions of the New York Banking law 1838

The provisions were aimed at easy and safe operation of the banks that has allowed anyone to operate a bank as long as two basic requirements were met:

  1. Bond security provision that did not limit a number of banks regulated by this law, but all notes the bank issued had to be backed by state bonds deposited at the state auditor's office and meet certain capital requirements [25] Prior to opening a bank, subscriptions for a minimum amount of capital funds were required. Person subscribing for a stock commonly paid in some of the funds and promised to provide additional funds up to the amount subscribed.[21]
  2. Any bond security provision was to be deposited with the state on a dollar-for-dollar basis as a condition for the issuance of banknotes. In effect this means that all the notes issued by a particular banks were backed and redeemable by a specific quantity of specie - gold or silver, and used as checks in transactions nowadays. Hence the banknote value was the value of the bank assets. In a case of a bank failure, the state representing auditor would close the bank, sell the bonds, and use the proceeds to reimburse bondholders. If the bond sale did not generate enough specie to redeem a bank's bond obligation at par (dollar-per-dollar value), the bond holders had another layer of protection by having the first claim to the bank's other assets. Hence, the Free Banking Era in the U.S. meant free entry into banking, not a completely free market (sometimes referred to as Laissez-faire).[25] In some states, the bank stock holders were even a subject to so-called "double liability," which mandated that in case of a bank failure, the stock holders would not only be responsible for the loss in the amount of their ownership, but they would also owe an additional equal amount from their own wealth to cover for the bank's losses.[26]

The experience of Free Banking

The free banking reforms were seen as a part of a greater struggle for liberty and hence much was expected from them. Free banking replaced special interest legislation with a systematic "rule of law," in a form of highly idiosyncratic, flexible, personalized charter conditions. It was expected that the elimination of the privilege associated with the Safety Fund System 1929 would decrease legislative corruption and log rolling, the number of banks would increase and they would be more rationally located, and the end effect of more available credit would encourage commercial and manufacturing businesses. A bulk of evidence suggests that the free banking laws indeed helped the growth of the number of banks. In 1800, there were only 25 banks in the United States and this number grew to 1,364 in 1860.[27] The bank expansion varied significantly across the states; for example New York and Pennsylvania had 4 and 2 banks in 1800, and this number grew to 299 and 80 in 1860 respectively. Although the economic development in some areas might have had some influence on the discrepancies, the difference was most likely caused by different chartered policies in each state that controlled the reserve requirements, interest rates for loans and deposits, the necessary capital ratio etc.[27] Many banks, however, failed to survive the period and provide a stable source of banking services, and a safe currency. In Minnesota, for example, between 1852 and 1854, 57 banks or eighty percent of the state's financial institutions, ceased operation.[28]

Wildcat banking and the failure of the Free Banking system

Numerous banks that started during this period proved to be unstable, and many shut. It is widely believed that as a result of light governmental regulation, many dishonest bankers appeared and created a phenomenon called "wildcat banking," which is believed to be the main cause of the downfall of Free Banking.[29] Wildcat banking saw institutions defraud the public by issuing notes they could not redeem in specie (gold or silver). There are several theories about how the fraud occurred, the most well known being that the banks discouraged redemptions by establishing offices in areas populated only by wildcat banks, far from the communities where they had circulated the notes. After making a profit, the bankers would close the bank and disappear with its assets.[28] However, among the banks that closed between 1838 and 1863 only about 7% were identified as wildcats. In New York, Indiana, Wisconsin, and Minnesota between 1838 and 1863, almost half the free banks closed, but less than 7 percent of the free banks could possibly have been wildcats. Yet in these states between 1852 and 1863, most of the closings (about 80 percent of those that involved noteholder losses) occurred during periods when bond prices strongly declined. And wildcat banking did not cause the declines.[29] This leads to alternative explanations, such as that propounded by a well-known study by the Federal Reserve Bank of Minneapolis: that banks suffered losses because of the substantial drops in the price of the state bonds that made up a large part of their portfolios.[28]

National Bank Act

Main article: National Bank Act

To correct such conditions, Congress passed (1863) the National Bank Act, which provided for a system of banks to be chartered by the federal government. The National Banking Acts of 1863 and 1864 were two United States federal laws that established a system of national charters for banks, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S. Treasury securities and established the Office of the Comptroller of the Currency as part of the Department of the Treasury and authorized the Comptroller to examine and regulate nationally-chartered banks.

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.[30] 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 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 widespread adoption 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).

Rise of investment banks

Civil War

During the Civil War, banking houses were forced to meet the federal government's need for money to fund its war efforts. Jay Cooke launched the first mass securities selling operation in U.S. history employing thousands of salesmen to float what ultimately amounted to $830 million worth of government bonds to a wide group of investors.[31] Cooke then reached out to the general public, acting as an agent of the Treasury Department, and personally led a war bond drive that netted approximately $1.5 billion for Treasury.[32][33]

Surging demand for capital in the Gilded Age

The 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.[34]

Lance Davis has demonstrated that the process of capital formation in the nineteenth century was markedly different between the British capital market and the American capital market. British industrialists were readily able to satisfy their need for capital by tapping a vast source of international capital through British banks such as Westminster's, Lloyds and Barclays. In contrast, the dramatic growth of the United States created capital requirements that far outstripped the limited capital resources of American banks. Investment banking in the United States emerged to serve the expansion of railroads, mining companies, and heavy industry. Unlike commercial banks, investment banks were not authorized to issue notes or accept deposits. Instead, they served as brokers or intermediaries, bringing together investors with capital and the firms that needed that capital.[35][36]

Bimetallism and the gold standard

Main article: Coinage Act of 1873

Toward the end of the nineteenth century, bimetallism became a center of political conflict. During the civil war, to finance the war the U.S. switched from bimetallism to a flat greenback currency. In 1873, the government passed the Fourth Coinage Act and soon resumption to specie payments began without the free and unlimited coinage of silver. This put the U.S. on a mono-metallic gold standard.[37]

Early 20th century

During the period 1890–1925, the investment banking industry was highly concentrated and dominated by an oligopoly that consisted of JP Morgan & Co.; Kuhn, Loeb & Co.; Brown Brothers; and Kidder, Peabody & Co. There was no legal requirement to separate the operations of commercial and investment banks; as a result deposits from the commercial banking side of the business constituted an in-house supply of capital that could be used to fund the underwriting business of the investment banking side.[38]

The Panic of 1907 and the Pujo Committee

Main article: Pujo Committee

In 1913, the Pujo Committee unanimously determined that a small cabal of financiers had gained consolidated control of numerous industries through the abuse of the public trust in the United States. The chair of the House Committee on Banking and Currency, Representative Arsène Pujo, (DLa. 7th) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade that concluded that a community of influential financial leaders had gained control of major manufacturing, transportation, mining, telecommunications and financial markets of the United States. The report revealed that no less than eighteen different major financial corporations were under control of a cartel led by J.P Morgan, George F. Baker and James Stillman. These three men, through the resources of seven banks and trust companies (Banker's Trust Co., Guaranty Trust Co., Astor Trust Co., National Bank of Commerce, Liberty National Bank, Chase National Bank, Farmer's Loan and Trust Co.) controlled an estimated $2.1 billion. The report revealed that a handful of men held manipulative control of the New York Stock Exchange and attempted to evade interstate commerce laws.

The findings of the committee inspired public support for ratification of the Sixteenth Amendment in 1913, passage of the Federal Reserve Act that same year, and passage of the Clayton Antitrust Act in 1914.

The Federal Reserve System

A private conglomerate prevented the Panic of 1907 by establishing themselves up as "lenders of last resort" to banks in trouble. This effort succeeded in stopping the panic, and led to calls for a federal agency to do the same thing. In response, the Federal Reserve Act of 1913 created the Federal Reserve System, a new quasi-federal central bank intended serve as a formal "lender of last resort" to banks in times of liquidity crisis—panics where depositors tried to withdraw their money faster than a bank could pay it.

The legislation provided for a system that included twelve regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks had the option to join, whereby those banks came under its authority as a quasi-federal regulator. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.[39]

McFadden Act

Main article: McFadden Act

The McFadden Act of 1927 was based on recommendations made by the Comptroller of Currency Henry May Dawes. The Act sought to give national banks competitive equality with state-chartered banks by letting national banks branch to the extent permitted by state law. The McFadden Act specifically prohibited interstate branching by allowing each national bank to branch only within the state in which it is located. Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994[40] repealed this provision of the McFadden Act, it specified that state law continues to control intrastate branching, or branching within a state's borders, for both state and national banks.

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.[41] 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, President Franklin D. Roosevelt signed the Federal Credit Union Act into law in 1934 as part of the New Deal, allowing the creation of federally chartered credit unions in the United States and creating the Credit Union National Association (CUNA). By 1937, 6400 credit unions with 1.5 million members were active in 45 states.[42] Today, the United States has over 9500 credit unions regulated by the National Credit Union Administration(NCUA).[43]

Savings and loan associations

The savings and loan association became a strong force in the early 20th century through assisting customers with home ownership, through mortgage lending, and further assisting their members with basic saving and investing outlets, typically through passbook savings accounts and term certificates of deposit.

Congress passed the Federal Home Loan Bank Act in 1932, during the Great Depression. It established the Federal Home Loan Bank and associated Federal Home Loan Bank Board to assist other banks in providing funding to offer long term, amortized loans for home purchases. The aim was to encourage banks, not insurance companies, to become lenders and to provide realistic loans which borrowers could repay to gain full-ownership of their homes.

Savings and loan associations sprang-up across the United States to take advantage of low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.

New Deal-era reforms

Further information: New Deal

During the 1930s, the U.S. and the rest of the world experienced the Great Depression. During the height of the Depression in the U.S., the official unemployment rate was 25% and the stock market had declined 75% since 1929. Bank runs were common because deposits were not insured and banks kept only a fraction of deposits in reserve. Also, many state governments favored local unit banks over statewide or nationwide banks. Local banks were much more vulnerable to economic crises.[44] Customers ran the risk of losing their deposits if their bank failed.[45]

By the beginning of 1933, the banking system in the United States had effectively ceased to function. The incoming Roosevelt administration and the incoming Congress took immediate steps to pass legislation to respond to the Great Depression. Roosevelt entered office with enormous political capital. Americans of all political persuasions demanded immediate action, and Roosevelt responded with a remarkable series of new programs in the "first hundred days" of his administration, in which he met with Congress for 100 days. During that period of lawmaking, Congress granted every request Roosevelt made, and passed some programs, such as the FDIC, that he opposed.

A major component of Roosevelt's New Deal was reform of the nation's banking system. With strident language Roosevelt took credit for dethroning the bankers he alleged had caused the debacle.[46]

Emergency Banking Act

Roosevelt closed all banks in the country and kept them all closed until he could pass new legislation.[47] On March 9, Roosevelt sent to Congress the Emergency Banking Act, drafted in large part by Herbert Hoover's top advisors. The act, passed and signed into law the same day, provided for a system of reopening sound banks under Treasury Department supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks. Their depositors eventually received on average 86 cents on the dollar of their deposits, despite the common myth that they received nothing back.

Creation of the FDIC and FSLIC

In June 1933, over Roosevelt's objections, Congress created the FDIC, which insured deposits up to $2,500 beginning January 1, 1934. On June 16, 1933, President Franklin D. Roosevelt signed the Banking Act of 1933. This legislation:[45]

The National Housing Act of 1934 contained provisions to create the FSLIC in order to insure deposits in savings and loans, a year after the FDIC began to insure deposits in commercial banks. It was administered by the Federal Home Loan Bank Board (FHLBB).[48]

Abandonment of the gold standard

To deal with deflation, the nation abandoned the gold standard. In March and April in a series of laws and executive orders, the government suspended the gold standard for the U.S. dollar.[49] Anyone holding significant amounts of gold coinage was mandated to exchange it at the existing fixed price of US dollars, after which the US would no longer pay gold on demand for the dollar, and gold would no longer be considered valid legal tender for debts in private and public contracts. The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act in 1934. Markets immediately responded well to the suspension, in the hope that the decline in prices would finally end.[50]

Glass-Steagall Act of 1933

The Glass–Steagall Act of 1933 was passed in reaction to the collapse of a large portion of the American commercial banking system in early 1933. One of its provisions introduced the separation of bank types according to their business (commercial and investment banking). To comply with the new regulation, most large banks split into separate entities. For example, JP Morgan split into three entities: JP Morgan continued to operate as a commercial bank, Morgan Stanley formed to operate as an investment bank, and Morgan Grenfell operated as a British merchant bank.[51]

Banking Act of 1935

The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the area of credit management, tightened existing restrictions on banks engaging in certain activities, and expanded the supervisory powers of the FDIC.

Together, the increased regulations of the New Deal era ushered in a period of stability in retail banking. The term 3-6-3 Rule (paying 3 percent interest on deposits, lending money out at 6 percent, and being able to "tee off at the golf course by 3 p.m.") has been used to describe the post-World War II period until the deregulation of the 1980s.[52][53]

Bretton Woods system

Main article: Bretton Woods system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments.

Automated teller machines

On September 2, 1969, Chemical Bank installed the first ATM in the U.S. at its branch in Rockville Centre, New York. The first ATMs were designed to dispense a fixed amount of cash when a user inserted a specially coded card.[54] A Chemical Bank advertisement boasted "On Sept. 2 our bank will open at 9:00 and never close again."[55]

Nixon shock

Main article: Nixon Shock

In 1971, President Richard Nixon took a series of economic measures that collectively are known as the Nixon Shock. These measures included unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.

Deregulation of the 1980s and 1990s

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, reduced 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.

Savings and loan crisis

The savings and loan crisis of the 1980s and 1990s was the failure of 747 of the 3,234 savings and loan associations in the United States. "As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion." The remainder of the bailout was paid for by charges on savings and loan accounts—which contributed to the large budget deficits of the early 1990s.[56]

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II.[57]

Expansion of FDIC insurance – 1989

Until 1989, national banks (those with national charters) were required to participate in the FDIC, while state banks either were required to obtain FDIC insurance by state law or could join voluntarily (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)

Interstate banking

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the laws governing federally chartered banks in order to restore the laws' competitiveness with the recently relaxed laws governing state-chartered banks.[58]

Repeal of the Glass-Steagall Act

Provisions of the Glass-Steagall Act that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.[59][60]

The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. Some political commentators on the American political left have claimed that this repeal directly contributed to the severity of the Financial crisis of 2007–2010,[61][62][63][64][65] but government reports and academic analyses of the crisis largely reject this claim.[66]

Late-2000s financial crisis

The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression.[67] It was triggered by a liquidity shortfall in the United States banking system[68] and has resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.[69]

The collapse of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[70] Questions regarding bank solvency, declines in credit availability and damaged investor confidence affected global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[71] Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets.[72] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts.

There is some debate as to what role the repeal of Glass–Steagall had on the late 2000s financial crisis.[65]

Although there have been aftershocks, the financial crisis itself ended sometime between late 2008 and mid-2009.[73][74][75] While many causes for the financial crisis have been suggested, with varying weight assigned by experts, the Levin–Coburn Report by United States Senate found "that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street."[76][77]

Both market-based and regulatory solutions have been implemented or are under consideration.[78]

Many have expressed nostalgia for the stability of the 1950s through the 1980s, the era of the 3-6-3 Rule, as a preferable way for banks to operate following the bailout of major banks.[79][80]

Expansion of FDIC insurance – 2008–2010

Due to the 2008 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. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this increase became permanent as of July 21, 2010.

Dodd–Frank Act

The Dodd–Frank Wall Street Reform and Consumer Protection Act is the most sweeping change to financial regulation in the United States since the Great Depression,[81][82][83] and represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation's financial services industry.[84][85] In the years following its implementation many Republicans wanted the law revoked, however President Obama in July 2014 remained in support of the regulation, while saying more reform was necessary, particularly in terms of the internal structuring of individual banks.[86]

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