Commercial Banking

Commercial Banking in the U.S. in the United States

Significance

Commercial banks are the most significant of the financial intermediaries, accounting for some 60 percent of the nation’s deposits and loans.

History

The first bank to be chartered by the new federal government was the Bank of the United States, established in Philadelphia in 1791. By 1805 it had eight branches and served as the government’s banker as well as the recipient of private and business deposits. The bank was authorized to issue as legal tender banknotes exchangeable for gold. Although the bank succeeded in establishing a sound national currency, its charter was not renewed in 1811 for political and economic reasons. The history of the second Bank of the United States (1816-36) repeated that of its predecessor. It served ably as the government’s banker, achieved a sound national currency, and failed for political reasons when President Andrew Jackson vetoed charter renewal.

Multiplicity of Banks

In the next three decades the number of banks grew rapidly in response to the flourishing economy and to the system of “free banking”—that is, the granting of a bank charter to any group that fulfilled stated statutory conditions. Government fiscal operations were handled initially by private bankers and later (after 1846) by the Independent Treasury System, a network of government collecting and disbursing offices.

The Independent Treasury, however, could not cope with the financial demands of the American Civil War. Moreover, the multiplicity of state banks, each issuing its own banknotes, had resulted in a highly inefficient currency mechanism. The National Bank Act (1864) established the office of the comptroller of the currency to charter national banks that could issue national banknotes (this authority was not revoked until 1932). A uniform currency was achieved only after a tax on nonnational banknotes (1865) made their issuance unprofitable for the state-chartered banks. State banks survived by expanding their deposit-transfer function, continuing to this day a unique dual banking system, whereby a bank may obtain either a national or a state charter.

Banking Crises

The stability hoped for by the framers of the National Bank Act was not achieved; banking crises occurred in 1873, 1883, 1893, and 1907, with bank runs and systemic bank failures. The Federal Reserve Act (1913) created a centralized reserve system that would act as a lender of last resort to forestall bank crises and would permit a more elastic currency to meet the needs of the economy. Reserve authorities, however, could not prevent massive bank failures during the 1920s and early 1930s. See Federal Reserve System.

Banking Acts of 1933 and 1935

The Banking Acts of 1933 and 1935 introduced major reforms into the system and its regulatory mechanism. Deposit banking was separated from investment banking; the monetary controls of the Federal Reserve were expanded, and its powers were centralized in its Board of Governors; and the Federal Deposit Insurance Corporation (the FDIC, which now insures each depositor up to $100,000 per bank) was created. The banking system has continued to thrive, secure from widespread panics, and has expanded its services by developing alternative sources of funding and reaching out to new borrowers.

Legislation

Competition for corporate and individual deposits is keen among the banking giants, whose growth is limited by the Bank Merger Act (1960) as well as by antitrust laws. The U.S. banking system differs radically in this respect from such countries as Canada, Great Britain, and Germany, where a handful of organizations dominate banking. In the past geographical constraints on expansion prevented banks from moving beyond their state or even beyond their county. Thus many small bankers were protected from competition. Later, most states as well as the federal government loosened the regulation of banks, especially in the area of mergers and acquisitions. Many banks have grown by taking over other banks both within and outside their home states. In 1980 there were over 14,000 commercial banks in the United States; in the mid-1990s there were less than 11,000.

Overall government controls on banking were significantly loosened by the Depository Institutions Deregulation and Monetary Control Act (1980). Among its provisions are abolition of state usury limits on certain types of loans, gradual elimination of interest-rate ceilings on savings and time deposits, and extension of permission of all depository institutions to offer interest-paying checking accounts. The Garn-St. Germain Financial Institutions Act (1982), among its many other important provisions, permited interstate acquisition of failing banks.

Regulation

While government regulation of commercial banking since the mid-1930s has led to a low failure rate and preserved a substantial amount of competition in some markets, local monopolies have also been implicitly encouraged. Moreover, stringent regulations have caused some bankers to devote considerable resources to circumventing government controls. The present rethinking of the role of government regulation in the economy in general may lead toward even further liberalization of controls over the banking system.

Main Topics of Banking

This entry in the American Encyclopedia has been organized to address the following topics, among others:

  • Banking : Banking and Lending Law
  • Banking : Banks, Saving & Loans, Credit Unions
  • Banking : FDIC
  • Banking : Interest Rates

Resources

Notes and References

Source: “Banking” Microsoft® Encarta® Online Encyclopedia

See Also

  • Credit Union
  • Thrift
  • Financial Regulation
  • Supervision of Banking Organizations
  • International Banking Act Of 1978
  • Federal Reserve System
  • Federal Reserve Banks
  • Expansion of Reserve Banks
  • Federal Deposit Insurance Corporation
  • Discount Rate

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