 |
Profit-Making and Banking Risks
|
|
|
|
1. granting loans to corporate and individual customers;
2. charging. Banks make profit by interest payments on overdrawn accounts;
3. lending on the money market;
4. investing in sound shares and securities.
In their pursuit of high profit the banks sometimes get involved in risky operations fraught with bankruptcy. That is why the government takes measures to minimize the danger of banks going broke. Every bank is obliged to take out insurance against robbery or bankruptcy lest the clients should lose their money in any case.
Text 2
Development of the U.S. Banking System
At the center of the U.S. banking system is the Federal Reserve System, which was established in 1913. The FRS, or the Fed as it is usually called, did not just suddenly appear. It was the culmination of a long history of debate and controversy about the appropriate structure for a banking system. Much of this history resolves around attempts by legislatures, both at the federal and state levels, to control banks. The debate stemmed from the dual function banks were expected to perform.
The Dual Functions of Banks
1. In a moneyed economy, a bank is a necessary institution for the handling and storing of money. The risk involved in individuals or businesses keeping their money as a perfectly liquid asset is too great.
2. Banks can make loans to people who want to borrow, but because these loans create demand deposits that are part of the money supply, they must be controlled. The demand for bank loans (bank credit) is particularly strong when business is prosperous and expanding. In history, such periods have been associated with times of rapid settlement and industrialization. The banks have served a necessary purpose in making credit available to finance such development. However, if the banks are too enthusiastic about creating credit, the result is succession of bank failures.
Banking Legislation
Banking legislation during the nineteenth century was characterized by a series of attempts, first, to restrict the ability of the banking system to overexpand the supply of credit available and second, to lend the prestige of the government to the credit that was created. But the schemes came to nothing as the financial panics of 1973, 1884, 1893, 1903, and 1907 clearly demonstrated. These panics were accompanied by bank failures and the loss of accumulated savings by depositors.
The ultimate source of the problem was that the supply of credit was not flexible enough. The total money supply was tied to gold and silver and therefore could not be expanded to meet needs. What was needed was a money supply managed by a central monetary authority to meet economic conditions and to guarantee the safety of banks and the currency. As we have already noted, when the banking system is always able to meet depositors’ demands for money, there is no need to withdraw.
The Federal Reserve System
Formation. The serious financial panic of 1907 convinced people that the formation of a central bank was essential. The Federal Reserve Act of 1913, which set up the Fed, was the compromise rising out of this controversy. Instead of a single central bank, the Federal Reserve Act divided the country into twelve Federal Reserve districts, each with its own central bank. The boards of directors for these twelve banks were not made up of bankers alone but of appointees who were both bankers and representatives of the community at large. A Federal Reserve board was established in Washington to oversee the operations of the whole system, but initially it had very little power.
|
|
|
Structure and operation:
1. All banks chartered by (that is, licensed to operate as a bank by the federal government) were required to become the members of the Fed. These are known as national banks. All other banks chartered by state governments were encouraged, but not required to join.
2. To give it increased credibility, the new system was to become the bank for the federal government.The US Treasury had previously performed this function.
3. Member banks were required to keep a proportion of their deposit liabilities with the Fed as a reserve, called the reserve requirement. The Fed was to apply strict auditing rules to member banks.
4. Each Federal reserve bank was empowered to issue the new national currency, called federal reserve notes.
5. The Federal reserve banks were authorized to loan to member banks at rates of interest determined by the Fed. The idea was this: if a bank found itself short of funds to pay depositors, it could turn to the Federal Reserve Bank in the district for help.
The new system of national banking cannot be said to have taken the banking community by storm. All 7,597 national banks were, by law, members of the Fed in 1915.But only 17 of the 19,793 state chartered banks had joined in the first year.
Growth of the Fed
Even today, there are more banks outside the Fed than there are in it. But the assets of those banks that are members far exceed the assets of those banks that are not. The Fed dominates the U.S. banking system today, and even those banks that are not members are influenced by its actions.
The Fed’s growth to a dominating position was, not surprisingly, slow. The banking community had to be convinced that membership was worthwhile and that the system itself was going to succeed. At the beginning, nobody really understood what a central bank was supposed to do. But two world wars and the Great Depression were effective schools for imparting an understanding of the principles of central banking. There is no doubt that the Fed has made many mistakes, some of severe consequences for the economy. What is not so clear is whether the Fed has made more serious mistakes than the system itreplaced might have made.
The Fed has come to realize over time that its main function is to control the money supply, thus enabling the economy to achieve its domestic and international goals. Instead of passively waiting for member banks to come to borrow, the Fed acts continuously to hit a target growth rate of the money supply. Further, the whole question of protecting the bank depositors was resolved by ensuring deposits through The Federal Deposit Insurance Corporation. As a result of those charges, the power of the twelve district Federal banks has declined and power of the Board of Governors (the former Federal Reserve Board) in Washington has expanded enormously.
Text 3
|
|
|
