1.1 General
The US banking system is one of the oldest, largest, and most important sectors of our overall economy. There were no modern banks in colonial America nor American banks as late as 1781.1 By the 1830s, to get away from the politicization and corruption involved in legislative chartering, a few states began to enact āfree bankingā laws. Without a central bank to provide oversight of banking and finance, the expanding banking system of the 1830s, 1840s, and 1850s suffered from some major problems, even as it supplied the country with ample loans to finance economic growth. One problem was financial instability. Banking crises occurred in 1837, 1839ā1842, and 1857 years when many banks had to suspend convertibility of their banknotes and deposits into coin because their coin reserves were insufficient. A good number of these banks failed or became insolvent when borrowers defaulted on their loan payments. The banking crises led to business depressions with high unemployment.2
The passage of the Federal Reserve Act in 1913 was a watershed in US banking history. In 1913, after three-quarters of a century without a central bank and a period punctuated by a number of banking crises, Congress created a new central bank, the Federal Reserve System.
In 1927, Congress passed the McFadden Act, which allowed national banks to become competitive with state banks by granting them jurisdiction to branch out within the state they were originally located to the extent that state law permitted. The banking architectural was strengthened with the Banking Act of June 1933 (āthe GlassāSteagall Actā) introduced federal deposit insurance, federal regulation of interest rates on deposits, and the separation of commercial banking from investment banking. Further, the GlassāSteagall Act strengthened the Federal Reserveās powers.
The American bank regulatory system is based upon the concept of dual oversight by federal and state agencies, and the primary regulators differ based upon a specific bankās charter. The structure and regulation of the US banking system differs from the rest of the world. The US system is made of big commercial and small banks coexisting, with more small banks holding the larger share in number. In contrast to the US system, other developed countries such as Japan, Germany, France, and Canadaās banking systems tend to favor larger national institutions.3 The US banking industry also is less highly concentrated than the banking industries in many other industrial countries. A study on āindustry concentration ratioā by the Bank for International Settlements concluded that the five largest banksā US ratio was 26.6%, while the ratio for Canada was 77.1%, France stood at 70.2%, and Switzerland at 57.8%.
In 1999, Congress repealed the GlassāSteagall Act that had effectively separated commercial and investment banking. The business of banking, long stifled by regulation, suddenly became more exciting. Increasingly, banks were not limited in their lending by the size of their deposit bases. They could obtain more funding to make more loans and purchase new forms of securities by accessing the Wall Street and international money markets.
In the United States, banks have been classified as either commercial banks or investment banks. Commercial banks accept customer deposits and offer commercial loans; while investment banks underwrite and register new securities and market them to individual or institutional investors, provide brokerage services, advice on corporate financing and proprietary trading, and assistance to merger and acquisitions. Banks are intermediaries between savers and borrowers. In its simplest form, the business model of commercial banks is to accept deposits from savers in order to make loans to borrowers; in other words, banks borrow from depositors and offer loans to individuals, business firms, nonprofits, and governments. The US banking system provides a secure way for consumers and businesses to store deposits. It is a primary conduit for capital markets activities and a source of credit for consumer mortgages, credit cards, auto loans, small business, and commercial lending.4
1.2 Size of the US Banks
According to The Bankerās Top 1000 World Banks Ranking for 2018, total assets reached $124 trillion, worldwide,5 when the total assets in the United States reached a peak of $17.5 trillion. The core banking functions held roughly 44% of total finance sector assets.6 US banks handle trillions of dollars of daily transaction volume. Most Americans use depository financial institutionsāsuch as commercial banks, savings and loan associations, and credit unions āto conduct their financial transactions.7 Those who do not have access to depository financial institutions conduct their financial transactions using money services businesses (āMSBsā) such as money transmitters, check cashers, currency exchangers, or businesses that sell money orders, prepaid access devices, and travelerās checks. While MSBs are subject to Bank Secrecy Act compliance requirements, some MSBs have failed to register with the proper authorities and thus are acting as unlicensed MSBs, used as vehicles by criminals in their illicit financial activities. In the context of globalization, banks often hold accounts with other banks in order to facilitate international business transactions in countries of the bank where the accounts are held. There are over 5900 banks and 5800 credit unions operating in the United States. Regulated depositories reported total assets of $21.4 trillion as of December 31, 2016, or 115% of US GDP.8 The US depository system is stratified by size and type of organization, with each playing a unique role serving its target client base. Key segments include the eight firms designated as US global systemically important banks (G-SIBs), regional banks, mid-sized banks, community banks, and credit unions .9 The eight US G-SIBs currently have $10.7 trillion of assets, or approximately 50% of total US depository assets, while regional and mid-sized banks, which operate across multiple states, have in the aggregate $6.7 trillion of assets, or approximately 31% of total US depository assets. Community banks and credit unions have total assets of $2.7 trillion and $1.3 trillion, respectively.10
1.3 Banking Regulation
The banking industry is one of the most powerful in the United States. But the path from then to now has not been linear, rather it has been influenced by a variety of different factors and an ever-changing regulatory framework. Forces, such as the desire for greater financial stability, more economic freedom, or fear of the concentration of too much power in too few hands, are what keep the pendulum swinging back and forth.11 Between 1782 and 1837, over 700 banks sprang up in the United States.12
Banking regulation can at best defined as the formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of banking. US banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. In the United States, the banking industry is heavily regulated. Most banks obtain federal or/and state charters and are then subject to regular and continuous oversight and audits. Despite these oversights, the 2008 financial crisis revealed that the laws, regulations, and actions of federal banking oversight authorities were inefficient and the failure of regulatory agencies to apply existing mandates, left much to be desired. Since 2016, the new administration is engaged in the deregulation process ignoring the lessons of the 2008 financial crisis. While the pace of new regulations has decelerated under the current US administration, the role of the states may grow in prominence.
1.4 Bank Liquidation
Since 2010, strenuous efforts have been made by regulators to protect or at least mitigate the effects of bankruptcy proceeding in the banking industry. The Wall Street Reform and Consumer Protection Act of July 2011, for instance, requires financial institutions with assets exceeding (with some exceptions) $50 billion (āsystematically importantā) to prepare living wills which identify how they intend to be reorganized in the event of a failure, inter alia, naming likely merger partners, and requiring increases in their stockholdersā equity positions against possible adverse events.13
Footnotes
1
Richard Sylla: The US Banking System: Origin, Development, and Regulation, the Gilder Lehrman Institute of American History (2009ā2019).
2
Richard Sylla: The US Banking System: Origin, Development, and Regulation, the Gilder Lehrman Institute of American History (2009ā2019).
3
Federal Reserve Bank of San Francisco (2002): How Does the US Banking System Compare w...