The Banking Industry

Created by mrc05d 

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Response: The National Banking Act of 1863

resulted in dual banking system and start of demand deposits

The liquidity disparity between assets and liabilities led to

bank failures

How do banks pay depositors

First come first serve

Bad News about their own bank

Bank run

Bad news about one bank spreads to other banks

Contagion

Regulations Preventing banking panics were intend to

protect and insulate

Federal Reserve Act of 1913

Created the 'lender of last resort'

lender of last resort

Gave the fed a monopoly on issuing currency

lender of last resort

Required national banks to join the federal system

McFadden Act of 1927 intended to

Promote banking competition by prohibiting interstate branching

The McFadden Act of 1927 actually

Reduced diversification, Increased credit risk, Limited branching, Allowed inefficient banks to compete with efficient banks

Glass-Steagall Act intended to

Protect commercial bank depositors and Limit the concentration of financial power

Limited branching suppots

cost inefficiencies and lower interest rate returns to investors

Glass-Steagall Act's unexpected results

Protected investment banks from competition through an increased cost of issuing new securities

FDIC Helped restore confidence in the banking system and reduce bank runs/panics because

Banks are no longer concerned about adverse selection

What problem did FDIC create

Moral Hazard

FDIC

Guarantees deposits at covered banks up to a limit and that Fed member banks must buy deposit insurance

primary government safety net

FDIC

What is the competitive landscape

Geographic restrictions eased and competition from other industries allowed

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