19 terms

The Banking Industry

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
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
Guarantees deposits at covered banks up to a limit and that Fed member banks must buy deposit insurance
primary government safety net
What is the competitive landscape
Geographic restrictions eased and competition from other industries allowed