Basic Time Line for Key Historical Events
(Mishkin, Chpt. 10, Figure 1, p. 230, and Chpt. 11, Table 1, pp. 270-271]
- 1782: Bank of North America was chartered in Philadelphia. Its
success led to the opening of numerous other banks.
- 1791: Alexander Hamilton established the Bank of the United
States in Philadelphia, the first U.S. central bank. This move towards
centralized banking was highly controversial.
- 1811: The charter for the Bank of the United States was allowed
to lapse.
- 1816: Congress chartered the Second Bank of the United States in
response to abuses by state banks and to difficulties encountered by the
Federal government in attempting to finance the War of 1812.
- 1832: Andrew Jackson vetoed the rechartering of the Second Bank of
the United States in the face of populist fears of "big city" banking
interests. States were given the right to control banks within their borders.
This was the commencement of the "Free Banking" period, so called because
there was very little federal government intervention in banking activities.
- The National Banking Act of 1863: This act established a new
banking system of federally-chartered banks ("national banks") and imposed a
tax on the issuance of banknotes (paper money backed by gold) by
state-chartered banks ("state banks") in an attempt to eliminate them. State
banks responded by setting up a demand deposit system that made currency
issuance unnecessary. This resulted in a dual banking system
consisting of banks chartered and supervised by the federal government
operating side by side with banks chartered and supervised by state
governments.
- Federal Reserve Act of 1913: This act established the U.S. central
banking system on a firm footing for the first time. The purpose of this
central banking system -- referred to as the Federal Reserve System (Fed) --
was to be the promotion of stability in the banking industry. The Fed was
given a monopoly power over the issuance of currency.
- All national banks were required to join the Federal Reserve
System, and were then to be subject to regulation.
- State banks were given the option to join or not. Most chose not
to join to avoid the high costs associated with regulation.
- Banking Act of 1933 (Glass-Steagall): This important act created
the Federal Deposit Insurance Corporation (FDIC) to provide federal insurance
on commercial bank deposits, restricted interest payments by depository
institutions, and imposed separation between commercial banking and the
securities industry. Under this act:
- Members of the Federal Reserve System were required to purchase
FDIC insurance for their depositors.
- Nonmembers were given the choice to purchase insurance or not.
Most chose to purchase insurance to stay competitive with
member banks.
- Any bank insured by the FDIC was subject to regulation by the FDIC.
- Interest payments on checkable deposit accounts were prohibited,
and checkable deposit accounts were restricted to commercial banks.
Interest-rate ceilings were also imposed on time deposit
accounts (Regulation Q).
- Commercial banks were prohibited from underwriting
or dealing in corporate securities and were limited to the purchase of
debt securities approved by bank regulatory agencies. Investment banks
were also prohibited from engaging in commercial banking activities.
- Representative Jim Leach of Iowa, Chair of the House Banking
Committee, attempted unsuccessfully in 1995, and again unsuccessfully in 1996,
to push a bill through Congress repealing that part of the Glass-Steagall Act
requiring separation of commercial banking from the securities industry.
Finally, in Fall 1999, the Gramm-Leach-Bliley Act was enacted by the U.S.
Congress which significantly weakened these separation provisions (see below).
- Branching Restrictions 1863--1985: Branching restrictions
are geographic limitations on the ability of individual banks to open more
than one office or branch.
- National Banking Act of 1863:
This act gave states the
authority to restrict branching within their borders.
- McFadden Act of 1927: This act prohibited national banks from
opening branches outside their home state and forced all national banks to
conform to the branching regulations in their home state.
- These two acts were meant to foster competition by preventing large
banks from driving smaller banks out of business by opening a nearby branch.
The actual result was lack of competition, however. Inefficient small banks
were able to remain in business, even if they offered poor inadequate
services, because their customers had nowhere else to go.
- The branching restrictions imposed by these acts account for the
comparatively large number of commercial banks in the United States.
- These branching restrictions have stimulated the development of
three financial innovations to get around them:
- Bank Holding Companies:
- Bank holding companies are companies that own one or more
banks. Bank holding companies can own a controlling interest in several
banks even if branching is not permitted. Many states permit bank holding
companies in other states to own controlling interests in banks in their
state.
- Nonbank Banks:
- Nonbank banks are limited service banks that fall
outside the legal definition of a bank (as defined in the Bank Holding Act of
1956) as an institution that both accepts deposits and makes
loans. Thus, nonbank banks are not subject to branching restrictions.
- Automated Teller Machines:
- Automated teller machines (ATMs) are small, widely
distributed electronic machines that permit customers to make bank
transactions by inserting plastic bank cards and typing in instructions. By
not owning or renting an ATM, but instead letting it be owned by someone else
and simply paying the owner a fee for each transaction, banks can effectively
use ATMs as surrogate branches.
- 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act:
This act essentially recognized a movement underway by states since 1985 to
get around branching restrictions by various means. It overturned the
McFadden Act's prohibition of interstate banking and established the basis
for a true nationwide banking system. In doing so, it increased
substantially the benefits of bank consolidation for the banking industry.
- Branching Abroad: In recent years, U.S. commercial banks have
increasingly opened branches abroad. This internationalization of the U.S.
commercial banking industry can be explained by three basic factors:
- First, the rapid growth in international trade and multinational
corporations has required commercial banks to become increasingly global in
their orientation.
- Second, by branching abroad, U.S. commercial banks have been able
to pursue activities that have been prohibited in the U.S. under the
Glass-Steagall Act, such as investment banking and insurance activities.
- Third, by branching abroad, U.S. commercial banks are able to
participate more directly and profitably in the Eurodollar market,
i.e., the market for dollar-denominated deposits held in foreign countries.
The Eurodollar market, initiated by actions of the Soviet Union in the 1950s
(see Mishkin Chapter 10, Box Discussion, page 255), is now one of the most important
financial markets in the world. The main center of the Eurodollar market is
in London.
- The Gramm-Leach-Bliley Act of 1999:
The principal focus of the Gramm-Leach-Bliley (GLB) Act of Fall 1999 is the
relaxation of the provisions of the Glass-Steagall Act of 1933 requiring
separation of commercial banking and securities activities. Specifically,
the GLB Act eases the way for banks and nonbanking firms to consolidate in
some fashion to take advantage of the synergies and cost advantages perceived
in such combinations.
- The GLB Act is 395 pages in length, hence it is difficult to do
justice to the full scope of this important act in just a few paragraphs.
The key features and effects to date of the GLB Act are discussed at some
length in
"Notes on the 1999 Gramm-Leach-Bliley Act".
- The Sarbanes-Oxley Act of 2002:
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The
Act - which applies in general to publicly held companies and their audit firms - dramatically
affects the accounting profession and impacts not just the largest accounting firms,
but any CPA actively working as an auditor of, or for, a publicly traded company.
A summary of the basic implications of the Act for accountants can be found
here.
tesfatsi AT iastate.edu 
Key Empirical Facts for U.S. Commercial Banking