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The modern commercial banking industry in the
United States began when the Bank of North
America was chartered in Philadelphia in 1782.
Due to the vast achievement of this bank, many
more came into business.
There was much debate over whether the federal
government or the state should charter banks.
Alexander Hamilton: supported greater
centralized control of banking and federal
chartering of banks. This led to the establishment
of the Bank of the United States in 1791.
The Bank of the United States has
components of both a private bank and
a central bank (government agency
that oversees the banking system and is
responsible for the amount of money
and credit supplied in the economy).
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The distrust of moneyed interests in the big cities
led to political pressures to eliminate the Bank
of the United States. Eventually, in 1811, the
bank’s charter was not renewed. However,
there was a definite need for a central bank
to aide the federal government in raising
funds during the War of 1812, so Congress
created the Second Bank of the United States
in 1816.
Apprehension between advocates and rivals of
centralized banking power were a big
problem during the process of the second
central bank in the United States. When
Andrew Jackson became elected in 1832, he
vetoed the re-chartering of the Second Bank
of United States as a national bank, and its
charter lapsed in 1836.
Until 1863:
- all commercial banks were chartered by the banking
commission of the state in whish each operated
- no national currency existed
- banks obtained funds primarily by issuing banknotes
(currency circulated by the banks that could be
redeemed for gold)
- banks failed on a regular basis, which in turn made their
banknotes worthless
National Bank Act of 1863
Created a new banking
system of federally
chartered banks (called
national banks), which
were supervised by the
Office of the Comptroller of
the Currency. As a result,
the United States now has
a dual banking system in
which banks supervised by
the federal government
and banks supervised by
the states operate side by
side.
Central banking
reappeared in the country
when the Federal Reserve
System was created in 1913
to promote an even safer
banking system. All national
banks had to become
members of the Federal
Reserve System and
became subject to a new
set of regulations issued by
the fed. State banks had
the option to become
members or not, but many
turned it down due to the
high costs of membership.
Great Depression 1930-1933:
During this time, 9,000+ bank
failures wiped out the
savings of many depositors
at commercial banks.
To prevent future loss, the Federal
Deposit Insurance Corporation (FDIC)
was established in 1933, which
provided federal insurance on bank
deposits.
Member banks of the
Federal Reserve System
were required to purchase
FDIC insurance for the
depositors, where nonFederal Reserve banks had
the option to buy it.
Provisions in the banking legislation in 1933
prohibited commercial banks from
underwriting or deal in corporate securities
and limited banks to the purchase of debt
securities approved by the bank regulatory
agencies. This was brought about because
investment banking activities of the
commercial banks were blamed for many
bank failures. Under the Glass-Steagall Act,
commercial banks had to sell off their
investment banking operations.
1782
Bank of North America is chartered
1791
Bank of the United States is chartered
1811
Bank of the United States’ charter is allowed to lapse
1816
Second Bank of the United States is chartered
1832
Andrew Jackson vetoes re-chartering of Second Bank of the United States
1863
National Bank Act of 1863; Comptroller of the Currency
1913
Federal Reserve Act of 1913 creates Federal Reserve System
1933
Banking Act of 1933 creates Federal Deposit Insurance Corporation (FDIC)
-The Office of the Comptroller of the Currency has
the primary supervisory responsibility for the 1,850
national banks that own more than half of the
assets in the commercial banking system.
- The Federal Reserve and the state banking
authorities have joint primary responsibility for the
900 state banks that are members of the Federal
Reserve System.
- The Fed also has regulatory responsibility over
companies that own one or more banks (which
are called bank holding companies) and
secondary responsibility for the national banks .
- The FDIC and the state banking authorities jointly
supervise the 4,800 state banks that have FDIC
insurance but are not members of the Federal
Reserve System.
- The state banking authorities have sole jurisdiction
over the fewer than 500 state banks without FDIC
insurance.
The Banker
Global Financial Intelligence
Since 1926
The Banker is a leading financial
magazine that “investigates, expose,
and pass expert comment on the
critical development in the global
banking sector.”
The Banker Awards is an annual
awards event held every year
recognizing the top financial
institutions. Some of the awards
categories include Bank of the Year,
Innovation in Technology, and
Central Banker of the Year.
Hans-Ulrich
Meister, CEO,
Credit Suisse
Switzerland
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Credit Suisse
If 2008 was a tough year for Credit Suisse in its home market of Switzerland, this year it
has shown its powers of recovery. Having lost SFr8.2bn ($8.13bn) last year, its first-half
results came storming back with a net profit of SFr3.6bn, return-on-equity of 20.1% and a
Tier 1 ratio of 1.5%.
It is the just rewards of a swift response and an agile business model, says Hans-Ulrich
Meister, CEO of Credit Suisse Switzerland. "Last year, in response to a dramatic change
in the markets, we accelerated the execution of our long-term strategy: we adapted
our business model, strengthened our capital position and reduced our risk profile. As a
result, Credit Suisse is well positioned to prosper in the new competitive landscape, both
in Switzerland and globally."
The bank has delivered on the key priorities it set out in 2008: to maintain capital
strength; reduce investment banking risk; maintain client momentum; and accelerate
the implementation of its strategy. Towards the latter, Credit Suisse has prepared for the
new private banking environment by expanding its footprint and its global wealth
management platform. It has refocused the investment bank as a client-centric,
capital-efficient operation, with lower earnings volatility; and in asset management it
completed the sale in 2009 of part of the traditional investment strategies business,
marking a significant step in the focus on asset allocation, Swiss business and alternative
investment strategies.
"This award recognises the strength of our business in our Swiss home market, which
makes a significant contribution to our overall performance, as well as our role as a
trusted financial partner to clients," said Mr Meister. "Our expertise and integrated
approach to providing solutions, combining our private banking, investment banking
and asset management capabilities, is proving very attractive."
http://www.thebanker.com/news/fullstory.php/aid/6990/The_Banker_Awards_2009_-_Country_Winners.html?current_page=NO_PAGE
Interest-Rate Volatility
(Higher Interest –Rate Risk)
The interest rate on 3 -month U.S. Treasury bills
EX) 1950’s : 1.0% ~3.5% 2.5%
1970’s : 4.0% ~11.5% 7.5%
1980’s : 5.0% ~15% 10.0%
Adjustable-Rate
Mortgage
Lending is more attractive
IF interest-rate is LOWER
 ARM(Adjustable-Rate
Mortgage)
is mortgage loans on which
the interest rate changes
when a market interest rate
changes.
Higher profit to financial institutions
issue more  with lower initial
interest rates  widespread
Financial Derivatives
Financial institutions need to
protect themselves from
Hedge or interest-rate risk
Futures contract : the seller
agrees to provide a certain
standardized commodity to
the buyer on a specific
future date at an agreed on
price
Financial derivatives : futures
contracts in financial
instruments
Information Technology
-> 2 effects
1) lower the cost of processing financial
transactions
2) make it easier for investors to acquire
information
FINANCIAL INNOVATION
<1> Bank Credit and Debit Cards
<2> Electronic Banking
<3> Junk Bonds
<4> Commercial Paper Market
<5> Securitization
<1> Bank Credit and Debit Cards
- Credit Cards
- Debit Cards
<1> Bank Credit and Debit Cards
<2> Electronic Banking
- Automated teller machine (ATM)
- Automated banking machine (ABM)
- Virtual Bank
<1> Bank Credit and Debit Cards
<2> Electronic Banking
<3> Junk Bonds
<1> Bank Credit and Debit Cards
<2> Electronic Banking
<3> Junk Bonds
<4> Commercial Paper Market
Improvement in
information technology
the
Market
The development of
money market mutual funds
Rapid growth in
Commercial Paper
<1> Bank Credit and Debit Cards
<2> Electronic Banking
<3> Junk Bonds
<4> Commercial Paper Market
<5> Securitization
Securitization is the process of transforming otherwise illiquid
financial assets(such as residential mortgages, auto loans,
and credit card receivables), which have typically been the
bread and butter of banking institutions, into marketable
capital market securities.

Why do financial industries such as
banking try to avoid regulations?
*Edward Kane
“Loophole mining”- a process of avoiding
regulations
Reserve requirements
- A cost on a bank equal to the interest
rate, i,
- The cost of ixr on the bank just like a tax
on bank deposits of ixr per dollar of
deposits
2. Restrictions on interest paid on deposits
- Restricting the amount of fund that banks
could lend and thus limiting bank profits
1.
Money market mutual Fund: issues shares
that are redeemable at a fixed price by
writing checks.
+ It uses funds to invest in short-term
money market securities that provide
you with interest payments.
+ It enables you to write checks up to the
amount of funds held as shares in the
money market fund.

Sweep account: is an account set up at
a bank or other financial institution
where the funds are automatically
managed between a primary cash
account and secondary investment
accounts.
+ It enables banks to avoid the “tax” from
reserve requirements.
+ It allows banks to pay interest on
checking account.
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In the he U.S., the importance of
commercial banks as a source of funds
to nonfinancial borrowers has shrunk
dramatically.
 The size of banks’ balance sheet assets
has declined by declines in their cost
advantages in acquiring funds and
declines in income advantages on uses
of funds which are caused by financial
innovations.

Declines in income advantages on uses
of funds: A loss of market share has
been occurred, and the growth of the
shadow banking system had been led
by junk bonds, securitization and the rise
of the commercial paper market .
1.
Expanding into new and riskier areas of
lending
2. Pursuing new off-balance-sheet
activities that are more profitable and
embrace the shadow banking system

Before the invention and use of
electronic currency checks and cash
had to be used or carried at all times.
However with the invention of digital
accounts and currency a simple piece
of plastic is all you need to purchase
goods and services. Not only does this
decrease the demand for cash but it
also helps the individual to carry less
cash and allow easy transfer of currency.

With the creation of the FED, interestsensitive funds are seeing an increase of
usage due to their sensitive nature with
the current status of the economy, by
using interest-sensitive funds, banks and
other financial institutions are able to
better adjust to the current situation and
to avoid inflations and recessions.

Prior to the formation of the FED, banks
were not required to hold a reserved
amount of the deposits that were made
to the bank, therefore most of the banks
lend out almost every deposit they had,
which resulted in some serious problems
when withdraws were required but loans
could not be called back, with the
required reserve amount, “runs” on
banks were decreased greatly.

Financial markets have greatly expanded
since their beginning of use. Now they
cover almost every single market
imaginable and the instruments used to run
these markets are expanded as well. One
example of this is the financial derivatives.
Derivatives are basically side investments
based on speculation of increasing profits,
however this can lead to problems as seen
in the mortgage crisis of 2009.

Bonds are a good way for any
government to raise money when they
need additional resources for
government projects, with variable rate
lending and borrowing and maturity
shortening, both government and bank
are left with new options for investment
and loaning.

Economies change everyday, and often prices
go with the change, but in order to protect
investments from serious losses, hedging
contracts were introduced and saw major
usage among corporations and financial
institutions. Hedging is basically a protection
against price rise and price fall, applying to
selling and buying, basically you want to buy
low and sell high, and hedging protects you
from low price when selling and high price
when buying. Even if you did not utilize
hedging, it is often better to be protected
than left empty handed unknown what will
happen next.

All in all there are a total of 12 federal
reserve districts in the US that are
responsible for their assigned states, this
organized manner allows for checks to
be cleared faster and also speeds up
the transferring of funds betweens states.
It also divides the members of the FED so
there is a balance of power amongst the
individuals.

The fed decides when to increase the
circulation of money and when to
decrease the circulation of money, it
also decides on the set interest rate
based on the status of the economy,
they manage the circulation and interest
rate extremely careful based on the
economy by using methods such as
open market purchases and open
market sales.