FrontPage: NNIGN
The Last Word: Ch 10
Review due and Quiz –
Monday
BANKING IN THE 21ST CENTURY
Chapter 10, Section 3
THE GOOD, THE BAD
AND THE UGLY…
Technology and Banking
Technology has also changed the nature of modern banking.
 Stored value cards
 represent money that the holder has on deposit with the
card issuer. (ex. bus fare cards, gift cards, phone cards, etc.)
 ATMs
 Allow consumers to perform functions previously done by
a teller at a machine
 Online banking
 allows customers to conduct much of their banking business
on the web
 Bill pay, transfers, etc.
 Debit cards
 allow consumers to make cashless purchases and have
the payments deducted immediately from their bank
account.
 Mobile apps
 now allow people to deposit checks into their account
from anywhere and bank from their phones
The Financial Collapse of
2008
 Many of the reforms and changes of the last
several decades (mostly deregulation of banks
and financial institutions) created a “perfect
storm” in the mid-late 2000s which led to a
financial collapse, a recession, and over a trillion
dollars of taxpayer money spent to “bailout”
banks that were “too big to fail”…
 Here are the major events that led to that
collapse…
Background to the Crisis
 Terms to know….
Background to the Crisis
 The Financial Services Act of 1999 lifted the
last restrictions from the Banking Act of 1933
that had prevented banks, insurance
companies, and investment groups from
offering the same products and competing
with one another.
 After 1999, banks began to sell stocks and bonds,
while some insurance companies and investment
groups began to offer traditional banking services.
 Also, this led to a large number of mergers
 Although consumers benefited from the increasing
number of bank branches available, they have been
hurt by higher prices due to reduced competition.
Beginning of the Crisis
 The financial crisis that began in 2007 was
very complex.
 Causes included both deregulation and the
“mortgage market”
 Banks lowered their standards for
mortgages
 Origin of the term, “NINJA” loan
 No Income, No Job, No Assets
 Real estate prices ballooned, in part
because of lax mortgage lending
standards.
Causes of the Crisis
 Banks stopped holding on to mortgages for the
life of the loan and began selling them to other
companies.
 Banks and other financial companies would
bundle and sell them as mortgage-backed
securities, an investment similar to a bond.
 The market for such securities was hot: investors
plowed billions into mortgage-backed securities.
 The easy profits encouraged banks to generate
more mortgages by lowering their lending
standards further, which drove house prices even
higher.
**Why would this drive house prices up?
Deregulation and the Financial crisis
 Not surprisingly, some who could not afford
their homes in the first place begin to default on
their mortgages
 Can’t pay them, take bankruptcy and walk away
 Supply of homes increases as demand decreases
 When the housing bubble finally burst, falling
home prices led to a rise of foreclosures.
 Those who purchased these mortgages now own
homes that are relatively worthless
 Suddenly, mortgage-backed securities changed
from a “hot investment” to a “toxic asset.”
 Credit markets around the world seized up as
banks lost faith that their loans would be
repaid.
 Many argue that tougher regulation and closer
supervision may have prevented this catastrophe.
FrontPage: NNIGN
The Last Word:
Ch 10 Review due and Quiz
– Monday
 http://www.hulu.com/watch/59026
 http://www.usatoday.com/story/money/business/
2014/08/21/bank-of-america-settlementannounced/14379775/