Economics: History of The Banking Sector In The United States (Coursework Sample)
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Question 1) Summarize the history of the banking sector in the United States (from the Civil War to today). Be sure to comment on the chartering system, the legal environment/major legislative changes, and the degree to which banks are getting concentrated
Banks serve as mediators to guarantee that individuals who need monetary help can obtain it, and individuals who have cash can deposit it securely (SIMONS). Congress declared the national banking act of 1863 during the civil war. During which state banks forced a 10% tax on their banknotes. This act led to a system of federally chartered banks. The national bank could issue banknotes tax-free.
The dual‐banking system that we still have today was devised to make money demand deposits. In this system, banks can choose whether to receive their charters from the comptroller of the currency at the U.S. treasury or state official. Only about ¾ quarters have a state charter, and the others have a federal charter. Bank chooses the charter depending on its profit, as state banks have more operational flexibility. This will lead to a better chance of making a profit.
Furthermore, the great depression resulted in the Glass- Steagall Act of 1993. This caused the Federal Deposit Insurance Corporation (FDIC) to restrict the transactions of commercial banks. It provided insurance to independent depositors, so they would not lose their savings when a bank failed. Lastly, the restricted bank assets were to certain standard forms of debt.
Furthermore, the law separated the commercial banks from the investment banks that limited financial institutions from taking advantage of economies. However, This changed in 1999 with the Gramm‐Leach‐Bliley Financial Services Modernization Act that repealed the Glass‐Steagall Act. 2007‐2009 financial crisis that led to the largest reform. It required closer government oversight establishments called systematically important financial institutions (SIFS) regardless of their legal form and sharply altered the authorities of the government agencies that govern the financial system.
It also prohibited depositories from proprietary trading. Whereas there are 4,700 banks estimated in the US today, and the number is decreasing, banks with branches have Changed significantly. For many years, most U.S. banks represented banks without branches. Today’s banks possess several branches and subsidiaries.
Question 2 ) Describe the safety net that has been established for the financial sector and the consequences (positive and negative) that this safety net creates.
The government safety net was employed to become linked within the monetary system to safeguard system investors, to protect bank clients from monopolistic exploitation, and to protect the balance of the monetary system. The government was committed to protecting private investors. The competition was supposed to discipline all the institutions in the industry, but only the force of law ensured the honor of a bank. The competition was reduced due to the growing propensity to merge small firms with the larger ones.
In the financial system, it intended to make sure that even large banks face competition. The combustible mix of liquidity risk and information symmetries means that the financial system is inherently unstable. A monetary institution can make and annihilate the value of its resources in a brief timeframe. Hence, A single firm’s failure can bring down the entire system. Government officials implement alternative strategies to protect the investors and guarantee the stability of the financial system. They work as the lender of last resort, making loans to Government authorities execute techniques to secure the investors and ensure the stability of the money related framework. They function as the lender after all other options have run out, making credits to banks that face abrupt deposit outflows. They also provide deposit insurance, assuring depositors receive the full value of their accounts if the institution fails. Hence, the safety net causes the bank manager to seize on many risks.
Question 3) Summarize the "stability" objectives of central banks and describe how they meet those objectives.
A vital function of central banks is to direct a financial approach to accomplish price stability and to help manage monetary variations. The approach structures inside which national banks work have been liable to significant changes over ongoing many years. ("Monetary Policy And Central Banking") The stability functions of the central bank entail low and stable inflation, high and stable real growth, together with high employment, stable financial market and institutions, stable interest rates, and stable exchange rates ("Monetary Policy And Central Banking"). Instability in one of these five objectives trumps a systematic or economy‐wide risk.
To meet the stability goals, certain measures are implemented. First of all, by adjusting interest rates, central bankers work to moderate cycles and stabilize growth and employment. Interest rates are raised up to prevent borrowing spend and dropped to increase borrowing to spend. Central banks mediate in the trade market to establish reserves for themselves or give them to the nation's banks. Furthermore, bond prices are increased to stabilize inflation.
Question 4 a) Describe the special role of the New York Federal Reserve Bank.
The special role of the New York reserve federal bank is to provide services to foreign central banks and certain international organizations that hold accounts there. The framework's place of contact with financial markets auction of Treasury securities foreign money is purchased and sold converse buying arrangements are executed.
The Federal Reserve Bank of New York is responsible for executing the central bank's cash by assessing price inflation and financial development and by managing the banks inside its locale. It offers cash to banks inside its locale. The Federal Reserve Bank of New York executes the methodologies set out by the Federal Open Market Committee FOMC, mainly through Permanent Open Market Operations by its Open Market Trading Desk. The Desk purchases (occasionally sells) U.S. treasury securities from vendors with new bank savings (Staff).
Question 4 b) Describe the composition and role of the Federal Open Market Committee.
The composition of the FOMC consists of 12 delegates.
1 7 members of the Board of Governors of the Federal Reserve System
2 Federal Reserve Bank of New York’s president
3 4 of the remaining 11 Reserve Bank presidents
The FOMC manages the federal funds rate, and by doing so, it influences real growth. The principal role of the FOMC is to manage fiscal policy.
Question 5 a) Detail the relationship between the Monetary Base and the money supply mathematically (defining all the terms as necessary) as well as verbally. Be sure to use realistic assumptions regarding the desire of people to hold cash and the desire of banks to hold excess reserves.
The money supply is the measure of liquidity delivered for public use in the economy. It is comparable to the cash claimed by people in general plus the demand deposits at the reserves, and the financial base is the percentage of the absolute cash available for use and the aggregate held by the banks as reserves.
Money supply=money multiplier x monetary base (Curtis, and Irvine).
The capital offered by the Federal Reserve is a monetary base, also recognized as high-powered money. Banks are generating capital by loaning money. A bank borrows or spends its surplus reserves in order to gain more interest. A one-dollar rise in the fiscal base allows the supply of capital to increase by more than one dollar. The progress in the money supply is the multiplier of cash.
Money supply (M) = C + D
Monetary Base (B) = C + R
C represents currency and R represents reserves
Considering the simplified model of bank money formation. Everything capital is bank savings, and the public has no currency. Since C = 0,
M = D
B = R.
Banks maintain the portion f
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