Strong Regulation (1933—1990s)

**1933-for many decades: Strong Regulations at both National and Local Levels including (a) National Deposit Insurance and (b) Strict Regulatory Oversight & Inspections; and (c) Segregation of Banking from Speculative Investing meaning that BANKS could take deposits and make loans

---(Different Kinds of Banks with Insured Deposits: (i) Commercial banks for Business banking and loans; (ii) Savings & Loans (‘mutuals’ democratically and locally controlled) and ‘mutuals’ for mortgages and housing for consumers in local markets; (iii) Credit Unions (customer-owned and democratically controlled—one person=one member=one vote electing unpaid Boards) credit cooperatives mainly for consumer lending; (iv) Government subsidized agencies and banks for lending for farming/Agriculture & Rural communities’ economic developments.)

---(Other Uninsured & essentially Unregulated Financial Institutions: (v) Investment ‘banks’ (the ones that collapsed from March-October 2008…leading to more general crisis in finance); (vi) brokerages and other miscellaneous ‘Wall Street firms’.) NOTE: These were not regulated as banks…. but they were regulated to keep them more honest—to prevent fraud and other unscrupulous activities that tried to exploit or take advantage of their customers-investors.

**1980s Gradual Deregulation of Banking until near complete Deregulation in 1999 (ending the 1933 changes but keeping deposit insurance; and, keeping, in theory at least, oversight & inspections…but lightly or minimal enforcement as ‘free market in banking’ returned to a quasi-pre-1933 system).

The Fruits of Deregulation? 2001-2008

**CRISES of 21st Century: (1) Dot.Com Stock Bubble and Bursting of 1990s-2000; (2) Corporate Accounting Scandals of 2001, with Enron as the most famous liar-company; (3) Mortgage Securitization & Housing Bubble of 2002-2007 and then Collapse of Investment Banks and Spread of Crisis throughout the World beginning in 2008.

The Future: Will the Massive Financial Crisis of 2008-present lead to New Re-strengthened Regulation of Banks and Entire Financial Sector?

--We will have to see what happens. Currently, the rules are such that another crisis can occur and the banks will need to be bailed out (the top banks have become even bigger and certainly they are still, even more, “Too Big To Fail”)

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ROW (rest of world): Separation of Banking and Other Financial Services Industries Throughout the World

=Universal banking

--No separation between banking and securities industries

--Germany, Netherlands, Switzerland, much of EU

=British-style universal (partial hybrid) banking

--May engage in security underwriting

--U.K., Canada, Australia, (& USA post-1999)

----Separate legal subsidiaries are common

----Bank equity holdings of commercial firms are less common (than in universal banking systems)

----Few combinations of banking and insurance firms

=Many countries (partial hybrid system): Some legal separation

--Allowed to hold substantial equity stakes in commercial firms but holding companies are illegal

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NOT-QUITE INVESTOR-CONTROLLED COMMERCIAL BANKING:

=USA additional features (many countries also have other banks with special laws that control their corporate governments; NOT purely investor-owned)

USA: Thrift Industry: Regulation and Structure

=Savings and Loan Associations (called ‘Mutuals’ or ‘Associations’ in ROW)

--Chartered by the federal government or by states

--Most are members of Federal Home Loan Bank

System (FHLBS)

--Deposit insurance provided by Savings Association Insurance Fund (SAIF), part of FDIC

--Regulated by the Office of Thrift Supervision

--Most disappeared and became for-profit banks with deregulation of 1979 after takeovers by investor-owners (lots of scandals and crimes)

=Mutual Savings Banks (called ‘MUTUALS’ in the ROW)

--Approximately half are chartered by states

--Regulated by state in which they are located

--Deposit insurance provided by FDIC or state insurance

=Credit Unions (called CREDIT COOPERATIVES in the ROW)

--Tax-exempt

--Chartered by federal government or by states

--Regulated by the National Credit Union Administration (NCUA)

--Deposit insurance provided by National Credit Union Share Insurance Fund (NCUSIF)

--Board of Directors elected by members (=depositors/borrowers) on the basis of One Person = One Vote

--Most ‘efficient’ for consumers (lowest costs for banking services for consumers of all financial institutions in the USA)

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International Banking

=Rapid growth

--Growth in international trade and multinational corporations

--Global investment banking is very profitable

--Ability to tap into the Eurodollar market

Eurodollar Market

=Dollar-denominated deposits held in banks outside of the U.S.

=Most widely used currency in international trade

=Offshore deposits not subject to regulations

=Important source of funds for U.S. banks