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National Bank Act of 1863

Created a system of federally chartered banks regulated by the Office of the Comptroller of the Currency (OCC).

Federal Reserve Act of 1913

Separated commercial and investment banking until repealed in 1999.

McFadden Act (1927):

Prohibited interstate bank branching for national banks; later overturned.

FDIC

Examines state-chartered banks not part of the Fed.

Federal Reserve

Supervises state-member banks along with state authorities.

Office of the Comptroller of the Currency (OCC).

Supervises federally chartered banks.

Bank of North America (1782)

First U.S. commercial bank, chartered in Philadelphia.

Second Bank of the United States (1816)

Created after War of 1812 due to poor state bank practices.

Decline of traditional banking

Caused by information technology advances and shadow banking growth.

Disintermediation

• Caused by interest rate ceilings + inflation (e.g., Regulation Q).
  

Financial Engineering

 Banks innovate to escape regulation (loophole mining).

Shadow Banking

Defined as nonbank lending (e.g., money market funds, hedge funds).

More risky due to lack of FDIC insurance and access to government liquidity

Securitization

Converts illiquid assets (e.g., mortgages, auto loans) into tradable securities.

Subprime mortgages emerged from this trend.

Financial Instruments

Futures Contract: Agreement to buy/sell assets in the future at a preset price.

Junk Bonds: High-yield, below-investment-grade bonds.

Sweep Accounts: Auto-invest idle checking funds overnight.

Innovation Drivers

Interest rate volatility → Adjustable-rate mortgages, derivatives.

Info Tech → Virtual banking, home banking, ATMs.

Securitization → Asset-backed securities (e.g., mortgage-backed securities).

Bank Business Models

• Economies of Scope: Using one resource to produce multiple outputs.
  
  

• Off-Balance Sheet Activities: Risky but profitable (e.g., loan commitments, derivatives).
  
  

• Bank Holding Companies: Growth strategy to bypass branching laws.