The banking industry of the United States has experienced tremendous changes over the past few decades. Regulation has had to keep up with the times, of course. The three major changes that the banks of America have worked around in recent decades have required regulatory transformations in order to increase the profits of the banks and at the same time to make banking a more convenient facility on offer to the consumers, investors, etc. Banks have merged and also ventured into the provision of nontraditional banking services to increase their revenues.
An example of added convenience that the recent changes in the industry have brought about is the growing number of American banks in foreign countries. Seeing that globalization has shifted a large number of American businesses into foreign markets as multinational corporations, the wisdom behind opening American banks in the self same foreign markets is apparent. As a matter of fact, besides consolidation and the provision of nontraditional banking services, globalization is the third major trend that has faced the banking industry of the United States especially in the latter half of the twentieth century.
The McFadden Act of 1927 was an enemy of the expansion of U.S. banks. By prohibiting banks from expanding across state lines, this Act was not only a barrier to competition but was also responsible for the establishment of a huge number of small banks with little to show in terms of assets. Thanks to the loopholes that McFadden carried along, the Act was eventually repealed, but only after the states of America began to allow their banks to branch across state lines. It was in 1975 that the state of Maine first allowed interstate branching unto its bank holding companies. Other states of America developed their own banking regulations to the same effect, eventually to rule out the McFadden Act, which was actually replaced by the Congress in the year 1994 when the Riegel-Neal Interstate Banking and Branching Efficiency Act was passed.
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This new legislation allowed all U.S. banks to branch across state lines. Consequently, there were important bank mergers that reduced the number of banks in the country, but did not decrease the number of physical banks or branches sprawled across the United States. Many of the physical banks or branches of banks remained under the supervision of the big, merged banks. Although economists believe that the big, merged banks should be experiencing economies of scale in addition to economies of scope, there is no evidence yet to suggest that the consolidated banks of America have indeed experienced economies of scale and scope. At the same time, it has been shown that bank mergers have the capacity to check inefficiency. When an efficient bank takes over an inefficient bank that did not fare too well during the McFadden days; there are obvious quality improvement implications.
The second major trend that the banking industry of the U.S. experienced especially in the latter half of the twentieth century was concerned with the provision of nontraditional banking services. Given that banks are functioning for the sake of profits – anything that threatens a source of bank revenue must be replaced by a different revenue source and the changes backed by regulation. The Glass-Steagall Act of 1933 was an obstruction to the revenue generating function of U.S. banks.
This Act prohibited banks from venturing forth into investment markets, allowing the financial markets alone to enjoy the blessings of the large corporate loans business. Another loss facing the banks of the nation was a new regulatory requirement introduced during the 1980s making it mandatory for banks to keep a specified minimum ratio of equity capital to total assets.
Fortunately, however, during the 1960s, the banks of the United States had already begun to publicly decry the Glass-Steagall Act, ultimately to have it repealed and replaced by the Gramm-Leach-Bliley Act of 1999. Subsequently, today’s banks are permitted to provide a variety of nontraditional banking services, including interest rate swaps, financial futures, and financial options; and thereby increase their revenues. Increases in bank profits are expected to lead to quality improvements also in the traditional banking areas.
In addition to the above, the banks of the U.S., especially since the last two decades of the twentieth century, have increasingly assumed the responsibilities of globalization. The Edge Act of 1919 had granted express permission to American banks to establish their subsidiaries abroad in order to ease the functioning of international business. Even so, there were only eight U.S. banks with foreign branches until the 1960s.
Today, there are more than one hundred U.S. banks with foreign branches – all making it easy especially for American businesses in foreign countries to transact with them. As globalization has replaced the Cold War era in a period of unprecedented integration among markets and economies, a great number of foreign banks have also opened their branches in the United States. These foreign banks in the U.S. were by and large unregulated until the year 1978. The International Banking Act of 1978 changed this to mandate that all foreign banks must also be regulated like the local (American) banks in the country.
Even though globalization arrived full-fledged at the banking industry during the last two decades of the twentieth century, its signs had begun to appear as early as 1960s. During that time, the Regulation Q, putting a ceiling on interest rates in the United States, had compelled a huge number of investors to move into European markets where regulations were relatively relaxed. Eurodollars were created when the U.S. dollars began to move out of their home country to be deposited into and borrowed from banks that were outside the country.
The Eurobond market, for long-term investment, was similarly created outside the United States, albeit committed to transactions in U.S. dollars in countries where regulations were more relaxed than in the U.S. These countries were not just in Europe, however. The Bahamas and the Caymans, for example, played an active role in the Euromarket because of little or no regulation as well as nearly zero taxation.
The most recent development in the banking industry in the area of globalization has been the permission granted by Federal Reserve for the establishment of International Banking Facilities. Allowed since 1981, these special facilities are based in the U.S. and largely unregulated. The only condition that these International Banking Facilities are required to meet is twofold: (1) International Banking Facilities should only deposit money that comes to them from outside the United States; and (2)
They must only lend to borrowers that are based abroad. American multinational corporations in foreign countries may also avail the services of International Banking Facilities. This kind of departmentalization in terms of the sources and uses of funds is meant to add to the convenience of banking. Furthermore, the creation of International Banking Facilities, plus the changes that the banking industry has experienced in terms of consolidation and the provision of nontraditional banking services; proffer evidence that the regulatory agencies are in fact committed to the improvement of business in general.
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