73 many state-chartered banks engaged in highly risky banking practices.
LO 3.5 The National Banking Act of 1864 permitted banks to receive
federal charters and provides the basis for the present national bank-
ing laws. The Federal Reserve Act of 1913 established the central
banking system in the United States. Separation of commercial
banking and investment banking activities was provided for in the
Glass-Steagall Act of 1933. The Glass-Steagall Act was not repealed
until the Gramm-Leach-Bliley Act of 1999 was passed. As a result of
the 2007–2008 fi nancial crisis and the 2008–2009 Great Recession,
Congress passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010. The Federal Deposit Insurance Corporation
(FDIC) provides for deposit insurance up to $250,000 per account.
LO 3.6 Banks may obtain either state or federal charters, which
makes the United States a dual banking system. Individual states have
the authority to decide whether banks can operate branches in their
states. Today, most states permit statewide branching, although a few
states still have limited branch banking laws that restrict branching to
a specifi ed geographical area, such as a county. Banks may be inde-
pendently owned or owned by either a one-bank holding company
(OBHC) or a multibank holding company (MBHC).
LO 3.7 A bank’s balance sheet is composed of assets that equal its
liabilities and stockholders’ equity. Bank assets are primarily in the
form of cash and balances due from depository institutions, securi-
ties, loans, and fi xed assets. Most assets are held in the form of loans.
A bank’s liabilities are primarily in the form of deposits that may
take the form of transaction accounts, such as demand deposits, or
nontransactional accounts, which are time and savings deposits. A
bank’s common equity equals the stockholders’ equity unless pre-
ferred stock has been issued by the bank. Common equity includes
the proceeds from the sale of common stock plus the bank’s retained
earnings accumulated over time.
LO 3.8 Bank management involves the trade-off of potential profi t-
ability against bank safety. Banks can fail because of inadequate bank
liquidity or because of bank insolvency. Bank liquidity is the ability
to meet depositor withdrawals and to pay debts as they come due.
Bank solvency refl ects the ability to maintain the value of the bank’s
assets above the value of its liabilities. Liquidity management is prac-
ticed in terms of both asset management and liability management.
Capital management focuses on maintaining adequate stockholders’
equity relative to assets to protect the bank against insolvency and
liquidity risk.
LO 3.9 International banking is when banks operate in more than
one country. While most developed countries have central bank-
ing systems, some countries allow universal banking while oth-
ers restrict commercial banking and investment banking activities.
Germany is a universal banking country. The United Kingdom is
moving toward universal banking, while Japan separates the two
banking activities.
Key Terms
bank liquidity
bank solvency
banking system
brokerage fi rms
certifi cates of deposit (CDs)
commercial banks
contractual savings
organizations
credit (default) risk
credit unions
depository institutions
Dodd-Frank Wall Street Reform
and Consumer Protection Act
dual banking system
fi nance companies
fi nance fi rms
fi nancial intermediation
Glass-Steagall Act of 1933
Gramm-Leach-Bliley Act of
1999
insurance companies
interest rate risk
international banking
investment bank
investment banking fi rms
investment companies
limited branch banking
liquidity risk
mortgage
mortgage-backed security
mortgage banking fi rms
multibank holding companies
(MBHCs)
mutual funds
one-bank holding companies
(OBHCs)
pension funds
primary reserves
prime rate
savings banks
savings and loan associations
(S&Ls)
secondary reserves
secured loan
securities fi rms
statewide branch banking
thrift institutions
unit banking
universal bank
unsecured loan
Review Questions
