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GENERAL STATE OF U.S. BANKING INDUSTRY
Banks in U.S. play an important role in safe guarding money, providing loans, providing credit, service payments like checking accounts, debit cards, and cashier's check. Banks may also offer investment and insurance products.
Goods and services
Banking consists of two parts: Monetary Authorities-Central Bank and depository credit inter-mediation.The U.S. Federal Reserve System of U.S. acts as the Central Bank of the United States and manages the country's money supply as well as international reserves, holds reserve deposits of other domestic banks and central banks of other countries and issues the dollars we use (J. P. Morgan 12).
Basically there are three types of banks which dominate in U.S: Commercial banks, savings and loans associations and credit unions. These institutions offer a full range of services to individuals, businesses and governments. Commercial banks range in sizes varying from global to regional and even small community banks with ATM locations. Recently, online banks which offer services via the internet have come up (J. P. Morgan 43).
Savings banks and savings and loans association
Some times known as thrift institutions, they are the second largest group of depository institutions. They were first established as community based institutions to finance mortgages for people. Over time, the distinction between savings banks and commercial banks has disappeared.
It is another kind of depository institution. They are formed by people with a common interest. Loans and savings accounts are only restricted to members. Credit unions are non profit making institutions and governed by board elected by members
Federal Reserve Banks
These are government agencies performing many financial services like regulating banking industry, creating and implementing the country's monetary policies. They use monetary policies to promote economic growth and limit inflation. During periods of slower economic activity, the Federal Reserve may increase money supply by purchasing government securities and other assets. It also promotes economic growth by lowering interest charges for loans. It may fight inflation through sale of securities and increasing interest rates (Zhang 45).
Interest from loans is the principal source of income for most banks. Money lend by banks comes primarily from consumer and business deposits. These deposits often earn interest for the owners through methods such as online payments cheques etc.The U.S. government regulates the money in banks by insuring through Federal Deposit Insurance Corporation (FDIC). Deposits in savings and loan association and credit unions are regulated and insured by other U.S. government agencies.
Some of the Major Events that Shaped the Banking Industry in U.S. in the year 2009
Nationalization of Banks;
Nationalization gets a serious attention.
On January 26 2009, an article by David E. Sanger says that White House is playing around a delicate issue. He asked the president if he was prepared to nationalize the banking system (J. P. Morgan 33).
Swedish bank fee sets an example for America
Sweden had enacted a direct tax on banks to pay for their own bailouts, similar to president Obama's proposal of recovering bailout money (Jan 22, 2010).
Conversion of bank bailouts to equity share by the U.S government
The Obama administration officials say the approach will help allow the U.S.government shore up the nations banking systems without any financial aid from the congress (April 20 2009).
Enlisting small investors in bank bails out
The Whitehouse plan would give tax payers an opportunity to benefit from the bank bailout with risks (April 9 2009).
Cleaning a dirty bank
Public-private investment program by the treasury will add little capital to the banks. There is amore simple, fair and sound way to recapitalize an insolvent bank (April 6 2009)
What Obama administration is doing is far much worse than nationalization. It is privatizing of gains and sharing of losses (April 1 2009).
Major Problems Facing Banks TodayCompetition
Most banks are currently facing fierce competition from financial markets according to Chinese official. For instance, the competition between Wells Fargo (WFC) ands its rival banking Titan Citi group(C) to win a deal in a stock deal brokered by Federal Reserve now valued at $12 billion.Loan risks.
Some banks may lend out non performing loans. Bank charges on loans in the second quarter hit $26 billion- three times the same period in 2007.Blind investment
Some banks may invest in non financial sectors which will ultimately have no returns.Taking TARP
The United Statesunited states government tried so many ways to respond to the credit crunch of 2008 that threaten to paralyzeparalyse one of the world's strongest economies. The Obama administration responded to the salutationsituatution through various means like recapitalization of the banking sector to allow banks recover their losses. The lowering of federal fund rate will help improve bank marginsmargis and raise the profits. However the low rates of 1% were not enough considering the losses that were likely to occur to the banking sector(Blundell wignall,2008).Also banks were suppose to cut dividends and come up with new capital from private sectors to repair balance sheets.
On the second half of 2008 the economic situation further deteriorated and the government had to move swiftly to bring the situation under control. This was done by injecting a whoopingwhoophing $ 700 billion into the economy (also known as the economic stimulus package) by the TARP authorities in the treasury. Already $ 250 billion has been directed to recapitalizing the banking sector. This will help harm the crisis in the U.S. banking sector.
Concern facing banks today;
The crisis is likely to cause a wave of bank merges and fire sales. Foreign banks are already hunting for good deals. Potential acquires include Toronto, Scotland Royal and London HSBC bank and Banco Santander in Madrid. They have all bought U.S. banks recently. The merger trend is likely to strengthen the U.S. economy. The deal between Wells Fargo and Wachovia will create a super bank of $1.4 trillion asset base and 48 million customers' link rivaling the bank of America and JP Morgan Chase and City group as well as thriving of small local banks with niche markets (J. P. Morgan 23).
- J. P. Morgan. U.S. "Mid- and Small-Cap Banks Failure Friday Rundown: only 1 Bank Fails Post-Holiday Weekend; First Failure in South Carolina; YTD Failures: 42." North American Equity Research, (12 April 19, 2010).
- J. P. Morgan. U.S. "Mid- and Small-Cap Banks: FDIC Extends Unlimited Deposit Insurance; We See Three Key Implications for Banks - ALERT". North American Equity Research, (13 April, 2010).
- J. P. Morgan. U.S. "U.S. Mid- and Small-Cap Banks FDIC Primer: Looking at the Value Creation from FDIC-Assisted Deals and Key Stocks to Own." North American Equity Research, (22 April, 2010).
- Zhang, Zhaohui. The impact of bailout on U.S. bank creditors' equity values: an event study of South Korea's caseTexas Tech University, 2000.