Another way of transferring money even without a bank account is through the bank’s money transfer arrangements, which include money orders, pay orders, bank drafts, mail and telegraphic transfers, electronic transfer etc, within and outside the country. There are also other bank guaranteed payment facilities which greatly facilitate import-export trade.
Banks also accept funds from the public and businesses into saving accounts, keep them safe and pay an interest rate on them. With these funds, that are not small amounts, the banks grant loan to borrowers to whom the banks charges an interest rate, which is greater than the interest rate given for depositions in order to make the bank viable. Banks also provide many more services including agency services, business introductions and credit reports. One last important service is buying and selling foreign currency, issuing travellers cheques and credit cards.
The commercial banking regulations.
Before we move to which are the regulations of the commercial banking we should see how the decision of putting regulations on the commercial banking system did occur. Money Market Mutual Funds (MMMF) are short term investment pools made
up of the contributions of many people and invested in the highly liquid end of
the market. But the interest rates earned from these short terms investments are passed on to individual fund holders. During that period of time the interest rates were very high, at about 16%-17%. These funds were really attractive because they enabled investors to withdraw funds really easy. They could withdraw funds by writing a cheque on a bank account owned by the Money Market Mutual Funds. These cheques were of fixed denominations. This is a case of regulatory bifurcation. Investors were receiving the interest rates from their deposits with the Money Market Mutual Funds something that was illegal by the Glass-Steagall Act, which will be analyzed below, and these accounts were checkable. That has as a result the beginning of a competition between banks for investor’s deposits. . To stem disintermediation from banks, banks have to become more competitive.
From 1929 to 1933, the number of US banks declined from about 25,000 to about
14,000 (a 40 percent drop), while the economy went into a deep recession. There were 8000 bank failures and depositors lost faith in the banking system and began the withdrawal of their funds. Many banks were closed for days and weeks at the time to stem the run on banks.
All of this went to the courts. By 1980, the Deposit Institutions Deregulation and Monetary control Act was passed. All the old regulations were phased out that were restrictive of banks to compete for deposits. Reserve ratio was reduced to 10% and reserves held by the Fed have to have interest accruing to them.
After that there were some regulations implemented as a result of this stressed safety and discouraged competition. The Glass-Steagal Act of 1933 comprised of four major components.
- The Glass-Steagall Act of 1933 prevented banks from paying interest on demand deposits. The reason for this is that the competition between the banks to take more deposits was raising the interest rates which as it is natural made the balance sheets of banks very fragile.
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Regulation Q Savings accounts had a ceiling of 3% interest that is payable by banks. This means that the maximum interest rate given by the banks should not overcome 3%.
This was counterview by the NOW’s and the Euro money markets.
- The setting up of the FDIC of the Federal Deposit Insurance Corporation and the government provision of deposit insurance.
- Placed restrictions to separate commercial banks from investment banking. Commercial banks are forbidden to underwrite corporate securities. Investment banks are prohibited from accepting deposits. Banks were prohibited from distributing mutual fund shares.
Thus these aspects of the regulation of banks fall into the categories of .
(1) Structural regulation is meant limitations on regulated firms’ freedom of entry and exit, product lines, office locations and product prices.
Structural regulation in European banking is minimal leading to universal banking. In the American and Japanese system seeks to enforce functional and regional specialization in the strictly domestic operational of domestic institutions.
(2) Prudential regulation comprises balance sheet restrictions aimed at assuring liquidity and solvency. These include blanket government deposit insurance guarantees (buttressed by lender of last resort facilities) and levying explicit premiums and capital requirements on insured firms.
The initiatives for both (1) and (2) above have come from the U.S in the aftermath of the Stock Market Crash of 1929 and the virtual collapse of the banking system. The major emphasis was on stability and competition among banks was discouraged.
This may be partially attributed to the failure of the Central Bank to inject sufficient reserves to offset the currency drain (from the gold std. balance of payments problem) and to prevent the money stock from declining.
Deposit Insurance provided by the Government is highly controversial because there is a moral hazard problem. Banks will become irresponsible and not take due care regarding their asset liability management. Today it has been conceded that Deposit
Insurance has eroded market discipline.
Edward Kane on the 12 country Basle Agreement of 1988: it is a time wasting placebo whose benefits are oversold.
Hidden costs to regulation.
There are unacknowledged subsidies that flow from the improper pricing of explicit and implicit government and international financial guarantees. Concealing them from taxpayers may allow such subsidies for burgeon out of control so that their long run effects become destabilizing. Systematic governmental disinformation policies designed to conceal unfunded losses by govt. deposit insurance funds make it hard for taxpayers to fill the disciplinary role that stock holders and creditors play in a private firm. “Ironically, inefficient regulators can and do perversely mine the periodic policy crises they and their predecessors cause for new powers and larger budgets”.
Conclusion
From everything that we have seen above we understand that commercial banking is almost all known banking functions. It is mainly working with money but banks do the same thing in general. Although it did not seem to need any special regulations it was proven that because of this lack of regulations cost to US the Great Depression with catastrophic results.
Bibliography
- Dr. Sheri Markose’s Lecture notes
- Financial Markets and Institutions-Frederic S. Mishkin, Stanley G. Eakins
- New regulation of the financial industry- Dimitris N. Chorafas
- The prudential Regulation of Banks- Mathias Dewatripont, Jean Tirole
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