The document discusses financial institution problems during the 2007-2008 financial crisis. Mortgage loans were pooled into securities that banks and financial institutions held as assets. The crisis led to a housing price decline, unemployment, and mortgage defaults, wiping out the value of mortgage loans and securities. Major financial institutions like Bear Sterns, Lehman Brothers, and others faced financial difficulties. The crisis was exacerbated by the Federal Reserve's bailouts and failures of institutions like Washington Mutual and Wachovia Bank. The US government passed TARP to purchase troubled assets from financial institutions.

1. Banks and Other Financial
Institutions

2. Financial Institution Problems During
the Financial Crisis
 Mortgage loans are loans backed by real property, such as buildings and
houses. In the 2000s, banks and other mortgage lenders pooled these
loans into securities and mortgaged-backed securities.
 The 2007-2008 financial crisis led to a sharp decline in housing prices,
increased unemployment, and mortgage loan defaults.
 This led to a drop in the value of mortgage loans and associated securities
on houses, wiping out equity.

3. Financial Institution Problems During
the Financial Crisis
 Many banks and financial institutions held mortgage loans and securities
as assets faced liquidity and solvency problems.
 The Great Recession of 2008-2009 was exacerbated by increasing
unemployment and a contraction in economic activity.
 Major financial institutions like Bear Sterns, Lehman Brothers, Merrill Lynch,
American International Group, Washington Mutual, Wachovia Bank,
Citigroup, and Bank of America faced financial difficulties.
 The crisis was worsened by the Federal Reserve's bailout of AIG and the
collapse of Washington Mutual and Wachovia Bank.

4. Financial Institution Problems During
the Financial Crisis
 The U.S. government passed the Economic Stabilization Act of 2008,
allowing the Treasury to purchase up to $700 billion of "troubled" assets
held by financial institutions, known as the Troubled Asset Relief Program
(TARP).
 However, much of the funds were used to invest in banks with little equity
and rescue large non-financial businesses.

5. Types and Roles of Financial
Institutions
 The US financial system, like the monetary system, evolved to meet
citizens' needs and facilitate savings-investment.
 Financial institutions assist individuals in saving and growing their savings,
with most investing indirectly through financial intermediation, which
accumulates and lends or invests individual savings.

6. Types of Financial Institutions

7. Depository Institutions
 The banking system in the United States primarily consists of commercial
banks, which accept deposits, issue check-writing accounts, and make
loans to businesses and individuals.
 Thrift institutions, such as savings and loan associations (S&Ls), savings
banks, and credit unions, accumulate individual savings and lend primarily
to other individuals.
 Savings banks, which emerged in 1812, focus on individual thrift savings
and safety of principal, while S&Ls, which emerged in 1831, primarily
provide home mortgage financing.

8. Depository Institutions
 Credit unions, cooperative, non-profit organizations, emerged later,
primarily providing consumer credit to member depositors.
 The process of transferring funds from individual savers and investors to
business firms involves depositing in commercial banks, making loans, and
purchasing debt securities.
 Thrift institutions, which focus on gathering individual savings and lending
them to individuals, are not depicted in previous figure.

9. Contractual Savings Organizations
 Contractual savings organizations, such as insurance companies and
pension funds, collect premiums and contributions from business firms
and government units to purchase debt and equity securities.
 Insurance companies offer financial protection for life, property, liability,
and health uncertainties.
 Pension funds receive contributions from employees and employers and
invest the proceeds on behalf of employees.

10. Contractual Savings Organizations
 These plans provide income during retirement years and can be private or
government-sponsored. Government-sponsored plans, such as Social
Security, are funded by working individuals paying taxes.
 The federal government also provides pension plans for civil servants,
military employees, and state and local government employees.

11. Contractual Savings Organizations

12. Securities Firms
 Securities firms perform various financial functions, including savings-
investment, marketing new securities, and facilitating the transfer of
existing securities between investors.
 Investment companies, such as mutual funds, issue shares to investors and
invest the pooled proceeds in corporate and government securities.
 Mutual funds grow by investing existing investors' funds in securities that
pay or distribute cash and appreciate in value.

13. Securities Firms
 Investment banking firms, also known as brokerage firms, sell or market
new securities issued by businesses to individual and institutional
investors.
 These firms obtain financial capital from their own resources or from other
financial institutions.
 Successful mutual funds attract more investor funds and invest in more
securities.

14. Finance Firms
 Finance firms, which provide loans to individuals for credit needs and
purchasing durable goods and homes, are not included in previous figure.
They offer loans directly to consumers and businesses, while sales and
consumer finance companies lend to individuals.
 Commercial finance companies provide loans to businesses unable to
obtain financing from commercial banks.
 Mortgage banking firms help individuals obtain mortgage loans by
bringing together borrowers and institutional investors.
 The primary mortgage market is crucial for the financial system's success,
while secondary mortgage markets buy and sell existing real property
mortgages.

15. Commercial, Investment, and Universal
Banking
 The banking system in the United States is divided into commercial and
investment banking.
 Commercial banks accept deposits, issue check-writing accounts, and
make loans to individuals and businesses.
 Investment banks help businesses sell their debt and equity securities to
raise financial capital.
 The traditional role of a commercial bank is to accept deposits from savers
in exchange for the bank's securities, which are then lent to the business in
exchange for the firm's promise to repay the loan.

16. Commercial, Investment, and Universal
Banking
 The Glass-Steagall Act of 1933 separated commercial banking and
investment banking in the United States during the Great Depression.
 The act was repealed with the Gram-Leach-Bliley Act of 1999, allowing
commercial banks to engage in investment banking and insurance
underwriting. Universal banking was permitted in the United States, as in
other countries.
 However, the 2007-08 financial crisis and the 2008-09 Great Recession led
to the need for more re-regulation of financial institutions, leading to the
Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

17. Commercial Banking and Investment
Banking Intermediation Activities

18. Functions of Banks and the Banking
System
 Depository institutions, including commercial banks, savings and loan
associations, savings banks, and credit unions, perform deposits, loans, and
issue checkable accounts, with the U.S. banking system performing five
functions:
1. accepting deposits
2. granting loans
3. issuing checkable deposit accounts
4. clearing checks
5. creating deposit money
 To the extent that commercial banks also perform investment banking
operations (i.e., are universal banks), they perform an additional function
 6. raising financial capital for businesses

19. Functions of Banks and the Banking
System
 Banks provide a safe place for the public to keep money for future use,
allowing individuals and businesses to spend their funds as they become
available.
 They also play a crucial role in the U.S. financial system by creating deposit
money and facilitating the payments process.
 Checks are cleared or processed in the U.S. by an efficient mechanism,
such as a bank employee depositing the check in the bank's deposit
account held at Last Bank.

20. Functions of Banks and the Banking
System
 There are three basic ways to clear a check through the U.S. banking
system:
1. Bank to bank
2. Through a bank clearinghouse
3. Through a Federal Reserve Bank

21. Traditional Methods for Processing
Checks through the Banking System

22. Traditional Methods for Processing
Checks through the Banking System
 Previous figure illustrates three ways of processing or collecting a check.
 First Bank can present the check directly to Last Bank, which pays and
deducts the amount from the deposit account. However, direct check
presentation is costly and time-consuming, so banks often use bank
clearinghouses.
 These clearinghouses handle transactions, reducing the deposit account
accordingly. Some banks also hold deposit accounts at correspondent
banks, such as Middle Bank, in distant cities.
 These correspondent banks either present the check directly to First Bank
or use the clearinghouse in their respective cities.

23. Traditional Methods for Processing
Checks through the Banking System
 Depository institutions with large checkable deposit accounts are required
to hold accounts with the Federal Reserve, responsible for their city or
area.
 The Federal Reserve Bank increases Last Bank's account and reduces First
Bank's account, reducing the checkable account balance by $100. The
banking system has the unique ability to create deposit money, expanding
the money supply.
 However, banks must hold a portion of their checkable deposits in the
form of reserves. The Fed regulates the money supply by setting reserve
requirements against checkable deposits and using reserve requirements
to set monetary policy.

24. Regulation of the Banking
System

25. General Banking Legislation
 A variety of laws have been passed in the United States to regulate the
banking system. Early laws focused on establishing, first, a system of
federally chartered banks and then a system of central banks.
 More-recent legislation has focused on deregulating banking activities and
improving the effectiveness of monetary policy.

26. The Savings and Loan Crisis
 Over 2,000 savings and loan associations were closed or merged between
the 1980s and 1990s due to mismanagement and greed, leading to
fraudulent activities by some of the institutions' officers.
 The S&L business has historically been difficult, as it borrows in the short
term and provides long-term mortgage loans.
 However, S&L managements failed to handle illiquidity and rising short-
term interest rate developments well. Deregulation also allowed S&Ls to
invest in high-yielding investments, leading to overbuilding and
insolvency.

27. The Savings and Loan Crisis
 Ethical mismanagement was a major reason for the collapse of the S&L
industry, with some S&L officers and managers engaging in fraudulent
behavior.
 There is no evidence to suggest that the S&L industry was run by unethical
individuals prior to the 1980s, but deregulation provided an opportunity
for unscrupulous individuals to pursue personal greed.

28. The Savings and Loan Crisis
 The Federal Savings and Loan Insurance Corporation (FSLIC) was bankrupt
in 1988 due to S&L failures. The Financial Institutions Reform, Recovery,
and Enforcement Act (FIRREA) was passed in 1989, terminating FSLIC and
forming the Savings Association Insurance Fund (SAIF).
 The Office of Thrift Supervision (OTS) took over S&L regulation from the
Federal Home Loan Bank Board (FHLBB). Congress created the Resolution
Trust Corporation (RTC) in 1988 to dispose of failed associations' assets.
The RTC closed in 1995.
 Commercial banks have faced similar challenges, but losses from
international loans, agricultural loans, and petroleum industry loans have
been more significant.

29. Protection of Depositors’ Funds
 During the late 1920s and early 1930s, bank "runs" led to the creation of
insurance protection laws for deposits at depository institutions.
 The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to
protect deposits in banks, followed by the Federal Savings and Loan
Insurance Corporation (FSLIC) and the National Credit Union Share
Insurance Fund (NCUSIF).
 The limitation on deposit account insurance increased over time, with
today's insurance being $250,000 per account. The Bank Insurance Fund
collects annual insurance premiums from commercial banks.

30. Protection of Depositors’ Funds
 The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) was enacted to address this issue, providing differences in deposit
premiums based on bank riskiness.
 However, deposit insurance will continue to exist, and changes are needed
to avoid future burdens on taxpayers. Suggestions include eliminating all
deposit insurance, reducing insurable deposits limits, levying higher
premiums on depository institutions, and implementing stricter regulatory
and supervisory control.

31. Structure of Banks
 Bank structure is characterized by how a bank is established, the extent to
which branching takes place, and whether a holding company
organizational structure is used.

32. Bank Charters
 A bank or depository institution in the United States must obtain a charter
from either the federal or state government, creating a dual banking
system.
 Federally chartered banks must include national in their titles and be
members of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
 State-chartered banks are not required to join either, but almost all are
covered by federal deposit insurance. About 8,000 commercial banks are
insured by the FDIC, with savings and loan associations and credit unions
also having charters.

33. Degree of Branch Banking
 State laws restrict commercial banks from operating branches away from
their main offices.
 Unit banking allows banks to have one full-service office, while limited and
statewide banking allow banks to operate branches within a
geographically defined distance.
 Branch banking systems are less likely to fail than independent unit banks
due to wide diversification of investments and the ability to offset local
economic problems.

34. Degree of Branch Banking
 However, opponents argue that the failure of a system of banks is more
serious.
 There are also conflicting views on the pros and cons of branch banking,
such as convenience for consumers, special advantages for the elderly, and
businesses satisfying large borrowing requirements through branch
operations.

35. Bank Holding Companies
 Banks can be owned by investors or held by a holding company, which
controls other organizations like one-bank holding companies (OBHCs) or
multibank holding companies (MBHCs).
 The 1956 Act and 1970 Amendments established authority, allowing
MBHCs to acquire banking-related companies and divest nonfinancial
holdings.

36. Bank Management
 Banks are managed to generate profits and increase wealth, but they must
also consider the interests of depositors and regulators.
 Bank managers must balance higher profitability objectives with
maintaining safety for depositors. Bank regulators ensure prudent
decisions between profitability and risk.
 Banks can fail due to inadequate liquidity or insolvency. Bank liquidity
refers to meeting withdrawals and debt repayments, while bank solvency is
the ability to keep assets' value above liabilities.
 Bank failure occurs when depositors or creditors are not paid, leading to
legal action.

37. International Banking and Foreign
Systems
 International banking refers to the practice of global banks operating in
multiple countries. European banks dominated this field until the 1960s,
when world trade expanded and multinational corporations increased.
American banks followed suit, opening offices in foreign countries and
establishing correspondent banking arrangements.
 Today, U.S. banks are actively involved globally, with major operations in
Europe, Asia, and Latin America. The International Banking Act (IBA) of
1978 provided a level playing field for all banks, restricting foreign banks'
interstate banking activities and allowing the Federal Reserve to impose
reserve requirements.

38. International Banking and Foreign
Systems
 The Foreign Bank Supervision Enhancement Act of 1991 strengthened
regulations relating to foreign banks. Some countries allow their banks to
engage in both commercial and investment banking, known as universal
banking.
 Germany is a universal banking country, with its largest banks participating
in both types of banking.
 The United Kingdom does not restrict its banks from engaging in both, but
some clearing banks have formed subsidiaries to perform investment
banking activities.

39. Thank you!