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Banking Law
University of Kentucky School of Law
Michael, Douglas

Banking Law

Introduction to Banking

History of Banking in the United States

i. First Bank of the United States was created in 1791
1. commerce at this time was concentrated in a few large cities
2. there was a need to have a central bank
a. to be treasury for national government
b. to issue notes/currency
3. the fact that it had a limited time period was typical of corporations
4. the bank was successful, however, during the 20 year period there was a political change in Washington
a. there were more maturing state banks that was in existence during this time and many believed that the national bank was unnecessary
5. the bank was not re-chartered, but the war of 1812 lead to a crisis in Washington and the need for a bank
ii. Second Bank of the United States was charted in 1816
1. this followed the crisis after the war
2. the bank was working well, but was still unpopular
3. Jackson vetoed the re-chartering of the second back and the charter again expired
iii. Free Banking Era 1836-1863
1. there was no national bank
2. banks existed under state law
3. at this point a lot of people thought they could easily get into the banking business
a. states were encouraged to write many general chartering statutes
4. during this era bank notes acted as currency
a. banks were often hundreds of miles away; thus you couldn’t go to the banks to redeem the banknote
i. you didn’t really know if it was worth as much as it said, especially if you had a note for wildcat banks
iv. National Bank Act 1863-1864
1. get charter to have a national bank
2. national banknotes were envisioned as superior because they would be uniform currency
3. national banks were only moderately successful
a. there was a tax placed upon state banknotes to make national banks more successful
b. this was not successful because the check system was adopted
4. You can have a national charter or a state bank today
a. National banks must have “national” in the title
v. Interregnum 1864-1913
1. Rise of dual banking/chartering system
2. Unit banking
a. Banks basically only had one location
i. The North never had branches
ii. The South had branches
iii. Banks in the West were individual banks
b. National banks could not branch
c. Banks remained small and local
d. Limitations on branching were not eliminated until 1994
3. Thrift Institutions (Savings Banks, Building and Loans, etc.)
a. Banks typically made money from lending money to businesses, but didn’t make personal loans
b. Most thrift institutions were mutual, which means that they were owned by customers
vi. Federal Reserve Act of 1913
1. national and state banking system was working well except for the occasional panics
2. What are panics?
a. The small banks in rural areas would deposit their money into big city banks because there are no local investments
i. The problem was that the flow of money would be low when it was needed, thus there was a panic (“run on the bank”) because there wasn’t any cash at the local bank.
3. The purpose of the act was to manage the country’s currency
4. The Fed is a system of 12 fed banks with their own districts
a. The depositors and customers of the fed banks are others banks
b. The fed bank would serve purpose that a bank could get cash when a bank needed it
c. Give emergency loans of member banks
d. Got a monopoly on check clearing
5. National Banks were required to join to be a fed reserve member
a. State banks could join if they wanted to
i. Most assumed that state banks would want to join
ii. Most state banks didn’t join because they didn’t want the additional regulation that came along from being a fed member
1. most states are still not members
vii. Interregnum 1913-1929
1. Branching: McFadden Act of 1927
a. This was the rise of branch banking (this was a reaction to branch retailing)
b. States began writing legislation to allow branch banking
c. A national bank may have a branch any where a state charter could
2. Chain banking or Bank holding company
a. This evolved as corporations were allowed to own stock in

market interest rates, so it doesn’t have opportunity to adjust its assets by selling mutual funds—this risked the thrifts going out of business
4. congress tried to let the thrifts survive by giving them more powers
a. They were allowed to give more than just mortgage loans
b. Allowed Savings and Loans act more like banks
i. Eventually allowed to offer checking accounts
5. The insurance funds that were to cover if banks (S & L) went began to run out of money
a. The S & L insurance fund ran out of money
b. The government bailed out the insurance funds
i. Bailed out savings and loans using tax dollars
ii. Congress demanded more strict operations of the savings and loans business in exchange for being bailed out
iii. Office of thrift supervision was put in the treasury department
iv. Insurance was run by the FDIC
v. Remaining enforcement authorities
xii. The Bank Crisis of the 1990s
1. there were tons of business failures, thus there were bank failures
2. the FDIC began to run out of money because enough banks failed
a. Congress believed a lot of banks failed because the FDIC didn’t intervene soon enough
b. Outlined things banks had to do when the banks capital reached a certain low point
xiii. The assault upon ancient citadels
1. Branch Banking
a. ATMs broke down the barriers in place for bank branching
b. Part of the Bank holding Act said a bank holding act couldn’t hold a bank in another bank unless another state said the holding company could
i. By the late 1980s, many states began to create laws that allowed bank holding companies to open up banks in other states