Banking Law Outline

I.             BANKING LAW – SUMMER 2013 – LAX
II.       Chapter 1 – Introduction & Overview
A.                     Introduction
·         Banking: commercial banks, savings banks, savings & loans, credit unions, money market mutual funds
·         Market Changes = legal problems
·         Challenge – keep abreast of feast paced developments in the law & marketplace
·         Opportunity – think creatively about how banking law is evolving in order to help clients protect their interests & avail themselves of new market opportunities
 
B.                     Historical Overview
·         American banking = quirky, explainable only on historical grounds
·         Also place current controversies in perspective
·          Bank of the United States
·         Before the 1st National Bank:
·         Currency: tangible medium of exchange that all sellers will accept in return for their goods & services
·         Specie: Currency with intrinsic value
·         Constitution of 1787 – several clauses to bring order to nation’s fiscal & monetary affairs
o   Federal Gov’t à “coin money, regulate value thereof, and of foreign coin.”
o   Forbade states to coin money, etc
o   Empowered federal government to regulate interstate & foreign commerce.
o   Silence on chartering a national bank à silence interpreted as implying Congress lacked such power
·         1790 – 4 chartered state banks: Philadelphia, NY, Boston, & Baltimore
·         1790 – Treasury Secretary Andrew Hamilton & Proposal for National Bank
o   Proposed Configuration:
§  Bank raise enough equity to support large circulation of bank notes
§  1/5 of shares purchased by government paying with its own bonds
§  4/5 of shares purchased by public: ¼ in specie and ¾ in government bonds – strengthening government’s credit by increasing demand for government bonds.
§  Private management with government oversight – structured to foster confidence in the bank’s notes
§  Charter good for only 20 years
o   Congressional opposition
§  James Madison regarded bank as unconstitutional
§  Agrarians viewed business corporations as evil instruments of an antidemocratic elit
§  Bank garnered 2/3 majorities in both houses of Congress: Northerners & Federalists in favor & Southerners & Republicans opposed.
o   1791 – George Washington signed the charter in to law
 
·            Second Bank of the US: 1816-1836
·         National bank died, but banking flourished
·         Operations continued in private hands after 1811
·         New system faltered, bank notes depreciated, note holders incurred losses & commerce suffered.
·         Renewed calls for national bank – Congress granted 20 year charter
·         McCulloch v. Maryland – sustained congressional power to charter the bank and precluded Maryland from taxing the bank.
·         Reprieved the bank from execution at the hands of state governments.
·            Free Banking Era: 1836-1863
·         Banking without a central bank after the fall of the 2nd national bank
·         Free banking – easy entry into banking without having to obtain a special legislative charter
·         Currency consisted largely of bank notes issued by state banks.
·            National Bank Act: 1863-1864
·         Free banking did not lend itself to helping the Treasury manage the federal government’s finances
·         Government withdrew from the banking system altogether in 1846 and established the Independent Treasury System
·         National Currency Act of 1863
·         Refined in National Bank act of 1864
·         1865 – 10% tax on state bank notes à sustained by Supreme Court in 1869
·         Federal government’s power to discriminate for regulatory purposes against an otherwise lawful industry.
·            From the Civil War to the Federal Reserve Act: 1865-1913
a)      Dual Banking System
·         By precluding to issue bank notes – checking accounts were created.
·         Borrower could transfer money to others by giving them checks instead of bank notes
·         Avoided the 10% tax
b)      Unit Banking
·         Unit banking – system of banking in which government restricts or does not permit a bank to open branch offices.  Encourage small, independent banks or banks that are theoretically independent banks or banks that are theoretically independent but are in fact owned by a bank holding company.  Unit banking largely confined to Midwest & southwest.
·         National Bank Act – 2 provisions
                                                                                                                                      i.      National bank to conduct its business at a single location
                                                                                                                                    ii.      Branching prohibited for national banks
                                                                                                                                  iii.      Did not affect state banking
c)      Market Segmentation
·         Thrift institutions arose, serving charitably rather than for profit making purposes
·         Savings Banks – help workers save part of their wages
·         Savings and loan associations – help people save money to buy homes
 
·            Federal Reserve Act
·         1907 Panic – stock market crash
·         Support for monetary reform
·         Federal Reserve System – Woodrow Wilson
·         12 regional Federal Reserve banks – modeled on bankers’ clearing houses
 
·            Industry Consolidation: 1914-1933
·         Integrated banks could compete more efficiently than competing unit banks
·         Gave