Regulation and control of financial institutions

FINANCIAL INSTITUTIONS IN THE U.S.A.

Businesses that distribute or deal in money are called financial institutions. New institutions that meet new financial needs are appearing almost every day in the USA. The most familiar institutions are commercial banks, savings banks, savings and loan associations, mutual savings banks, credit unions, investment banks and so on.

A commercial bank is a privately owned profit-making corporation. It serves both individuals and businesses by offering checking and savings accounts, loans, and credit cards. It also deals in some brokerage, insurance, and financial advice.

The commercial bank is the most important source of short term loans for businesses. Sometimes the borrowers pledge collateral to back up the loan. Such loan is a secured, loan. Companies with a good financial position are given the prime rate of interest which is the lowest commercial interest rate.

The commercial bank offers its customers accounts of two types: demand deposits and time deposits. A demand deposit makes the money in it available to depositors immediately, while a time deposit requires depositors to leave their money with the bank for a stated period of time.

Most banks offer their customers various savings certificates, called certificates of deposit. Savers may put their money into thirty day, six month, or two and a half year certificates. The highest interest is paid to the customers who deposit their money for a longer period.

Banking services are not free and banks charge fees for them. Many banks assess a service fee if an account balance falls beneath a particular minimum, such as $200.

There are two types of commercial banks. A national bank is chartered by the federal government. About one third of all commercial banks are national. A state bank, which is smaller than a national bank, is chartered by an individual state.

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There is a central bank for all states in the USA called the Federal Reserve System (“the Fed”) which controls various financial institutions. The government and member banks jointly own the Fed. All national banks are members of the Fed. Most of the state banks do not join the system. Member banks have a right to obtain funds by borrowing from their district reserve banks, to use various services which the system provides, to obtain financial advice and assistance and to receive a dividend on stock that the district bank owns.

The Fed controls the money supply and prevent the economy from crisis. Its most powerful tool in controlling the money supply is the reserve requirement. It is the percentage of all deposits that a bank must keep on hand at the bank or on deposit with the Fed. If the Fed requires banks to keep 20 percent of all funds on deposit, then they can loan out the other 80 percent to individuals and companies.

The Fed also sells and buys governmental securities (bonds). When it buys government securities, it increases the money supply by putting more money in circulation. When the Fed sells government securities, it decreases the money supply.

The Fed is “the banker’s bank” because it lends money to member banks. The interest that the Fed charges is called the discount rate. The discount rate is an effective monetary tool. The Fed uses it to “fine tune” the economy and to influence the rate at which banks lend to their customers. The Fed also uses a set of credit controls. It establishes the margin requirements on credit purchases of stocks and bonds. The margin is the percentage that credit customers must pay in advance.

Besides its monetary functions, the Fed also clears checks by moving them from the bank where they were deposited to the bank on which they are drawn. The check travels electronically from one bank to another through the Federal Reserve Bank.

The government also insures deposits ill case of bank failure. The Federal Deposit Insurance Corporation (FDIC) requires the banks to give customers information about their asset quality, capital and earning. This prevents customers from doing business with banks that are in trouble.

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