Banking System in America - Essay Example

? Banking in the United s of America is under the regulation of various governmenst and it has numerous liabilities, and an example is that from 2010, its liabilities amounted to 43% of the budget of the National government. In the United States of America, their banking system is disjointed with each state having its own regulator and rules that govern the operations of the state subject to the National Banking act of 1863 (Miller, 2010). However, depending on the operations of a bank and the agreements and charter it has signed, its operations may be regulated by various states in America and by the Federal government. In the United States of America, separate financial regulatory structures are in place to regulate the Insurance and financial securities aspects of the banking sector at the State and the Federal level and. these regulatory agencies are controlled by the Federal government in conjunction with the State governments. In the United States of America, there are laws that are enacted to prevent money laundering, anti-terrorism laws, laws that are meant to prevent usury lending, anti-fraud and privacy laws, and laws to promote lending of money to people with small incomes, all this fall under the banking sector. This paper discusses the performance of the banking industry in America. In effectively discussing this aspect, this paper will give the industrial characteristics of the banking sector in United States of America. It will review the pricing, efficiency and profitability of the banksin America as well as analyze environmental factors that drive the Banking sector in America and thereafter access there impacts. This paper seeks to answer the following questions, What are the industrial characteristics of the Banking sector in United States of America? How efficient is the banking system in United States of America in providing services to its people? What are the environmental factors that influence the performance of the banking system in America and what are its implications? The banking system in America is regulated by The National Banking acts of 1863 and 1864 and they are responsible for the creation of the banking system in the United States of America and any other legislation created, needs to be in accordance to this laws. This act promoted the development of a currency that could be used all over the United States of America and it supported withholding of bank assets which includes financial securities offered by the treasury of the United States of America. The National Banking Act recognizes the office of the treasury regulator whose role is to control the value of the United States currency and ensure that banks don’t collude to manipulate the American currency, the dollar. Banks in United States of America are characterized by the notion of relationship banking. This characteristic of the United States Banking system is for the purposes of maintaining profitability . Relationship banking refers to a situation where banks provide financial services through an intermediary. In the United States of America, banks practice these aspects of financial system. The main aim of banks in applying the principles of relationship banking is to enable them acquire information about a client to be used in the long run. These aspects of banking is important because it reduces the cost of gathering information about a client through many transactions and the information gathered, banks can use them to introduce other services in the economy and finally through this system of relationship banking, banks and their clients build a reputation through constant financial interactions and therefore facilitates negotiations of low cost loans. The American banking system is also characterized by emergence of private banks. American banking system allows expansion of commercial banks opened by individuals or companies. This was made possible by the requirements of The National banking act of 1863 which allowed competition in the banking sector. Due to this, there are many small banks in the United States of America, spread all over the states forming the Federal Government of America. The government of United States of America regulates these banks by imposing a minimum deposit that these bank’s need to put into the treasury. Through various banking legislations, these deposits are transferred to other banks operating in the United States of America. These reserves are always not available for circulation and are kept for emergency periods, like to counter inflation, etc. In recent times, American banking system has seen an increase in profitability partly due to efficiency in its management. In recent times, profitability in the banking sector of United States of America increased. Banks profits in the United States of America were high before the financial crises that hit the United States of America during the years 2007 to 2012. These profits were made in unstable economy and the banks did not use them to stabilize their capital base. During the period of 1994 to 2005, the size and market power of most banks in America increased (Miller, 2010). Their operational efficiency was superb and all this translated to better profitability however, efficiency is not the only determinant of profitability since concentration is the most important aspect of management which would increase the performance of banks (Langran, 2007). During these periods, banks focused on a particular aspect of the economy and came up with ways and means in which to fully capture the market, as a result their profitability got better. During the period of the financial crises, Banks were unable to make profits requiring bailout from the United States government; however, during the years 2011, Banks in America made profits. Federal Insurance Corporation of America led a survey to investigate the level of profitability in the American financial system and it came to a conclusion that there was improved performance and profitability (Hyman, 2011). During the financial crises of 2007, various banks in the American financial system restructured their operations in line with the American Government Stimulus Program. The American government lent to these institutions substantial amount of money which they managed efficiently; reducing loses arising from loans and the report by Federal Insurance Corporation estimates that the 7513 financial institutions operating in America, managed to get revenue of approximately 28 billion dollars and this was an increment of 38% as compared to the previous season of 2010. Due to increase in profitability, banks improved their levels of capital base to protect them against unexpected financial crises. During the period 2011, the banks that emerged most profitable are, Citigroup, Bank of America and JP Morgan. Despite increased profitability experienced in 2010 and 2010, many investors in the banking sector sold their portfolios in fear of a new recession therefore creating opportunities for new investors to enter the market and introduce new and efficient management policies in the banking sector (Hyman, 2011). In United States of America, banks offer various services and their pricing system is governed by American Federal and State laws. For example, they charge interest on loans, and the interest charged depends on the type of loans, the percentage of risks involved and the lending rates in the states in which they operate in. In American financial system, States such as California, Texas, New York, etc. have enacted legislations that protect poor people against exploitation by banks in terms of charging higher interests. Other financial activities in which banks in America engage in are, trading in stocks and government bonds, trading in the currencies and storing important documents for its clients. Pricing in these economies depends on the dynamics of the economy at present and other individual factors. For example, in February 2011, the Financial Select Sector traded at 17 dollars per share and sold as low as 11 dollars per share before gaining. Therefore, the pricing of this sector is dynamic and changes with time. There are environmental factors that influence the operations of Banks is politics. In United States of America, politics influences the policies bank enact,, though in limitation. For example, the Federal Reserve System of America makes final decisions regarding Banking system and services in America (Holland, 2010). The institution is managed by board of governors who are appointed by the President of United States of America and approved by congress. In regard to this, politics plays a crucial role in determining events in the banking sector. However, members of these organisation cannot be fired by the President or Congress unless a commission of inquiry is put in place to investigate their conducts, therefore they can formulate policies while ignoring the recommendations of the President and the congress. People selected by the President and Congress to sit in this board are experienced professionals in the field of economics, business and finance and therefore, good and effective policies concerning the American banking system are always enacted. However, there are some limitations in the sense that these individuals are always conservative and faithful to the views of the professional groups they come from. Therefore in enacting financial policies, they tend to enact policies that favor their lines of thoughts as opposed to the views of other professionals (Dombroski,1996). The Federal Reserve System has the responsibility of coming up with a monetary policy that may affect the operation of banks. However, the institution cannot enact financial policies that are against the Congress, since by a simple majority vote in parliament and senate, the institution can be disbanded. Since decisions of this organ affects all the banks in America, it can be said that banks in America enact their policies in regard to the ideological beliefs of the United States Congress (Well, 2004). In the long run, interference by the Federal Reserve System in the American banking system is useful. In case of financial difficulty, commercial banks in America can apply for bailout from this institution. This institution, with the help of United States Federal Government gives loans to commercial banks which have faced high level deposit withdrawals from their clients and therefore to prevent them from attaining bankruptcy status, they are bailed out. In view of this, banks therefore can aggressively implement policies that seek to increase their profitability knowing in mind that ion case they fail, they will get assistance from the Federal Reserve System (Brown, 1968). In conclusion, the banking system in America is complex with various factors affecting the operations of American Banks. Politics is the main influencer of banking policies in the United States of America. It is through political activities that institutions such as the Federal Reserve Commission were formed and they play a crucial role in regulating the banking industry in America. The National Banking Act of 1863 is not the only financial law enacted in America. In 1927, the McFadden act was enacted. This was a legislation meant to create equal competitive structures between State Banks and Nation Banks. Finally, the American banking system needs to be regulated in order to avoid the collapse of the American financial system as it nearly happened in the year 2007-2009 Bibliography Brown, W. J. (1968). The dual banking system in the United States.New York: American Bankers Association, Dept. of Economics and Research. Dombroski, P.J. (1996). Policy responses to globalization of American Banking System.Pittsburg: Pittsburg University Press. Holland, J. (2010). Fifteen Biggest Lies about the US economy. Hoboken: Wiley. Hyman, L.(2011). Debtor Nation, The History of America in Red Ink.Princeton: Princton University Press. Langran,R.(2007). Government, Business and the American Economy.Lanham: Lttlefield publishers. Miller, A. (2010). US Economy. Farmington Hill: Green Haven Press. Well, R.(2004). The Federal Reserve System: a history.Jefferson: Mcfarland Press. Read More