Current state of the U.S banking industry - Research Paper Example

GENERAL OF U.S. BANKING INDUSTRY Nature of the Industry Banks in U.S. play an important role in safe guarding money, providing loans, providingcredit, service payments like debit cards, checking accounts and cashier’s check. They may also provide products of insurance or investment.Goods and servicesBanking consists of depository credit inter-mediation and Monetary Authorities-Central Bank. The Federal Reserve in the U.S. plays the role of a Central Bank and it thus supervises the state’s supply of money and also other matters like international reserves, domestic banks, holds reserve deposits and controls the central banks of other countries.

It is also responsible for issuing the dollar (J. P. Morgan 12).Industry organizationBasically the US is dominated by three types of banks and these are; Commercial banks, credit unions and savings and loans associations. These institutions present a full variety of services to persons, companies and governments. Commercial banks vary in size ranging from global to local and even small society banks with ATM locations. lately, online banks which presents services by means of the internet have surfaced (J. P. Morgan 43).

Savings banks and savings and loans association Are also referred to as thrift institutions, and are the next major faction of depository organizations. They were primarily established as society footed organizations to fund mortgages for the community. Eventually, the difference linking savings banks and commercial banks has vanished.Credit unionsCredit unions are another form of a depository organization. They are created by a group of persons who share a general interest. Loans and savings accounts are only limited to associates or members.

They are not meant to make profit and they are headed by members who are elected as the board.Federal Reserve BanksThese are government organizations dealing with numerous economic services like controlling banking business, making and applying the state’s monetary plans. They use monetary policies to encourage financial development and border inflation. During phases of slower financial activity, the Federal Reserve might augment the supply of money by buying government securities plus additional assets.

It as well encourages financial enlargement by lowering interest costs for loans. It may fight inflation through sale of securities and increasing interest rates (Zhang 45).Interest from advances is the main cause of returns for the majority banks. Money loaned by banks comes mainly from customer plus company deposits. These deposits frequently make interest for the proprietor by ways such as online payments cheques. The U.S. government regulates the money in banks by insuring through Federal Deposit Insurance Corporation (FDIC).

Nationalization of Banks;On January 26 2009, an article by David E. Sanger says that White House is playing around a delicate issue. He asked the president if he was prepared to nationalize the banking system (J. P. Morgan 33).Swedish bank as an exemplar for AmericaSweden had passed a direct levy on banks to give for their own bailouts, alike to president Obama’s suggestion of improving bailout money (Jan 22, 2010).Conversion of bank bailouts to equity share by the U.S governmentThe Obama administration officials say the approach will help allow the U.S.government shore up the nations banking systems without any financial aid from the congress (April 20 2009).

Enlisting small investors in bank bails outThe Whitehouse plan would give tax payers an opportunity to benefit from the bank bailout with risks (April 9 2009)Cleaning a dirty bankPublic-private investment agenda by the treasury will put in little resources to the banks. There is an additional easy, just and sound method to recapitalize a broke bank Obama’s capitalismWhat Obama administration is doing is far much worse than nationalization. It is privatizing of gains and sharing of losses (April 1 2009).

Major Problems Facing Banks TodayCompetitionMost banks are currently facing fierce competition from financial markets according to Chinese official. For instance, the competition between Wells Fargo (WFC) ands its rival banking Titan Citi group(C) to win a deal in a stock deal brokered by Federal Reserve now valued at $12 billion. Loan risksSome banks may lend out non performing loans. Bank charges on loans in the second quarter hit $26 billion- three times the same period in 2007. Blind investmentSome banks may invest in non financial sectors which will ultimately have no returns.

Taking TARPThe United States government tried so many ways to respond to the credit crunch of 2008 that threaten to paralyze one of the world’s strongest economies. TARP simply means Troubled Asset Relief Program. The Obama administration responded to the salutation through various means like recapitalization of the banking sector to allow banks recover their losses. The lowering of federal fund rate will help improve bank margins and raise the profits. However the low rates of 1% were not enough considering the losses that were likely to occur to the banking sector(Blundell wignall,2008).

Also banks were suppose to cut dividends and come up with new capital from private sectors to repair balance sheets.On the second half of 2008 the economic situation further deteriorated and the government had to move swiftly to bring the situation under control. This was done by injecting a whooping $ 700 billion into the economy (also known as the economic stimulus package) by the TARP authorities in the treasury. Already $ 250 billion has been directed to recapitalizing the banking sector.

This will help harm the crisis in the U.S. banking sector.Concern facing banks today;The crisis is likely to cause a wave of bank merges and fire sales. Foreign banks are already hunting for good deals. Potential acquires include Toronto, Scotland Royal and London HSBC bank and Banco Santander in Madrid. They have all bought U.S. banks recently. The merger trend is likely to strengthen the U.S. economy. The deal between Wells Fargo and Wachovia will create a super bank of $1.4 trillion asset base and 48 million customers’ link rivaling the bank of America and JP Morgan Chase and City group as well as thriving of small local banks with niche markets (J. P. Morgan 23).

Works citedJ. P. Morgan. U.S. “Mid- and Small-Cap Banks Failure Friday Rundown: only 1 Bank Fails Post-Holiday Weekend; First Failure in South Carolina; YTD Failures: 42.” North American Equity Research, (12 April 19, 2010).J. P. Morgan. U.S. “Mid- and Small-Cap Banks: FDIC Extends Unlimited Deposit Insurance; We See Three Key Implications for Banks – ALERT”. North American Equity Research, (13 April, 2010).J. P. Morgan. U.S. “U.S. Mid- and Small-Cap Banks FDIC Primer: Looking at the Value Creation from FDIC-Assisted Deals and Key Stocks to Own.

” North American Equity Research, (22 April, 2010).Zhang, Zhaohui. The impact of bailout on U.S. bank creditors equity values: an event study of South Koreas caseTexas Tech University, 2000.