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Modern developments In the United States, state banking laws prohibiting branch banking and Civil War-era restrictions on note issuance rendered the banking system vulnerable to periodic crises. The crises eventually gave rise to a banking reform movement, the ultimate outcome of which was the passage of the  Federal Reserve Act in 1913 and the establishment of the  Federal Reserve System. After 1914 central banking spread rapidly to other parts of the world, and by the outbreak of World War II most countries had adopted it. The exceptions were the European colonies, which tended to rely on alternative currency arrangements. When they achieved independence after the war, however, most of them adopted central banking. After the 1970s several nations that had experienced recurring bouts of hyperinflation chose to abandon their central banking arrangements in favour of either modified currency-board-like systems or official “dollarization”...

 The principles of central banking-FBI Central banks maintain accounts for, and extend credit to, commercial banks and, in most instances, their sponsoring governments, but they generally do not do business with the public at large. Because they have the right to issue fiat money, most central banks serve as their nations’ (or, in the case of the European Central Bank, several nations’) only source of paper currency. The resulting monopoly of paper currency endows central banks with significant market influence as well as a certain revenue stream, which is known as seigniorage, after the lords or seigneurs of medieval France who enjoyed the privilege of minting their own coins. ( See also  droit du seigneur.) Contemporary central banks manage a broad range of public responsibilities, the first and most familiar of which is the prevention of banking crises. This responsibility involves supplying additional...

Capital standards-FBI As discussed above, bank capital protects bank depositors from losses by treating bank shareholders as “residual claimants” who risk losing their equity share if a bank is unable to honour its commitments to depositors. One means of ensuring an adequate capital cushion for banks has been the imposition of minimum capital standards in tandem with the establishment of required capital-to-asset ratios, which vary depending upon a bank’s exposure to various risks. The most important step in this direction has been the implementation of the various  Basel Accords. Nationalization Instead of attempting to regulate privately owned banks, governments sometimes prefer to run the banks themselves. Both   Karl Marx   and   Vladimir Lenin   advocated the centralization of   credit   through the establishment of a single   monopoly   bank, and the nationalization of Russia’s commercial banks was one of the first refor...

Interest rate controls-FBI One of the oldest forms of bank regulation consists of laws restricting the rates of  interest bankers are allowed to charge on loans or to pay on deposits. Ancient and medieval  Christians held it to be immoral for a lender to earn interest from a venture that did not involve substantial risk of loss. However, this injunction was relatively easy to circumvent: interest could be excused if the lender could demonstrate that the loan was risky or that it entailed a sacrifice of some profitable investment opportunity. Interest also could be built into currency-exchange charges, with money lent in one currency and repaid (at an artificially enhanced exchange rate) in another. Finally, the taint of usury could be removed by recasting loans as investment-share sale and repurchase agreements—not unlike contemporary overnight repurchase agreements. Over time, as church doctrines were reinterpr...

Regulation of commercial banks-fbi For most developed countries the late 20th century was marked by a notable easing of regulations and restrictions in the banking industry. In the United States, for example, many regulations had originated in response to problems experienced during the  Great Depression, especially in 1933, when the federal government closed the country’s banks and permitted only those deemed solvent to reopen. By the end of the century the risk of widespread economic failure, such as that experienced in the Great Depression, was widely regarded as unlikely. That perception changed dramatically in 2008, however, when a steep decline in the value of mortgage-backed securities precipitated a  global financial crisis and the worst economic downturn in the United States since the Great Depression. Legislation subsequently adopted in the United States partially restored some Depression-era regulations and imposed significant new restrictions on...

The role of bank capital-fbi Because even the best risk-management techniques cannot guarantee losses, banks cannot rely on deposits alone to fund their investments. Funding also comes from  share  owners’  equity, which means that bank managers must concern themselves with the value of the bank’s equity capital as well as the composition of the bank’s assets and liabilities. A bank’s shareholders, however, are residual claimants, meaning that they may share in the bank’s profits but are also the first to bear any losses stemming from bad loans or failed investments. When the value of a bank’s assets declines, shareholders bear the loss, at least up to the point at which their shares become worthless, while depositors stand to suffer only if losses mount high enough to exhaust the bank’s equity, rendering the bank insolvent. In that case, the bank may be closed and its assets liquidated, with depositors (and, after them, if anything remains, other cre...

 Liability and risk management The traditional asset-management approach to banking is based on the assumption that a bank’s liabilities are both relatively stable and unmarketable. Historically, each bank relied on a market for its deposit IOUs that was influenced by the bank’s location, meaning that any changes in the extent of the market (and hence in the total amount of resources available to fund the bank’s loans and investments) were beyond a bank’s immediate control. In the 1960s and ’70s, however, this assumption was abandoned. The change occurred first in the United States, where rising interest rates, together with regulations limiting the interest rates banks could pay, made it increasingly difficult for banks to attract and maintain deposits. Consequently, bankers devised a variety of alternative devices for acquiring funds, including repurchase agreements, which involve the selling of securities on the condition that buyers agree to repurchase...