Thesis on "Federal Reserve Bank's Role in Bank Holding Companies"

Thesis 8 pages (2764 words) Sources: 2 Style: MLA

[EXCERPT] . . . .

Federal Reserve Bank's Role In Bank Holding Companies

Banking was very different before the Federal Reserve was created. Now, of course, there is a centralized banking system consisting of only twelve banks, but before, there was no centralized system to be found at all. The purpose of this paper is to discuss the differences between now and then and create an understanding of the many significant differences that were created by the Federal Reserve System, and also to look at the minor role that system plays in bank holding companies.

In 1908, the National Monetary Commission was established through Congress. They did this because there had been a large number of financial problems in the country, and people were panicking about money. The purpose of the Commission was to study the problems and recommend what should be done to fix them. This took a few years, but they finally agreed on a solution, and the Federal Reserve Act was signed in December of 1913. The act was not able to prevent the Great Depression from taking place, but it was able to keep inflation at a reasonable rate, and is still able to do this through controls and governance. Federal control over banking is still needed, since it helps to keep the rate of inflation realistic and to prevent the bank failures and suspensions that were a problem in the years before 1914 (Wells, 1987).

The Truth in Lending Law

Federal laws are extremely important in the banking industry. They not only regulate what banks can do, which it is important in itself, but they also detail the rights that consumers have if they think that they have been wronged or treated improperly by a bank or other lending institution. This is the main purpose that the federal laws have as they relate to banks, and consumers who have filed complaints would probably feel that the federal laws designed to protect them were of the most serious form of importance.

For example, these federal laws give consumers the right to withhold a payment on their credit card if they are disputing the charges. Federal laws also protect many people by making sure that credit reporting agencies keep accurate information on all consumers, seeing that consumers are not discriminated against based on several criteria such as race or sex, and striving to ensure that debt collection practices that are designed to be harassing to the consumer are prohibited by law (Pippidis, 1996).

The law which remains the topic of this particular section is often called Regulation Z. Consumers know it more commonly as the Truth in Lending Act. This Act was created to protect consumers from unfair credit practices at the hands of both banks and other lenders. Before this law came into effect, a lot of banks and lending institutions would advertise rates and then explain to the consumer when he or she arrived that it would be necessary to charge a higher rate because of some reason that was likely not legitimate at all.

Many consumers did not understand much about how banking and loans really worked, so they assumed that if the bank stated they needed to charge the consumer a higher rate, then there was an honest reason for that. Many consumers were cheated out of a great deal of money because of this. It is similar to "bait and switch" ideas that stores used to use when they would say they had an item for a certain price and then when the consumer arrived in the store, the salesperson would say they were out of that item, but they had something comparable at a higher price that the customer could see. Since the customer was already there, he or she often bought the higher priced item. This was also the case with lending until the Truth in Lending Act was finally put into law.

The Truth in Lending Act was originally created and put into law by the U.S. Congress back in 1968. It has been through revisions since then; and the most notable of these came in 1980 when it was reworked and included as a part of the Depository Institutions Deregulations and Monetary Control Act. The Truth in Lending Act was implemented by the Federal Reserve Board, and it deals only with credit as it applies to consumers, and not businesses. Credit that is given for businesses, agricultural purposes, or other commercial ventures does not come under Regulation Z, although that does not mean these businesses will not have any protection against unfair credit practices that are designed to cheat them (Legal, 2003).

As has already been mentioned, the Federal Reserve Board is the group responsible for implementing the Truth in Lending Act, and for ensuring that banks and other lending institutions remain in good compliance with the Act. Consumers who think that a particular institution is not in compliance should contact the Federal Reserve Board and have them investigate the charges. There are high penalties for noncompliance, including requiring the creditor to pay back double the amount of the finance charge if they are found to be guilty. They are also often required to pay the attorney's fees and the court costs to the consumer who they wronged. The consumer who feels he or she was treated unfairly has one calendar year to sue the creditor on a Truth in Lending Act violation (Legal, 2003).

The Federal Reserve Board is not the only agency, however, who can keep track of compliance with the Truth in Lending Act. For example, organizations like the Veterans Administration, Department of Housing and Urban Development, and Department of Transportation all have regulations for certain types of businesses. In the case of the Department of Transportation, there are certain Truth in Lending regulations which are applicable to the airline industry. The Truth in Lending Act does not give standard requirements as to how all creditors must compute their credit charges. What it does do, though, is to make sure that enough information is offered to the consumer from each institution to which they are applying so that they can determine exactly how much the credit will end up costing them (Legal, 2003).

As for which of the federal agencies regulate national, state, or state member banks, most of these are regulated by a Federal Reserve Bank that serves the particular district in which the bank is located. For banks which are not regulated by the Federal Reserve Bank in their district, they are regulated by the Federal Deposit Insurance Corporation, commonly called the FDIC (Bankers, 2003).

The Federal Reserve Bank

Before 1863 there were just two banks, and the government owned one-fifth of each one of them. This caused many political problems and resentments, and the twenty-year charters that these banks had were not renewed. Once this took place all banks were chartered by different states, and none went across state lines. Some were not even allowed to branch at all, and that held true within the same state. This made for a confused and disorganized system, and the banking regulations from one state to another state were often quite different. Because many banknotes ended up very far from their point of origin, they were sold at a heavy discount. Individuals who worked in the banking business tried to keep the country informed when it came to the prices of these notes, but there was a serious time delay between when the information was known and when other people heard about it. Dishonest people often took advantage of this delay (Rolnick & Weber, 1982).

Along the Eastern seaboard, it was the Suffolk Bank that operated in the Boston area. It had a clearinghouse to prevent the smaller regional banks from issuing too many banknotes, and it worked very well. It was generally just called the Suffolk System, and banks that joined it were guaranteed proper value for the notes that they collected, instead of having to take a much lower price for many of them. The only problem with this kind of banking system is that most banks had to hold state bonds that were equal in value to the banknotes they issued to consumers. The prices were often rapidly changing, and a lot of times banks did not really have what they needed to protect holders of all the notes that were out there (Rolnick & Weber, 1982).

A note guarantee system was finally established by six of the states in an effort to stop fears about banknotes that could not be redeemed at their face value and had to be sold for less (FDIC, 1953). If banks had enjoyed the freedom to hold the type of assets that they preferred to hang on to, and if they had been able to branch out in ways that they wanted to, this guarantee system very likely would not have even been necessary.

Bank Holding Companies

Eventually, a national banking system was established as a way to help fund the… READ MORE

How to Reference "Federal Reserve Bank's Role in Bank Holding Companies" Thesis in a Bibliography

Related Thesis Papers:

Federal Reserve System Essay

Federal Reserve System of the United States, established in 1913, is an independent agency that regulates and oversees the nation's banking system. The Federal Reserve System is known as the… read more

Essay 2 pages (628 words) Sources: 1 Topic: Economics / Finance / Banking

---

Federal Reserve System Term Paper

Federal Reserve System more commonly known as the Federal Reserve or simply 'the Fed' functions as the Central Bank of United States. It was established by the Congress in 1913… read more

Term Paper 7 pages (2752 words) Sources: 1+ Topic: Economics / Finance / Banking

---

Central Banks Dissertation

Central Banks

What criteria are, and have been, used to determine monetary policy. Examine the evidence for and against the view that central banks can control inflation. Should central bank's… read more

Dissertation 35 pages (10788 words) Sources: 15 Topic: Economics / Finance / Banking

---

Role of Treasury Is Central to the Success of Any Organization Essay

Role of Treasury

The role of the treasury is central to the success of any organization. The support functions of the treasury not only are essential for basic function of… read more

Essay 5 pages (1655 words) Sources: 8 Topic: Management / Organizations

---

Securitization and Bank Liquidity Term Paper

Securitization and Bank Liquidity

The objective of this work is to examine securitization and how it is currently used in the banking industry with a focus on real estate and… read more

Term Paper 17 pages (4798 words) Sources: 15 Style: Harvard Topic: Economics / Finance / Banking

---

View 100+ more related papers  >>