Industry sign banking florida rfp myself
okay last time we were talking about a little bit of this history of banking and part of the history of banking gets into the idea of regulation if you remember we talked about the McFadden act what year 1927 that was a year babe hit 60 this is what officially broke our country up into making basically banking markets at the state level or smaller and what gave us thousands of different banks we talked about that a little bit and how that this prevents banks from achieving economies of scale large scale operations sometimes are more efficient lower cost and smaller scale operations so to achieve economies of scale bigger banks would be better and that's not about everything but it is some activities and it also prevents banks from enjoying what geographic diversification you know when I talk I cannot spell that is to say diversifying risk into various geographic areas okay I believe where we stopped last time is talking about the glass-steagall Act which was enacted what year 1933 what had happened was this the the Great Depression started in 1929 but really started off as not such a terrible thing it was a recession and then it just got worse and worse and worse and what happened during this period 29 to 33 was about one third of all banks failed okay and so and there was not there was not a lot of regulation there was not a lot of data collection there was not a lot of economic analysis and so basically what happened I mentioned to you last time is people just kind of made up their own story on what happened and so one story that was very popular then was you know these banks failed because they were reckless and sometimes fraudulent and you know just dishonest and just a bunch of a bunch of bad characters and so we've got to regulate them and so and there are undoubtedly bad characters in any group except for college professors but almost any occupation almost any career you're gonna find some people that are breaking rules but the point that I think most economic historians looking back on would today say you know that was not mainly the problem we've seen this same type of situation occur at various times what happened here and what knocks one third of the banks out or any large number of banks is basically a panic that sets in when people are worried about hey or my deposits safe I think we all know this that when you put money in the bank you make a deposit they don't just throw all that money in the vault lock it up you know put a guard on it and wait for you to come get it what they will do is take most of that money and make a loan and they're holding fractional reserves so most of us know that when we give our money to Bank they just hold it a little and most of it's gone and so what happens as a result of those fractional reserves is when banks start failing and you get it's not just any small Bank but you get kind of a large Bank to fail and then people that are doing business that other banks thank gosh I hope my bank doesn't fail because they're just holding some fraction most people don't know the fraction but just some fraction of my money is actually being held by the bank if they close their doors I won't get my money back and so that's what happened during this period was a few notable banks failed and then just a panic set in and so people then said you know as far as I know my bank's not doing anything wrong but I ought to go down just to be safe rather than sorry I'll get my money back and so if banks are holding 10% of our deposits on reserve and 11 percent of us get the idea I'm gonna go get my money back we go down there we get in line we ask for our money the bank's taken the money out of the vault and paying everybody what they owe and finally they get to the end of the cash and then they say sorry we had no more and that's what happened back in 1930 31 32 33 is bank stood to say sorry I have no more and it wasn't because they were fraudulent it's because of fractional reserves okay and it doesn't make any difference if you had 50 percent of fractional reserve if 51% of the people show up and I mean if you have a bank that is managed perfectly does not take any significant risk at all nevertheless if people show up and they want their money back and you have fractional reserves you run out of cash now in theory and we don't want to get too far talking about the Federal Reserve because we'll talk about it later but in theory the Federal Reserve a set up to stop that that if people go down to the bank and say I want my money I want my money the banker could call up the Federal Reserve and say hey our customers want a lot of cash I want to borrow some from you and the Federal Reserve and theory will put a bunch of cash in an armored truck and drive it out and say here you go the only problem was the Federal Reserve wasn't playing along it wasn't doing its job in 1930 31 32 33 and so when those bankers call the Federal Reserve says ah this will blow over well it didn't it blew over the banks failed what do we have today well we'll come back to a part of glass-steagall I told you about the part of preventing banks from getting into other activities but part of glass-steagall was deposit insurance and so today we say oh if my bank fails I'll still get my money anyway back to our story so there was this idea going around at a 1933 and later well before 1933 actually but the idea was going around that these banks are failing because they were just manage because they were taking improper risk because sometimes they were crooks just managing the banks okay and so that idea was there as I say without a lot of good reason and so then what happened was it yet a new president elected who was the president anybody 1932 Great Depression new President Franklin Roosevelt thanks to those of you who don't study your history 1932 Franklin Roosevelt's elected he takes office in 1933 and within just I don't know a hundred days or something like this maybe you remember reading about this but they basically passed one new law after another this whole New Deal legislation and they created Social Security and did a lot of other things in a short period of time one of the things they did in that short period of time is a quote fixed the problem with banks and part of that was Deposit Insurance and part of it was to erect something that has been called a firewall around the banking system and the firewall is basically this we've got our banks here and I don't mean to say a bank but just banks and then the idea the firewall is we're just gonna create a wall around banks and just say look if you want to be a bank be a bank if you want to do something else for example insurance or something else I mean any number of different activities if you want to manufacture cars if you want to do something else that's not banking you just go do that something else but don't do banking those are different businesses and so here's the firewall and so the term I used last time was I said that glass-steagall said that these banks could only engage in activities that are closely related to banking and in those days closely related to banking mainly meant taking in deposits and mate and making loans okay and also maybe buying some government bonds and things like this but anyway taking into positives making loans and if you want to do these other things I just mention insurance but investment banking brokerage what a long list of activities the answer is no okay problem with this is what banks can't achieve diversification before we were talking about geographic diversification now this is product diversification right what you go to the Walmart store you see all the different things they sell what if all Walmart could sell would be just I don't know pick something out like toys and then if there's a downturn in the toy business Walmart or be in financial trouble but Walmart instead has all these different departments and so if there's a downturn and toy sales maybe something positive has happened over an automotive department or over in a grocery store Bartman or someplace else Cosmetics right well what we're saying to banks is you just do this one thing and then that's it and if there's a downturn in that one thing then gosh that could be something that imposes a lot of risks on that banking company another thing they can't achieve economies of scope before we talked about economies of scale economies of scale are efficiencies that occur when you get bigger okay and that was a problem of the McFadden act economies of scope are economies or efficiencies that you achieve by having operations in related activities but not the same activity okay and one of these may be for example marketing another may be analysis what you have is insurance companies investment banks banks they're conducting a similar type of analysis wouldn't it be nice if you could hire some accountants and economist and different financial experts and so forth and let them analyze issues for you financial issues and then share that information within the company and there would be economies that we you would achieve or efficiencies if you could have one economist or financial expert or accountant and share this knowledge with different lines of business well we're saying no you can't do that if you want that analysis you hire that person if you want the analysis you hunter the person potentially we're paying twice as much what about it could be that the same people the same customers I'll use the same little picture maybe the same customer wants to buy insurance as wants to do banking business wouldn't it be a convenient thing if you go into this customer comes into the bank says hey I want to do a little business today and the banker says hey do you need insurance for your business or if this person goes to buy insurance and they're signing up for insurance casualty insurance businesses have to buy insurance on their buildings and things like this hey you're buying interest do you need a bank business long cuz we've got a bank well you can't do that you just go do business with an insurance company go do a business or the bank those are separate activities there's no cross marketing to these okay so anyway it's the economies of scope that this works against we don't want we won't allow banks to achieve these savings these economies of scope okay so what we didn't get diversification we didn't economies of scale because of McFadden act we didn't get diversification we don't get economies of scope because of glass-steagall okay so that's kind of the situation that we faced up to 1933 1927 1933 we get these laws let's talk about history post-world War two by the way the economy changed aid a lot between 1933 and post-world War two 1946 along in their late 40s early 50s and I don't know how it occurs to you in your own mind but really we're talking about a period that's not so long if we just say from 1933 to 46 13 years if we say 1933 to 53 20 years and I know 20 years is a long time compared to the age of a college student but it's not so long it's not forever and so here we are at the very bottom of the Great Depression a lot of people out of work not it's an industrial economy but the economy is not operating on now scale we get into World War two crank up all this really heavy manufacturing I mean you know we're making airplanes and ships and huge numbers supplying the world that shouldn't say the world but everybody who's our allies with a lot of food and clothing and things like this the war is over and a very good part of Europe and a very good part of Asia big part of Europe and Asia are just bombed out and so their industrial base is gone the war is no longer going on but the United States still has this really powerful economy and people around the world if they want manufactured goods if they want sort of advanced products they came here right and I mean we were dominant in the world economy so we go from a situation where boy the economy is not doing much until early 1950s just preeminent in every way by the way we had had the leading economy in the world for a long long time but here it's just dominant it's like there was not any competition anymore because here's Europe and here's his major Asian cities and so forth just been bombed into oblivion people just living in poverty and so now it's not a close competition I don't know we weren't measuring a lot of those numbers at those sons I'm not be surprised if half of the gross domestic product of the world wasn't being produced in the United States and today it's more like 20 25 percent so anyway we get this really advanced industrial economy after World War two and so these things are getting in the way McFadden act glass-steagall Act they're getting in the way of what bankers want to do now the what's happening is there's all sorts of prosperity in the United States populations growing rapidly we know about the baby boom generation started in 1946 so populations growing up in built everyplace big businesses small businesses everywhere the banking industry is wanting to grow along with the economy and here we have McFadden and a glass-steagall Act that says no and so bankers are saying what are we gonna do to get around this because then it's what they are what they do not do is say oh that's what the law says okay what they say is that's what the law says we have to obey the law but is there some way of obeying the law and still getting what we want and what they're looking for is a loophole how where is there a loophole is there a way to get around these rules and so let's talk about this one the McFadden Act issue is this no branching there's a bank holding company movement I mentioned this already a bank holding company the law says this banks cannot branch across state borders and a lot of state said you can't have a branch within your county that would be a unit vacant state or you can just have a few branches a little bit of branching States what are we gonna do about this well here's what happened at first we had a bank and maybe out here are some shareholders that owned not maybe but for sure that owned that Bank and so let's develop a new kind of company and the company wasn't this idea didn't come up after World War two the idea was around before but didn't expand much and so at the World War two hey here's a really good application of the bank holding company idea we'll set up a bank holding company will tell these shareholders they don't own the bank they own the bank holding company and then the bank holding company owns the bank okay for example there's Commerce Bank was a banking company in Kansas City and so they set up a company in also Kansas City Commerce Bank shares and Commerce Bank shares is a bank holding company also Kansas City okay and so now what now what as they say hey state laws don't allow us to open branches around the state US banks but they don't prevent bank holding companies from owning separate banks so let's go over and have a bank in st. Louis let's have another bank and I don't know Joplin and you just go down the list and they had way over a hundred banks and Missouri is this legal yeah because the law says you cannot have branches around the state you're limited to how many a home office and how many branch offices and by the way each one of these could have it depends on the year we look two or three branches but that's it and you can't open branches in the next county over or a hundred miles away or any time yeah okay we'll open banks separate banks each one will get its own Charter its own license to operate this would be called Commerce Bank of Kansas City Commerce Bank of st. Louis Commerce Bank of Joplin Commerce Bank of Springfield Commerce Bank of Columbia and so forth separate banking companies and then what they said is this hey if we need to train new employees what we can do is we'll hire some tellers and maybe if this bank will get a teller and this one will get to this one we'll get three and then we'll train them all at the same time and achieve some economies of larger scale business we'll get a computer and provide Computer Services the one hundred banks in the state we'll make a commercial and a commercial will be the same and we'll show it all over the state and then all they'll
hange on the commercial is it'll say Commerce Bank you know in some slogan in some picture and some generic kind of a building and then all they'll do is say Commerce Bank and then add the words of Joplin of Columbia of whatever but it's all the same commercial and so what they're doing is they're finding ways to achieve these economies of scale and yet comply with state law I think Commerce Bank was late to do this but there were some other banks that were actually jumping over there was a boatman's Bank in st. Louis and boatman's Bank jumped over the state border into Illinois okay and they got around the McFadden act very clearly by going into Illinois was that legal it was not legal for boatman's bank to do that but the bank holding company that owned boatman's could do it and acquire a bank over in Illinois and other states and so this is a bank holding company movement what happened let me do a little erasing here what happened well we got the Bank Holding Company Act 1956 and it said you know up until now it didn't say it exactly these words but up until now bank holding companies are just formed and do whatever they do but now we're gonna start regulating bank holding companies before you can start up what is a bank holding company it's a company that owns a bank by the way this is really just a shell operation this bank holding companies not doing anything it's just a legal entity its function is to own a bank okay so anyway what they said is if you want to set up a bank holding company you've got to register with the Federal Reserve and you've got to comply with the rules the Federal Reserve has four bank holding companies and the fur thing that you cannot do is get around the McFadden act by having a bank holding company no bank holding companies jumping over those state borders okay but bank holding companies are still very popular and where they were most popular was this is after 1956 they were most popular in states with unit banking and limited branching because n states with unit banking lumber branching we still have these laws that prevent branching or limit branching and how do you get around that bank holding company by the way this Act gave the Federal Reserve a whole new role and that is the Federal Reserve is the regulator of bank holding companies and still is today okay so the Federal Reserve is a bank regulator of member banks so-called nipper banks and the Federal Reserve makes monetary policy and does a lot of other things but it also regulates bank holding company since this time so anyway this was taking place starting in the 1950s 1980s we got another movement the non-bank bank I think I may be mentioned that the other day here's what happened banks went to the Federal Reserve the Federal Reserve that was regulating bank holding companies and said what do you mean exactly a by a bank you know and you're all gonna see this Sunday cuz you'll have kids and the kids will come in ask you some question you know I'm just saying that's kind of a curious question I wonder what that means that means that kids getting ready to fool you okay what do you mean I can't go on the other side of that Street and then you say you know don't go over there okay no I didn't go to the other side I just got out halfway into it you know that sort of stuff anyway so the banks go to the the Federal Reserve as their regulator a bank holding companies I say what do you mean by a bank and the Federal Reserve said you know it's a company that accepts demand deposits mace commercial loans and the banks oh that's right that's right I'd forgotten what you meant by that and then what they did is they some of them got rid of demand deposits they said we'll take your savings account but no more checking deposits no and other banks kept in taking savings and checking the deposits and stopped making commercial loans but then they said we're not banks because a bank the Federal Reserve said on a bank yes the except demand deposits make commercial loans we don't do those two things yes we accept demand ones we don't make commercial ones or in yes we make commercial loans and we don't have said demand deposits just savings deposits we're not a bank nevermind that they had bank charters we're not a bank so since we're not a bank let's jump into that next date so then like a Florida banker jump over into Georgia say look at us you know it's like I'm over here you know I'm in Georgia I'm not a bank you can't stop me and the Federal Reserve see mm-hmm stop it this went on for a to three years and the Federal Reserve got very upset about this they're getting away with murder and so then the Federal Reserve went to the Congress and said pass a moratorium and the Congress said okay and they passed a moratorium and they said that's the end of that and the banker said boy we had something going there for awhile okay and 1982 there was something called the Goron saint-germain act here's what was taking place there was a same as a loan crisis at this point and the banking industry is going through tough times too by the way we had two recessions one in 1981 and that one in 1980 stock just ended very quickly when the Federal Reserve started throwing money into the economy and then we went back into the recession in 81 so there were two recessions one in 1980 and then another one 81 82 and they were so close together it looked like one bad recession and so what happened was in 80 through 82 banks are not doing well the number of failures was up but there was a an actual crisis in to save his loan industry and so lots of banks lots of savings loans were found I mean not dozens but hundreds and hundreds of savings and loans were failing and so the government was running an insurance plan not only for banks but another one for savings loans for banks we had the FDIC and for savings alone Zeff slic and so a lot of banks a lot of savings Owens failing and these insurance funds are being depleted and so what the Congress did and there was more to the law than the Goron saint-germain by the way named after two people a senator and a congressman this congressman in my opinion was a bad man for reasons that we won't go into here but I mean it was all about his performance of his job and so forth anyway Senate Finance Committee House Banking Committee Chair chairs chairpersons and so very often that's how these laws get named McFadden a glass-steagall and so forth so anyway what this laws did was they try to say how could we save some money for these insurance funds and then what they said is this if we have a bank or a Savings and Loan and it is failing it's about ready to go under and we know that we're gonna be over here into this insurance fund to deal with this problem pay off depositors and so forth if we've got a bank or a Savings and Loan failing before we close it down and pay him off what we will do is we'll turn to the rest of the banking industry and say hey if you want to buy this bank or savings alone it's failing we'll let you do that even if you're crossing the borders of state borders even and it's not violation anymore because they change the law but in violation of the original McFadden act we will let you cross those borders if you will take on this obligation of the federal government or the FDIC FSOC yes sir they would auction them off they would first say who's interested in maybe five banks ten banks that say I'm interested and then what they do is bring these bankers in let them see the books and basically let them bid we don't want to get into this too much right now but when a bank is failing it's got some bad assets and so usually what will happen is the government woman FDIC will step in and buy some of these bad assets at face value and so then get rid of those bad assets and then sell the bank off to somebody else in this case that didn't happen though we've got a bank it's failing and I mean it's lousy it's got a negative net worth maybe by a lot and then we say we this is the federal government we say this you know we've always told these bankers it can't cross the border and from let's say New York into California but we get this billion dollar problem and so what we'll let you do is we'll let you break that rule and cross the border from New York into California if you'll take this billion dollar problem off our hands and so that's what Gordon st. Germain did okay and so the the banks that wanted to expand their network into other states not all banks wanted to do that but there were some banks that wanted to basically develop an interstate banking network and so when a bank would be failing they'd get news of that and then they go out and make an attempt to buy that bank and like I say they were solving the government's problems this is it's understandable but it's a little bit like you know paying the government protection or something like that too it's kind of like they said you you may not do something unless you pay us a lot I know so the banks were basically the healthy banks were paying for the privilege of entering these states and so we got some interstate banking that way a third way that we got interstate banking also in the 80s and early 90s we'd call these regional banking packs or agreements the McFadden act said this it said that nationally chartered banks had to follow the same rule as state chartered banks and always before a state would just regulate banking within their state but with one of these regional banking PACs what would happen is two states that are next to each other might get together and say hey your banks can come into our state if our banks can come into your state and so this would be reciprocal agreements it was almost always done on a regional basis so this became regional reciprocal interstate banking and almost always it's with states that our immediate neighbors so then with contiguous states contiguous would be touching States and that's the way these tends to develop let me draw you a little map of the United States and I am quite a little map maker several lakes up north Florida is putting on a little weight little book so what we got was something like this we got a region in the southeast we get a region in the Northeast by the way what they're trying to do is cut out in New York and some of these like California where these biggest banks are what they're basically trying to say is we don't really have a problem with Georgie banks getting into Florida or Florida banks getting into Georgia we're afraid for our Florida banks and our Georgia banks and those New York banks come in here and compete with us because they are huge and they'll just take all our customers away and put us out of business we can't have that and so these regions started sprouting up that were excluding some of the biggest some of the states with the biggest banks and so there's this New England region and there was a Southeast region there was a southwest region I shouldn't get california in there but a southwest region and we got a Midwest region and guess what there were some banks in the Southeast region and their region included like Tennessee and then Tennessee was not only in the southeast region it was contiguous to states in the southeast but also contiguous the states in the Midwest and so you could be in Florida in theory and then get yourself a bank up in Tennessee and then get your bank of self a bank in Missouri and one in Oklahoma and Oklahoma is in the southwest region and then you're into Texas and then you're into what Arizona and New Mexico and you could be doing pretty good so these what happened was we got a lot of interstate banking at this point but it was done on a regional basis on which so we got these huge banks out of this but pretty big and so we got to a certain point but we just said you know we're not very far from interstate banking and so in 1994 we got something called a riegle-neal act regal Senate Neil House of Representatives and so then what it allowed basically was this it didn't allow there's two different kinds of branches there's let's say branching by merger and then de novo which is new just go out and open a branch and so what riegle-neal said is we will allow mergers not de novo branches but so we're not gonna allow like a New York bank to come in to you know your state or my state or whatever we're not gonna allow New York to come in here and just open a bunch of branches but if any bank that is otherwise well capitalized well-managed doesn't have financial problems and so forth if they are combined with all the regulations we will allow them to merge akrur to acquire banks in other states and turn that bank into a branch office and so if they want to be in I don't know you name it Montana or someplace like that they can go out and basically buy a Montana Bank and then now we've got a branch office in Montana I don't know where the hell Montana is it's up there someplace north a lot of trees Buffalo I think big sky anyway questions about this and that is basically where we are right now is we have got now banks that are huge I think I mentioned to you Bank of America and Bank of America is at 40 I'm gonna say 42 states but maybe that is not current but something like that do you remember how many branches I said is sixty three hundred or something like this does anybody remember that number no I don't think it was 7080 things six thousand I'm gonna say three did you have it in your notes sixty two hundred I was very close and so they are scattered all around the United States not every state but not a lot of states yes sir the non-bank Bank you said non non-bank its non-bank bank come on I don't hurt you on a test the banks were prohibited from jumping over state borders so then they went to the Federal Reserve and said what do you mean by Bank and they got a definition it's a company accepts demand deposits makes commercial loans and then these institutions said thank you they didn't say what the way they were up to thank you and then they went and either got rid of checking deposit stop accepting those and tell their customers take your money back or they stopped making commercial loans and sold those commercial loans off so they don't they either do not have checking deposits on their books or they don't have commercial loans on their books and then according to the definition of a bank they were not a bank and then they said hey there McFadden ik that applies the bank's the bank holding company that applies the banks we're not a bank so then they started jumping over those state borders what I'm saying to you though is they still had bank charters so they're a bank they're just I'm not a bank a non-bank bank so anyway that's kind of the history what's happened with this whole McFadden act and the branching and today we have got banks that are doing business and thousands of different locations and this is a way it seems to be going there are big market shares one aspect of this regal Aniyah riegle-neal act I almost said it the other way around is to limit market shares and so one thing they did is they said we don't want our banking companies to get too big and so they put a limit then on 10% the market share of the bank that is for the United States we don't want to bank being bigger than accepting more than 10% of all the deposits going into banks in the United States okay and so at the very least there would be ten banks and of course we still have thousands over 7,000 so anyway let's go on with a little bit of history and talk about how the glass-steagall Act has worked out I won't talk too much about what I did a moment ago which is after World War Two was over the economy is very vibrant the stock market was strong and so forth people investing from around the world people more prosperous or buying insurance they want a whole range of financial services and so anyway we've got the firewall of glass-steagall and so then banker said hey I got an idea and this is not a this idea is not very unique I'm gonna set up a bank holding company and that bank holding company owns a bank but then it's also got this subsidiary that does something else that's not banking let me give you a little bit of this what we talked about already the bank holding company this is a multi bank bank holding
company the multi bank bank holding company its purpose is to get around to McFadden act this is still a single bank bank holding company its purpose is not to get around the McFadden act its purpose is to get around glass-steagall that is to say to comply with a law and yet achieve those objectives of getting into other businesses okay and so after this movement got going for a while we got the Bank Holding Company Act of 1970 we already had one in 1956 and the Bank Holding Company Act of 1970 then told the Federal Reserve it's not just a multi bank bank holding companies but the single bank bank holding companies we want you to regulate what these subsidiaries are doing yes sir I don't know about the grandfather clause on this they were grandfathered with the multi bank bank holding companies I don't know from other things I mean I don't have the answer but from other things I do know my guess would be is that they gave them some time to divest themselves of these or to come into compliance because as soon as the Federal Reserve started regulating what these subsidiaries can do and they were called subs but as soon as the Federal Reserve started regulating this the first thing it is they came out with the list and I said here are activities that are closely related to banking closely enough that we will allow you to do it and so then these banks would have to come into compliance with the law with their subsidiaries and let me finish by saying this I told you economic historians were not really buying into that story of what caused the Great Depression and so economists are the ones running the Federal Reserve and economists were the ones regulating these banks and so economists were pretty much willing to add more and more functions to this list of what subsidiaries were allowed to do and this list went from a few things to more and more and more until finally it was a pretty long list and whatever was on the list a bank could just do it and didn't even I mean they had to apply they had to register but they didn't have to wonder on that gosh is this going to be allowed the answer is going to be sure and like I say more and more and more and there were dozens of different activities that bankers could get into by the 1990s we'll talk more about this next time so long
