Banking in the United States - Why Regulation Works

I found this article through Netvibes and it ties in well to my series on Banking in the United States.

Online bank NetBank closed by U.S. regulators
FDIC to oversee customers’ access to insured funds
By Robert Schroeder, MarketWatch
Last Update: 6:11 PM ET Sep 28, 2007
WASHINGTON (MarketWatch) — U.S. banking regulators shut down a Georgia-based online bank on Friday due to high levels of mortgage-related losses.

The Office of Thrift Supervision closed down NetBank Inc. (NTBK) , a thrift with $2.5 billion in assets, and appointed the Federal Deposit Insurance Corp. as receiver.

The OTS said the bank experienced significant losses beginning in 2006 due to defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls and failed business strategies.

It was only the second bank failure in the past three years.

It reminds me that we shouldn’t let new technology fuel our arrogance to reinvent the wheel. While the Banking system in the United States has flaws, the leadership in this country went through one humbling experience after another to get it right.

When the United States was still a colony, the financial system here was a complete mess. Unregulated, both the colonies and private institutions could issue paper money at will. Since there was absolutely no regulation, there was a likely chance that the institution would fail making your money worthless. Caught in the Revolutionary War without a way to finance it, the Continental Congress began printing its own currency. However, they saturated the market causing inflation; when too much money follows too few goods, making the money worth 1/100th of its face value.
Banking in the United States - Colonization to the Civil War

After the Civil War, it took nearly fifty years to create the Federal Reserve System — which is the dual control central Banking system that we have today. The National Banking Act was a step in the right direction, but it had its problems.

The National Banking Act was the seed that created the Federal Reserve System we have today, but the road was rocky. After The Civil War and up to World War I, 100 years of financial insolvency had severed the trust that that citizens had with their banks. This period of growth was tough because banks were still failing, the stock market was down, currency was disappearing, and people were panicking. The fear that financial institutions would fail became a self-fulfilling prophecy and for every step forward the country took two steps back.
Banking in the United States - The Civil War

The moral of the story is that before we consider sites such as Prosper and Lending Club as the saviour to central Banking, we need remember why we have this system in the first place. I read here that Lending Club is going to take on the United States banking system.

Lending Club also aims to be to the lenders rescue, positioning itself as offering investors “the ability to gain higher returns than those offered by CDs and savings accounts” while “benefiting from an asset class whose performance is more predicable than stocks and is not correlated to the stock market”

Without deposits, you lose stability and create a financial institution that has a greater chance of failing. The United States banking system has a deposit reserve in place that ensures its customers that if there is a widespread financial crisis, they won’t lose all of their money. While FDIC insurance only insures deposits up to $100,000, it is a start to rebuild your wealth.

The Banks will evolve and become net-friendlier, but will never be replaced by P2P lending.

School: commerce, drexel, economist

Posted on September 28th, 2007 | By: David Litsky | Filed under Banking, Web Technologies

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