The Subprime Crisis and Financial Regulation:An International Perspective

The history of banking in the United States is exceedingly complicated. Beginning in the 19th century we have had a dual banking system, in which both states and the national government could and did charter banks. Many states had quite restrictive branching restrictions. Eventually through federal law this preposterous imitation of small town America gave way to economic reality. Today, thanks to 1994 legislation, banks can merge and branch on a countrywide basis. Consequently, the number of banks in our highly decentralized system fell from over 14,000 to about 7,000 and is continuing to fall. An interesting example of the change is that Bank of America, an historically renowned San Francisco bank, is now headquartered in North Carolina and employs more than 200,000 people as a result of a major bank merger movement, having become the second largest U.S. bank. Universal banking, as it is known in Germany where a bank can engage in all kinds of lending and securities businesses, was not known in the United States until quite recently. It is true that universal banking was common in the United States prior to 1933. But it was then outlawed by Congress, which blamed universal banking for the Great Depression. As a result two separate financial services industries grew up, commercial banking for loans and investment banking for securities. But in a development that took the entire decade of the 1990s, the United States returned more or less to universal banking. Today, for example, Citibank is not only a huge commercial bank but one of the largest underwriters of securities in the United States.