Money, Banking, and International FinanceWhat would happen if a bank stopped accepting deposits? Legally, the bank is no longer a bank
and becomes exempted from the extensive U.S. bank regulations. Nonbank bank is simply a
finance company.
Third innovation was the creation of money-market mutual funds (MMMF). MMMFs are
pools of liquid money-market assets managed by investment companies. The MMMF is
identical to a mutual fund. Investment companies sell shares to the public in small
denominations, and the fund managers invest in money market instruments. Consequently,
MMMF became very successful. MMMF grew from $3.3 billion in 1997 into $186.9 billion in
1981 and 959.8 billion by 2010.
The MMMFs began hurting the banks financially as people started withdrawing money
from their bank accounts and investing them into MMMFs. MMMFs paid a higher interest rate,
and they allow check-writing privileges. Accordingly, banks began losing customers, and they
place pressure the regulatory agencies that, in turn, placed pressure on Congress and the
President to change the laws. Since 1982, banks began offering money market deposit accounts
(MMDA) that are similar to a MMMF with only one difference. The FDIC considers a MMDA
to be a bank account and thus, it insures them, while it does not insure MMMFs. Finally,
MMDAs have no reserve requirements, and they have grown rapidly as people started to invest
in them.
Last innovation, automated teller machine (ATM), allowed banks to circumvent
regulations. Modern computer technology allows a bank's customers to receive banking services
through computer terminals located at banks, stores, and shopping malls. Customers can make
deposits, withdrawals, and credit-card transactions. Technically, ATMs are not bank branches,
and are not subjected to branch banking restrictions. Therefore, ATMs are located some distance
away from the main bank. Furthermore, many banks created networks, so customers could
access their accounts from any place within the United States and across the world. Moreover,
banks offer debit cards. For example, a customer uses a debit card to pay for goods and services
by electronically transferring funds from his checking account to a store's bank account. Thus,
the debit card has replaced checks. Some businesses do not accept checks, but take debit cards
because the merchants know they will receive money from the customer's bank.
Political climate was changing in the United States before the 2008 Financial Crisis.
Innovation, rising interest rates, and deregulation were eroding the regulatory structure set up in
the 1930s. Banks can cross state lines, open branches in other states, offer investment advice and
brokerage services. Thus, the banking industry experienced two trends. First, banks can acquire
other banks, reducing the number of banks in the United States. Second, as banks merge, they
become bigger as their assets grow. U.S. banks were approaching the size of Japanese and
German banks, which traditionally were larger in asset size.
Then the 2008 Financial Crisis struck the U.S. economy, causing many commercial and
investment banks to teeter on bankruptcy. The U.S. federal government came to the rescue and
purchased stock of many financial corporations. Taxpayers indirectly helped the corporations.
Subsequently, the U.S. government helped and approved many bank mergers, including mergers
between commercial and investment banks. Consequently, the U.S. government bailed out these
banks because they were too big to fail. A wave of large bank failures would implode the whole