Friday, June 12, 2009

the federal deposits insurance corporation

Individual member banks may satisfy some of their liquidity needs by borrowing from their regional Reserve Banks. These commercial banks, and others as well, may also use the newer techniques of liquidity management and borrow excess reserves from other banks in the federal funds market. As already noted, they may also secure added deposits by issuing certificates of deposit, or even secure funds from their bank holding company, which may have floated an issue of commercial paper. But if the banks having thus secured additional funds proceed to make unwise loans or acquire investments that subsequently decline in price in the market, the bank itself may go into bankruptcy with grievous loss to its many depositors.
prior to the banking Act of 1933, which established the federal Deposit insurance Corporation (FDIC) as of January 1,1934 each bank had to take its own steps to safeguard its depositors. The various reserve requirements established by state laws, the national banking Act of 1863, and finally the federal Reserve Act of 1913, all had as underlying philosophy the idea that depositors would be protected by banks carrying reserves, as well as by preventing an overextension of bank credit in speculative ventures. After 1913, the possibility of rediscounting eligible paper by the member banks at the various federal reserve Banks also seemed to offer reassurance to depositors that, if they wished to withdraw their money,the member banks could secure the needed cash.
Nevertheless, these safeguards did not prove sufficient. the high casualty rate of commercial banks in the 1920 's and 1930's has already been described. In the widespread bank runs of the depression days of the early 1930's , even sound banks were sometimes forced to close their doors because of an inability to meet the heavy cash withdrawals of their panicky depositors. As a result, bankers have gained the reputation for being conservative and cautious in their lending and investing activities. Many senior bankers in their own lifetimes have seen what happened to less prudent bankers. Each bank, therefore, and properly so, has felt it necessary to be concerned with its own liquidity requirements and hence with the safety of its deposits.

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