Federal Home Loan Bank Act

Examples of Federal Home Loan Bank Act in the following topics:

• The Glass Steagall Banking Act

  • Thus, the United States government passed the Glass-Steagall Banking Act in 1933.
  • In practice, the Glass-Steagall Banking Act insulated investment banking from the competition.
  • The Glass-Steagall Act also created the Federal Deposit Insurance Corporation (FDIC).
  • Although federal law prohibited banks from crossing state lines and opening banks in another state, the federal government did not hesitate to violate its own rules when it needed to.
  • If a bank foreclosed on a person's house, then a bank possesses a home that is losing value.

• A Bank Failure

  • Your bank borrows the $8 million from the Federal Reserve as a loan.
  • Your bank could ask the Federal Reserve for a loan, but the Fed may not grant the loan.
  • For example, a bank grants loans for credit cards, mortgages where the homes are spread across the state, and commercial loans for hotels, restaurants, retail stores, and factories.
  • For example, a person applies for a home-improvement loan and plans to use the loan to speculate in the derivatives market.
  • Borrower can only use the loan for home improvement.

• The United States Banking System

  • This office also grants charters on behalf of the U.S. federal government, and it requires national banks to be members of the Federal Reserve and Federal Deposit Insurance Corporation.
  • When a bank encounters financial difficulties and cannot receive a loan from other financial institutions, then the bank can ask the Fed for a loan.
  • U.S. government imposed another restriction upon the U.S. banking industry – the McFadden Act.
  • The McFadden Act prohibited a commercial bank from opening a branch in another state.
  • The Federal Home Loan Bank System (FHLBS) is a U.S.government agency similar to the Federal Reserve.

• Websites

• Becoming an International Bank

  • The Federal Reserve System restricts U.S. banks to invest in foreign firms that are "closely related to banking. "
  • Method 3: The U.S. bank becomes an Edge Act Corporation.
  • Furthermore, the Federal Reserve System exempts the subsidiary from some U.S. banking regulations and has the authority to approve the Edge ActCorporation.
  • An international banking facility, similar to an Edge Act corporation, accepts deposits from foreigners and makes loans to foreigners.
  • This is a full fledge bank that accepts deposits and makes loans.

• The Special Case of Banking

  • The government's bank-insurance agency, known as the Federal Deposit Insurance Corporation, pays off the depositors, using funds collected as insurance premiums from the banks themselves.
  • Then, in late 1999, Congress enacted the Financial Services Modernization Act of 1999, which repealed the Glass-Steagall Act.
  • After the war, the government had been eager to foster home ownership, so it helped create a new banking sector -- the "savings and loan" (S&L) industry -- to concentrate on making long-term home loans, known as mortgages.
  • This put banks and savings and loans in a dire financial squeeze, unable to attract new deposits to cover their large portfolios of long-term loans.
  • The Federal Savings and Loan Insurance Corporation, which insured depositors' money, itself became insolvent.

• Answers to Chapter 10 Questions

  • Liabilities are demand deposits, savings accounts, small and large-denomination time deposits, borrowings, discount loans, and federal funds (if the bank borrowed funds).
  • Assets include vault cash, deposits at other banks, deposits at the Federal Reserve, loans, and bank's physical assets like its buildings and computers.
  • A bank's net worth equals bank's total assets minus total liabilities.
  • If a bank forecloses on a home that is losing value, then too many foreclosures cause total liabilities to exceed total assets.
  • Floating rate debt is loans with a variable interest rate.

• The Lender of Last Resort

  • The Fed provided loans to support a number of institutions from collapse, including AIG, Bank of America, and Morgan Stanley.
  • According to the Federal Reserve Bank of Minneapolis, "the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy. " Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals.
  • The rate the Fed charges banks for these loans is the discount rate (officially the primary credit rate).
  • By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply.
  • For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).

• The Reserve Ratio

  • The reserve ratio is the percentage of deposits that a bank is required to hold in reserves, or funds that are not allowed to be loaned.
  • Banks assume responsibility for consumer deposits and make money by loaning out deposited finds.
  • In order to reduce the risk of a panic or "run on bank" from the perception that a bank may not have adequate liquidity to meet depositor access to cash deposits, central banks have adopted policies to ensure that banks use prudent judgement when assessing the amount of deposits to loan.
  • The conventional view in economic theory is that a reserve requirement can act as a tool of monetary policy.
  • The Federal Reserve is charged with maintaining sustainable economic growth.

• Government Financial Institutions

  • Federal, state, and local governments in the United States create government financial institutions that lend funds to the public.First, The U.S. government uses direct financing, when it creates a public corporation that sells bonds and commercial paper to investors in the financial markets.Then the public company uses the investors' money to lend to borrowers directly.For example, the Farm Credit System, a U.S. government agency, lends to farmers.Farmers use these loans to finance growing crops, equipment, or mortgage loans.Second, the U.S. government lends money to students who pursue a college education.For example, the Student Loan Market Association, known as Sallie Mae, lends directly to students or buys student loans from banks.Finally, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) grant mortgages to low-income households.They also buy and sell mortgages to boost the liquidity of the mortgage loan market.For the second method, a government can lend to the public through loan guarantees, which is similar to insurance.For example, a bank lends to a student to pay for an education, and the U.S.
  • Department of Education guarantees the loan.If the student defaults, subsequently, the U.S.
  • Department of Education repays the loan to the bank, and then the U.S. government uses its authority to collect from the student.
  • Some people question a government's role in financing.When a government directly lends, the government squeezes the financial institutions out of the loan market.Furthermore, the federal government loan guarantees increase the problem of moral hazard.Financial institutions receiving the loan guarantees might not screen borrowers as much, lending to borrowers with a high default risk.For example, the effects of the 2007 Great Recession continue to linger in the U.S. economy, even in 2014.Recession caused mass layoffs and doubled the unemployment rate.Then the housing values continue to plummet while foreclosures continue soaring.Consequently, the U.S. government might be liable for trillions of dollars in loan guarantees and bailout of public corporations.We explain several examples below:
  • Department of Education, SallieMae, and commercial banks granted college student loans that had surpassed $1 trillion in 2012.Unfortunately, college graduates continue to enter an abysmal job market in 2013.Student-loan default rate hovers around 24%.College students, on average, owe approximately $24,000 while law school graduates accumulate loans exceeding a $100,000.Unfortunately, a stagnant economy would force the U.S. government to pay billions in loan guarantees.