One major industry that every individual should be educated on is the banking system due to the fact that individuals are trusting these financial institutions to protect and grow their capital. I have seen multiple instances in which the lack of knowledge and this topic leads to disaster for many and it will only continue unless initiative is taken to know about the ins and outs of the systems. Banks are the backbones of people’s futures, they offer all different types of loans such as student and mortgage along with certificates of deposit and many more entities which require in-depth research.
Central banks
Central banks are institutions that manage the currency and monetary policy of a country or monetary union and oversee their commercial banking system. The central bank that we are the most familiar with is the U.S. Federal Reserve and its mission is to foster the stability and efficiency of the nation’s monetary systems and in turn promote macroeconomic performance. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets. There is much controversy over what the Fed should be doing especially about metrics such as inflation and continues to cause tension between U.S. lawmakers and presidents. In 1913, President Woodrow Wilson signed the Federal Reserve Act into law which created a system of twelve public-private region banks such as the New York Fed. Inflation has hiked in the past few years so I deem it an important topic for everyone, not only finance experts, to know about. Inflation is defined as the rise of prices due to supply constraints that increase the cost of producing goods and services or because consumers are spending more on commodities and producers cannot keep up. This is why the prices of goods and services rice, a noticeable one that was taking social media by storm was the price of eggs which can be as high as $5 a dozen compared to its previous $2 in their respective area. In order to combat this phenomenon, the Fed restricts the amount of money being lent out which pushes interest rates high so that borrowing decreases. In the past months, the Fed has increased the interest rate by 60 basis points bi-monthly on average. Basis points are the measurement for interest rates, 1 basis point equals .01%.
Commercial Bank
Commercial banks are the institutions that individuals are most familiar with because of the direct contact that we have with it every week if not every day. The general function of a commercial bank is lending and borrowing, banks receive money and give that money out in forms of loans and charge an interest rate to earn profit. This is how the banking system circulates your deposit, money is given out to the community, potential businesses, and bonds. While you are depending on the bank to build your money, they themselves are maintaining themselves by using your capital as a foundation for their investments. This is the primary function of a commercial bank and there’s multiple types for various reasons. The three types of commercial banks are private banks, public banks, and foreign banks which we don’t really have to worry about. Private banks are a type of bank where private individuals and businesses own a majority of the share capital while public banks are nationalized and the government holds a significant stake. There’s also growing online presence of online commercial banks so there isn’t any reason an individual should not have an account.
Current Events
Unless you have been living under a rock, I’m sure you have heard something about the Silicon Valley bank which is being called the second worse bank failure in history. Silicon Valley bank was shut down in March 2023 by the California Department of Financial Protection and Innovation. The reasoning being that its investments greatly decreased in value and its depositors withdrew large amounts of money. In the aftermath of the failure, federal regulators promised to make all of those in connection to the bank whole even for the funds that weren’t protected by the FDIC. The reason they took these steps is to reestablish confidence in the banking system to prevent future disasters. When getting into the main factors of the collapse, it comes from the Fed increasing interest rates in response to high inflation which made the bank’s investments riskier. Because investors could now buy bonds at at higher interest rates, the bank’s bonds started to decrease in value. These treasury bonds were obtained when Silicon Valley bank received a huge influx of cash from 2019-2022 due to its high growth. They tend to have low-risk but these circumstances seem to have the adverse effect on the bank’s revenue.
Federal Regulation
The regulators will do whatever it takes to avoid an economic disaster all together. The effort, time, and money that it would take to make the customers of Silicon Valley Bank whole is minuet compared to nourishing the entire economy back to health if a national disaster were to happen. Regulators are solely worried about consumer confidence in banks because they don’t want any type of ripple effect. A new program even came about because of this crisis, the name of it is the Bank Term Funding Program. It’s a federally authorized program that offers loans to banks, credit unions, and other deposit institutions. With these ongoing events, You can see where the priorities of the government lie and I wonder what April will look like.
Hey Michael! I thought your post was really great- it was informative and relevant with everything going on and I like the way you explained the high level and offered some deeper details. I feel like I learned a lot and am even a little embarrassed at how little I understand our federal banking system, haha! I’ll also be interested to see how April looks and just hoping for no more bank runs before then!
I really appreciate you taking the time to research this topic due to the current events in our country. It is really important to understand our banking system to avoid getting sucked into the negative hype cycle of the media. I hope the government can help solve this situation.
When I took my tech trek class to New York, we visited a TON of FinTech startups. I was so amazed at how new startups were trying to disrupt every last facet of the financial services industry. Traditional banks are definitely under assault from a number of different places.
Hey Michael! This blog post caught me up on everything I’ve been missing on commercial banks and the recent failure of Silicon Valley bank. Your insight on the recent collapse of Silicon Valley bank due to the Fed increasing interest rates and its bonds decreasing in value taught me something I did not know at all previously. I enjoyed reading about how regulators are focused on consumer confidence in banks to avoid an economic disaster and the new Bank Term Funding Program that has emerged from this crisis. I wonder how this worrisome situation will look by the end of the year. Great read!
Great information Michael! Way to explain the Central banks. I did not know that much aside from the fact that the United States’ central bank is the Fed. SVB news is absolutely crazy especially since a lot of depositors had a lot more than just $250,000 in their account and to see that federal regulators are going to help them recover all of it! Hopefully the SVB speaker still joins us at the end of the semester!
Great post Michael, and a great time to write it. It was nice understanding how these banks are structured and how the money is held. With the recent issues it will be very important to see what changes in terms of laws and restrictions that banks will need to follow, in order to protect from these types of collapses in the future.