It is practically impossible to operate without banks nowadays. Some people have excess money than they need while others run short of the amount they require for their investment opportunities. Banks come in handy to help in channeling money from people who have excess to those who lack money. Similarly, cases of theft could be highly pronounced if everybody kept his or her money in the house. Consequently, banks have helped in enhancing economic growth as well as improving living standards of many people. In this regard, it is important to understand the origin of banks. At the same time, it is crucial to note that banks are not entirely advantageous and there are instances when banks have been blamed for escalating an economic problem thus, calling for government regulation.
The history of banking can be traced back to the days when goldsmiths used to keep pieces of gold for people and issue them with receipts. These people were expected to give back the receipts and collect their pieces of gold whenever they wanted to transact. It was later discovered that the process was cumbersome and goldsmiths started issuing receipts for specific values of gold. Thereafter, people stopped withdrawing the pieces of gold and simply exchanged the receipts during their transactions (Grossman, 2010). Consequently, goldsmiths realized that they always had stocks of gold with them and started making extra receipts for the same pieces of gold, and made a lot of money. This gave birth to the loaning system used by modern banks. Modern banks also take cue from ancient family owned banks of Italian rich cities. Currently, banks accept deposits and give loans to people and corporations both private and public (Kaufman, 2003).
There are different types of banks in United States which are categorized according the primary regulator of the institution. Using this form of categorization the banks in United States can be grouped into five groups. Firstly, there are banks known as national banks. These banks are regulated by the federal government and are required to be members of the Federal Reserve. Secondly, there is a group known as Federal savings association. Though the federal government is the primary regulator, these banks are not members of the Federal Reserve (Grossman, 2010). However, these banks are members of federal Home Loan Banks system and a chunk of their business is supposed to be in mortgage lending. Additionally, there are banks known as state member banks which are regulated by the Federal Reserve. However, these banks are not compelled to be members of the Federal Reserve. The other type consists of State Non Member Banks. Though they are organized under state laws, these banks are not members of the Federal Reserve and are regulated by Federal Deposit Insurance Corporation (FDIC). Lastly, there is the State Savings Association which is similar to Federal Saving Association banks only that it is regulated by FDIC (Grossman, 2010).
Though banks have highly contributed towards development of various countries, they have been highly blamed for some problems. To begin with, banks have been known to be over ambitious and give unsecured loans to clients who are sometimes not creditworthy. In this way, banks create asset bubbles which later burst leading to economic crises (Kaufman, 2003). On the same note, banks are in most instances risk averse and will therefore be reluctant to engage in high risk ventures, especially when the returns are not high. In this regard, during financial crises when people are supposed to spend to boost economic growth, banks are reluctant to offer loans. During the recent financial crisis for example, banks were unwilling to give people money even after the federal government released funds to commercial banks. Similarly, banks have a tendency to either overestimate or underestimate risks during recessions leading to ineffective decisions and thus further dampening matters (Kaufman, 2003).
The government comes in handy in ensuring that problems facing the banking sector are mitigated. In the first place, governments including the United States government are called upon to help bail out banks during economic recessions (Grossman, 2010). Otherwise, since banks highly depend on their loan books the probability of them collapsing when people are unable to repay their loans is high. Moreover, banks need regulation to ensure that they pass the money to the public whenever the government funds them during economic crises. Furthermore, the tendency of banks to give out loans on speculative collateral instead of tangible assets should be controlled. As a result, governments have to implement policies to ensure that banks only use existing assets when giving out loans. If left to operate freely, banks will loan out every single coin in their possession to increase their returns. However, this puts them in jeopardy incase of depression. Consequently, the minimum requirements regulation is vital to ensure that banks can be able to sail through (Kaufman, 2003).
Banks are very vital in any economy not only to channel money between savers and investors, but to also provide safe custody for money. It is important to note that banks have been there for a very long time and the modern ones are just improved cases of the ancient ones. Though banks have been associated with economic crises, doing away with them is impossible. As a result, it is upon the government to regulate the way banks carry out their day-to-day activities to ensure that they do not pose any risk to the economy.
References
Grossman, R. S. (2010). Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Princeton: Princeton University Press.
Kaufman, G. G. (2003). Market Discipline in Banking: Theory and Evidence. Bradford: Emerald group Publishing.