
Banks traditionally are protectors and providers of money intermediaries between those
who have money and want it protected and those who need money to purchase
homes,
grow businesses or fund education. Banks take deposits and transfer this money to
borrowers as loans, earning the spread between the low-interest borrowed funds and the
higher-interest lent funds. The Federal Reserve, the industry’s regulator, allows banks the
special privilege of creating money by lending more than they receive in deposits. Hence,
anking was and is a confidence business: the system works as long as depositors have
confidence in a bank’s solvency. Lost confidence results in depositors demanding their
money back—an ominous event of the
Depression
. Deposit insurance, provided by the
FDIC (Federal Deposit Insurance Corporation) and FSLIC (Federal Savings and Loan
Insurance Corporation), was created as a New Deal reform to prevent bank runs. It
protects up to $100,000 of a depositor’s money when a bank goes under.
Despite Depression fears, the banker has been a symbol of local tradition. Often a
town’s most prominent citizen, the banker was conservative, well-respected and often
olitically influential. Banking was once profoundly local, whether in small towns or
major
cities
. Only locals, it was thought, could evaluate borrowers’ ability to repay
“Banker’s hours”—09:00 to 15:00—were a technical requirement. While adjusting the
ooks each day was an exhaustive manual process, the staid, leisurely reputation of the
banker persisted (as in
It’s a Wonderful Life
(1946)).
American attitudes towards debt provided the impetus for the postwar growth o
anking. European principles of thrift and avoidance of debt are ignored as Americans
often prefer huge mortgages to tiny bank accounts. Home-equity loans even free up the
value of one’s house to allow current spending. US households have over $5.5 trillion in
outstanding debt.
Technology also has profoundly altered the banks’ and bankers’ role as intermediary
smashed barriers to entry and prompted consolidation. Financial assets held by depository
institutions have declined from 70 percent in 1932 to 40 percent in 1990. Much of this
decline is explained by new institutions that provide savings and lending opportunities.
The consumer credit industry once a boon to banking, is now dominated by non-
anking
institutions. Credit cards provide a line of credit to individuals on which banks may earn
healthy interest rates. By the mid-1980s, however, retailers (for example, Sears), phone
companies (for example,
AT&T
) and manufacturers (for example, General Motors) had
introduced
credit cards,
eliminating the bank as intermediary These firms sold their
receivables in a burgeoning money market where firms sold debt to mutual funds and
institutions, again bypassing banks.
Mortgage securitization, wherein a firm buys a portfolio of mortgages and packages
them into diversified, saleable investments, removed other lucrative servicing and pricing
opportunities that banks held. Starting in the early 1980s, investment banks like Salomon
Brothers securitized over 70 percent of all mortgages (Crawford and Sihler 1991:138).
Banks now require fewer deposits and can extract fewer fees for services because loans
are sold after origination. Mutual funds have embraced securitized debt. Money Market
Mutual fund assets total $1 trillion, reducing the traditional savings account and bank
Encyclopedia of Contemporary American Culture 100