Jaylen McDuffie

Macroeconomics
Professor Vlad

Banking Systems in the United States

Many people automatically generalize “banks” when someone refers to banks in the United States. They

often assume that banking is a simple process. It is a simple process if you look at banks as the place

where you put your hard-earned money for safekeeping or as a place where someone loans you money

which you promise to pay back. People no longer have to carry around lots of cash or keep their money in

the home as it was done many years ago. However, the banking process is much more complicated than

the average person would think. If you dig deeper into the history and all the functions of banks, it’s not

hardly a simple process. There are several different parts, branches and types of banks in the United

States.

The first United States commercial bank was chartered in 1791. The bank was considered to be a huge

success by economic historians. The treasury secretary, Albert Gallatin, commented that the bank was

“wisely and skillfully managed” (Hixson, 114). This bank had a remarkable amount of liquidity. For

example, in 1809, the banknote ratio was about 40 percent. Comparing that to the modern average deposit

ratio of about 12 percent probably making this bank the most liquid bank in the United States ever. Beside

the liquidity of the bank, it was also very profitable, earning most of its income through substantial loans

to private businesses as well as the government. In 1811 the chief was in favor of the renewal of the bank

because of how successful it was. Its circulation of around $5 million in paper currency accounted for

about 20% of the nation’s money supply. This was the closest thing to a national currency the United

States had at this point in time.

economic growth, but on September 24, 1869, a severe financial panic swept the nation reaching its peak

deeming this day as “Black Friday”. More specifically, the finance of the civil war and reconstruction

took a huge toll on the U.S. causing the debt to jump from $64 million to $2 billion by the end of Andrew

Johnson’s administration. This national debt was getting worse when the federal government started

issuing paper money also known as “greenbacks”. This caused problems because this paper currency was

not redeemable in gold causing the price of gold to skyrocket. In 1900, the United States finally adopted

the gold standard which meant the U.S. currency was now equal to and exchangeable for gold.

The Federal Reserve System is the central bank for the United States and was founded by congress in

1913. It was founded to provide a more flexible, safer, and more stable monetary and financial system.

Over the years, the role of the Federal Reserve systems have expanded to much more. The board of

governors also known as the Federal Reserve Board provides the leadership for the system. This board

consist of the seven governors, picked by the president but must be confirmed by the senate. These

governors serve 14-year staggered terms to ensure stability over time. The Board of Governors has many

responsibilities. Among the responsibilities of the Board of Governors are: guide monetary policy action,

analyze domestic and international economic and financial conditions, and to lead committees that study

current issues, such as consumer banking laws and electronic commerce. The Board also exercises broad

supervisory control over the financial services industry, administers certain consumer protection

regulations, and oversees the nation's payments system. The Board oversees the activities of Reserve

Banks, approving the appointments of their presidents and some members of their boards of directors.

The Board sets reserve requirements for depository institutions and approves changes in discount rates

recommended by Reserve Banks.

On October 24, 1929 the stock market crashes and is known as “Black Thursday.” Because of the stock

market crashing from 1930-1933, the United States goes through one of its darkest times called the great
depression causing nearly 10,000 banks to fail. The unemployment rate soared to 25 percent of the labor

force, the stock market lost 80 percent of its value and 7,000 + banks failed. For example, at the store, the

price of chicken fell from 38 cents a pound to 12 cents, the price of eggs dropped from 50 cents a dozen

to just over 13 cents, and the price of gasoline fell from 10 cents a gallon to less than a nickel. Before the

Great Depression, federal government spending accounted for less than 3 percent of the Gross Domestic

Product (GDP). The GDP measures the value of economic activity within a country. By 1939, federal

outlays exceed 10 percent of GDP. (At present, federal spending accounts for about 20 percent of GDP.)

The great depression was such a hard time for the United States they wanted to find a way to try and

prevent this from ever happening again. As a resolution they came up with the Federal Deposit Insurance

Corporation (FDIC) established to protect deposits against bank failure as well as regulation of securities

markets, the birth of the Social Security System and the first national minimum wage.

In banks today, they continue making money by lending money at rates higher than the cost of the money

they lend. To be exact, banks collect interest on loans and interest payments from the debt securities they

own, and pay interest on deposits, CDs, and short-term borrowings. The difference is known as the

"spread," or the net interest income, and when that net interest income is divided by the bank's earning

assets, it is known as the net interest margin (NIM). The average net interest for banks in the United

States, was 3.23% in the first quarter of 2018. Though a rebound from the 30-year low of 2.95 in the first

quarter of 2015, it's lower than a decade ago: The net interest margin for American banks in the first

quarter of 2007 was 3.33%. A recent peak of 3.84% was reached in the first quarter of 2010. On the

surface, this suggests that a typical net interest margin for American banks in the 21st century seems

stuck between 3% and 4%.

You can calculate the bank's net interest margin using the following formula:

net interest margin = ($5.5 million - $2.5 million) / $100 million = 0.03, or 3%.
 Another big way the banking systems today makes their money is from debts. Banks will raise the

capital with debt issuance. The most common type of debt is consumer debt. This is a personal debt owed

by an individual to another entity, normally a bank or credit union. Consumer debts are most likely

involving household purchases. These purchases are typically consumable and include items that do not

depreciate in value. Purchases like this allow consumers to better themselves through a purchase without

the requirement of paying the full purchase price up front. For example, consumer debt may come in the

form of auto or student loans. Also referred to as credit debt, there are typically two types of consumer

debt: revolving and non-revolving.

These following statistics come from the Federal Reserve’s Consumer Credit G.19 Release:

● Total consumer debt totaled $3.898 trillion in 2018, a 7.6% increase from last year.
● Average consumer debt per capita is approximately $11,880 (total consumer debt/total
● US population as of July 4, 2018)
● Total revolving consumer debt was $1.039 trillion in 2018.
● Total revolving consumer debt rose 11.4% annually in 2018
● Average revolving debt per capita is approximately $3,167 (total revolving consumer debt/total
● US population as of July 4, 2018).
● Credit card debt in May 2018 broke the previous record of $1.02 trillion set in 2008.
● Credit card debt was 27% of total consumer debt in 2018, down from 38% in 2008.
● Two in ten adults say they roll over $2,500 or more a month in credit card debt [Source:
● NFCC]
● Total non-revolving consumer debt was $2.858 trillion in 2018
● Student loans totaled $1.524 trillion in 2018.
● Auto loans totaled $1.113 trillion in 2018.
● Average loans per student equal approximately $76,468 (total student loans/total
students enrolled in public or private universities in 2018)

PNC Financial Service Group (PNC) is a bank holding company based in Pittsburgh, Pennsylvania, but

had spread to 19 states and the District of Columbia. It has been ranked 8th on the list of largest banks in

the united states with 2,459 branches and 9,051 ATMs. In 2017 it was recorded to have over 16.3 billion

dollars in total revenue and had 5.3 billion dollars in Net income. With 380 billion dollars in total assets

they also have a tier 1 capital ratio with 11.6%. On December 31, 2017 they totaled around 5.3 billion

dollars in outstanding credit loans. In this company interest rates vary from where you live and a lot of
other variables. The rates for a personal unsecured line of credit with $5,000-$25,000 is all 11.25% APR

with a $50 annual fee. PNC bank does loans for undergraduate students and the variable rate varies

starting at 5.15% all the way up to 11.30% APR and a fixed rate starting at 5.61$ all the way up to

11.79% APR and both of those have a .50% discount for automatic payments. The rates for the auto loan

rates Vary depending on the model year, and how fast you want to pay the car off. The rates vary from as

low as 4.19% to as high as 4.99% APR.

Banking in the United States. (n.d.). Retrieved from https://www.infoplease.com/timelines/banking-

PNC Corporate Profile(pp. 1-2, Rep.). (2018). Pittsburgh, PA: The PNC Financial Services Group.
Retrieved from https://www.pnc.com/content/dam/pnc-com/pdf/aboutpnc/Fact
Sheets/CorporateProfile.pdf.

The Gilder Lehrman Institute of American History Advanced Placement United States History Study
Guide. (2012, August 09). Retrieved from
http://ap.gilderlehrman.org/history-by-era/economics/essays/us-banking-system-origin-development-and-
regulation