History of Banking: From the establishment of FED to the 2007 Financial Crisis

A breakthrough event in the history of banking was the establishment of the Federal Reserve Bank (FED) in 1913. This was the beginning of a new era that limited the activities and economic influence of commercial banks. 

The United States became a global lender during the World War I. Due to 1929 stock-market crash, the global economy was destroyed. As many as 9,000 companies went bankrupt at that time. An important law introduced by the US government was the Glass-Steagall Act. According to the Act, commercial banks were banned to speculate on consumer deposits. 

Further changes occurred during World War II. The FED and banks had to perform huge financial transactions worth billions of dollars, which led to the establishment of companies with huge lending demand and mergers of the banks to satisfy market demand. There was a globalization of banks that operated on a global scale. Domestic banks in the USA then gained consumer confidence with deposit insurance and the expansion of mortgage lending, which increased access to lending facilities and interest in them.

A milestone in the global banking development was the launch of online banking services. This took place at the turn of the 20th century, with the origins dating back to as early as 1980s. The growing popularity of smartphones accelerated the expansion of mobile banking services and today almost everyone makes transfers through an online banking system. A 2021 J.D. Power’s study shows that as many as 41% of respondents use digital banking exclusively. 

The 2007/2008 banking crisis led to the collapse of the high-risk mortgage market in the USA and had serious repercussions on a worldwide basis. The cause of the crisis was the granting of mortgages to people with insufficient financial capacity and such loans were used as collaterals for structured bonds, which were sold for investment and speculative purposes. The insolvency of bank customers led to a shortage of cash in the lending market and instability and also to the collapse of Lehman Brothers. The events back in those days showed that banks had lost track of reality, offering products that were beyond comprehension of their personnel and extending loans to people who could not afford them. The 2007/2008 financial crunch severely undermined confidence in banks and may have been the beginning of the end of the banking era as we know it.

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