в федеральном страховании вкладов, что требовало как значительной помощи в размере более 150 млрд. долларов, так и осуществления структурных изменений в программе страхования.
Text 8. Bank of the United States
The Bank of the United States was established in 1791 to serve as a repository for federal funds and as the government’s fiscal agent. Initially proposed by Alexander Hamilton, the First Bank was granted a twenty-year charter by Congress in spite of the opposition of the Jeffersonians to whom it represented the dominance of mercantile over agrarian interests and an unconstitutional use of federal power. The Bank, based in Philadelphia with branches in eight cities, conducted general commercial business as well as acting for the government. It was both well managed and profitable, but it won the enmity of entrepreneurs and state banks, who argued that its fiscal caution was constraining economic development. Others were troubled by the fact that two-thirds of the bank stock was held by British interests. These critics, working with agrarian opponents of the bank, succeeded in preventing renewal of the charter in 1811, and the First Bank went out of operation.
Soon, however, problems associated with the financing of the War of 1812 led to a revival of interest in a central bank, and in 1816, the Second Bank of the United States was established, with functions very much like the first. The Second Bank’s initial years were difficult, and many felt that its mismanagement helped bring on the panic of 1819. Popular resentment led to efforts by several states to restrict the Bank’s operations, but in McCulloch v. Maryland (1819), the Supreme Court held that the Constitution had granted Congress the implied power to create a central bank and that the states could not legitimately constrain that power.
This decision did not settle the controversy, however. State banks and western entrepreneurs continued to criticize the Bank as an instrument of federal control and of eastern commercial interests. In 1832, Senator Henry Clay, a longtime supporter of the Bank, was running for president against Andrew Jackson, who was up for reelection. Clay persuaded the Bank’s president, Nicholas Biddle, to apply early for rechartering, thus injecting the issue into the campaign. Congress approved the renewal, but Jackson (who distrusted banks) vetoed it, campaigned on the issue, and took his electoral victory as a mandate for action. Starting in 1833, he removed all federal funds from the Bank. When its charter expired in 1836, the Second Bank ended its operations as a national institution. It was reestablished as a commercial bank under the laws of Pennsylvania, where it continued to operate until its failure in 1841.
EXERCISES
Exercise 1. Answer the questions:
1. What was the purpose of establishing the Bank of the United States and why was it opposed by the Jeffersonians? 2. What was the attitude of entrepreneurs and state banks to the First Bank? 3. What was the fate of the First Bank? 4. Against what political background was the Second Bank established? 5. What happened to the Second Bank and was it a success?
Text 9. Bank lending
Loans are among the highest-yielding assets a bank can add to its portfolio, and they provide the largest portion of operating revenue. That is why granting credits to qualified borrowers is the principal economic function of banks. For most banks in the United States, loans account for half or more of their total assets and about two-thirds of their revenues. Moreover, risk in banking tends to be concentrated in the loan portfolio. When a bank gets into serious financial trouble, its problems usually spring from significant amounts of loans that have become uncollectible due to mismanagement, illegal manipulation of loans, misguided lending policy, or from an unexpected economic downturn. No wonder, then, that when examiners appear at a bank they make a thorough review of the bank’s loan portfolio. Usually this involves a detailed analysis of the documentation and collateral for the largest loans, a review of a sample of small loans, and an evaluation of the bank’s loan policy to ensure that it is sound and prudent in order to protect the public’s funds.
One of the most difficult tasks in lending to business firms is deciding how to price the loan. The rate of interest at which a loan is raised may be thought of as the «price» of borrowing money. The lender wants to charge a high enough rate to ensure that each loan will be profitable and compensate the bank for the risk involved. However, the loan rate must also be low enough to accommodate the business customer in such a way that he or she can successfully repay the loan and not be driven away to another lender or into the open market for credit.
The traditional method of providing funds is the granting of overdrafts. With the overdraft facility, a company opens an account with the bank, and an overdraft with a specified limit is granted on the account. The overdraft is by far the cheapest form of borrowing, but it can only be obtained if the bank manager considers the customers to be creditworthy. Before agreeing practically any loan, a bank asks for some security, i.e. a kind of insurance. Thus a perfect advance is not only profitable and liquid, it is safe too. Many business loans are of such large denomination that the bank itself is at risk if the loan goes bad. Banks need to take special care, particularly, with business loans because they often carry large risk exposure. Moreover, it doesn’t take many business loans defaults to create bank earnings losses instead of profits. Most loan officers like to build several layers of protection around a business loan agreement to ensure the return of interest earnings to the bank. – Typically, this requires finding two or three sources of funds which the business borrower could draw upon to support the loan which may be the following: the borrower’s profits; assets pledged as collateral behind the loan; a strong balance sheet with ample amounts of marketable assets and net worth; guarantees given by the borrower, such as drawing on personal property.
Banks provide credits to a wide variety of customers and for many different purposes.
Banks make loans of reserves to other banks through the federal funds market and to securities dealers through repurchase agreements. Far more important in dollar volume, however, are direct loans to both businesses and individuals. These loans arise from negotiation between the bank and its customer and result in a written agreement designed to meet the specific credit needs of the customer and the requirements of the bank for adequate security and income.
Most bank credit is extended to commercial and industrial customers. Historically, commercial banks have preferred to make short-term loans to businesses, principally to support purchases of inventory. In recent years, however, banks have lengthened the maturity of their business loans to include term loans (which have maturities over one year) to finance the purchase of buildings machinery, and equipment. Because the longer-term loans carry greater risk due to unexpected changes in interest rates, banks have also required a much greater proportion of new loans to carry variable interest rates that can be changed in response to shifting market conditions. I»
Moreover, longer-term loans to business firms have been supplanted to some extent in recent years by equipment leasing plans available from larger banks and the subsidiaries of bank holding companies. These leases are the functional equivalent of a loan: the customer not only makes the required lease payments for using the equipment but is responsible for repairs and maintenance and for any taxes due. Lease financing carries not only significant cost and tax advantages for the customer but also substantial tax advantages for a bank because it can depreciate leased equipment.
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