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The financial system is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level. Gurusamy, writing in Financial Services and Systems has described it as comprising "a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions."
МІНСТЕРСТВО НАУКИ І ОСВІТИ МОЛОДІ І СПОРТУ УКРАЇНИ
Уманський державний педагогічний університет імені Павла Тичини
Інститут соціальної та економічної освіти
Кафедра практики
іноземних мов
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на тему «Financial system of the United States of America»
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Студентка 35 групи
економічного факультету
заочної форми навчання
Гарбар Леся Іллівна
Перевірив:
Бондар Галина Олександрівна
Умань - 2012
Contents
The financial system is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level. Gurusamy, writing in Financial Services and Systems has described it as comprising "a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions."
According to Franklin Allen and Douglas Gale in Comparing Financial Systems:
"Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely."
Financial structure is an important determinant of the efficiency and stability of financial systems and the channels through which monetary policy is transmitted.
The financial system of the United States of America (US) constitutes the banking system , nonbank financial institutions and financial markets . This paper provides background information on the banking system and financial markets of the US.
Banking in the United States is regulated by both the federal and state governments.
The five largest banks in the United States at December 31, 2011 were JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs. In December 2011, the five largest banks’ assets were equal to 56 percent of the U.S. economy, compared with 43 percent five years earlier.
Bank regulation in the United States is highly fragmented compared with other countries. While most of these countries have only one bank regulator, in the U.S., banking is regulated at both the federal and state level. Depending on its type of charter and organizational structure, a banking organization may be subject to numerous federal and state banking regulations. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies — separate from the bank regulatory agencies — at the federal and state level.
U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation laws (for example, defining what constitutes usurious lending).
Since the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1989 (FDICIA), all commercial banks that accept deposits are required to obtain FDIC insurance and to have a primary federal regulator (the Fed for state banks that are members of the Federal Reserve System, the FDIC for "nonmember" state banks, and the Office of the Comptroller of the Currency for all National Banks).
Federal credit unions are regulated by National Credit Union Administration (NCUA); Savings & Loan Associations (S&L) and Federal savings banks (FSB) are regulated by the Office of Thrift Supervision (OTS).
The US Congress introduces legislation relating to financial services, and regulators at federal and state levels issue rules and regulations governing the practices of the industry.
Committees at Congress handling financial affairs are the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives.
The US banking system comprises the Federal Reserve System, commercial banks, savings institutions and credit unions. The whole system is regulated at both federal and state levels. Table 1 shows the regulators and insurance agencies for the US banking system.
Table 1-1 - Regulators and Insurance Agencies for the US Banking System
Banking Institution |
Federal Regulator |
Banking Insurance Agency |
Federal-chartered banks |
Office of the Comptroller of the Currency |
Federal Deposit Insurance Corporation |
State-chartered banks |
Federal Deposit Insurance Corporation |
Federal Deposit Insurance Corporation |
Savings institutions |
Office of Thrift Supervision |
Federal Deposit Insurance Corporation |
Credit unions |
National Credit Union Administration |
|
The Federal Reserve System (Fed) is the central bank of the US. It constitutes a Board of Governors and 12 regional Reserve Banks. The Board of Governors is made up of seven members appointed by the US President and confirmed by the Senate. Only one member of the Board is selected from any one of the 12 regional Reserve Banks. The full term of a Board member is 14 years.
Listed below are the functions of the Federal Reserve Board:
(a) conducting the nation's monetary policy;
(b) supervising and regulating banking institutions and protecting the credit rights of consumers;
(c) maintaining the stability of the financial system; and
(d) providing certain financial services to the US government, the public, financial institutions and foreign official institutions.
The duties of the 12 regional Reserve Banks include:
(a) operating a nationwide payments system;
(b) distributing the nation's currency and coin;
(c) supervising and regulating member banks and bank holding companies;
(d) serving as banker for the US Treasury; and
(e) acting as depository for the banks in its own District.
A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment which act as backup facilities should the primary form of intermediation fail."
However, in the absence of effective financial regulations, non-bank financial institutions can actually exacerbate the fragility of the financial system.
Since not all NBFIs are heavily regulated, the shadow banking system constituted by these institutions could wreak potential instability. In particular, CIVs, hedge funds, and structured investment vehicles, up until the 2007-2012 global financial crisis, were entities that focused NBFI supervision on pension funds and insurance companies, but were largely overlooked by regulators.
Due to increased competition, established lenders are often reluctant to include NBFIs into existing credit-information sharing arrangements. Additionally, NBFIs often lack the technological capabilities necessary to participate in information sharing networks. In general, NBFIs also contribute less information to credit-reporting agencies than do banks.
NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits. Additionally, NBFIs also introduces competition in the provision of financial services. While banks may offer a set of financial services as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific clients. Additionally, individual NBFIs may specialize in one particular sector and develop an informational advantage. Through the process of unbundling, targeting, and specializing, NBFIs enhances competitio within the financial services industry.
In 1996, the five NBFI sectors accounted for approximately $200 billion in transactions. (See Exhibit 2-1).
Exhibit 2-1
a) Approximately one-half of this amount was attributable to the money order sector.
b) About one-quarter of this amount was attributable to the check cashing sector.
c) Approximately twelve per cent was attributable to the travelers check sector, and about five percent each to money transmission and retail foreign currency exchange sectors.
Most businesses that offer one NBFI service offer multiple NBFI and other (non-financial) services.
a) Check cashers almost always offer ancillary services, usually money orders, money transmission and numerous non-financial services.
b) Travel-related and financial services businesses often sell travelers checks and offer cash conversion of foreign currencies to their clients.
c) Many grocery, liquor, convenience and drug stores offer money orders; some (grocery stores especially) also offer money transmission services.
The US financial markets are highly developed and influential on the world economy. Its equities markets, debt markets, money markets, foreign exchange markets and futures and options markets, all exercise enormous influence over financial markets in other countries. In 1996, there were 45 600 security and commodity brokers. Table 2 lists the regulators and self-regulating organizations (SROs) for the US financial markets.
Table 3-2 - Regulators and Self-Regulating Organizations for the US Financial Markets
Types of instrument |
Federal Government Regulator |
Self-Regulating Organization |
Corporate stocks/bonds |
Securities & Exchange Commission |
National Association of Stock Dealers |
Asset-backed securities |
None |
None |
Municipal securities |
None |
Municipal Securities Rulemaking Board |
Money market instruments |
None |
None |
Futures |
Commodity Futures Trading Commission |
National Futures Association |
Options |
Commodity Futures Trading Commission |
Options Clearing Corporation |
OTC Foreign exchange |
None |
None |
Equities are shares that represent part ownership of a business enterprise. There are different types of equities, namely, stocks, preferred stocks and warrants.
The US equities markets comprise several stock exchanges. The most important are located in New York City: the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). Other smaller regional exchanges are located in Boston, Philadelphia, Cincinnati, Chicago, San Francisco and Los Angeles. Stocks not listed on a formal exchange are traded in the over-the-counter (OTC) market which includes the National Association of Securities Dealers Automated Quotation system (Nasdaq) and the National Market system (NMS). Securities markets are regulated by the Securities and Exchange Commission (SEC).
To operate in the securities business, firms must be licensed and subscribe to the Security Investor's Protection Corporation (SPIC) which insures client balances against brokerage failure.
The Securities and Exchange Commission (SEC) protects investors and maintains the integrity of the securities markets. SEC is empowered with broad authority over all aspects of the securities industry. This includes the power to register, regulate and oversee brokerage firms, transfer agents, clearing agencies as well as the nation's securities SROs such as the NYSE and the National Association of Securities Dealers (NASD). The SEC has five Commissioners who are appointed by the US President with the advice and consent of the Senate. Their term of service is five years.
In implementing the various pieces of federal securities legislation, the SEC establishes rules that regulate procedures and standards for a variety of activities. These include rules for short selling, solicitations, rights distributions, confirmation procedures, margin credit arrangements, proxy solicitation, tender offers, net capital requirements for securities firms and broker-dealers, reserves, commissions, off-exchange trading, sales of unregistered securities and shelf and active registrations.
Money markets provide liquidity for investors to obtain or lend funds on a short-term basis. Debt instruments with maturities of one year or less are traded in money markets. These instruments include commercial paper , bankers' acceptances , treasury bills , government agency notes , local government notes , interbank loans , time deposits and international agency paper.
There is neither a government regulator nor a SRO for the money markets.
5.19 A future contract is an agreement to buy or sell a standard amount of a specific commodity in the future at a certain price. There are two forms of future contracts, namely, commodity futures and financial futures. Commodity futures concern agricultural products, metals, energy and transport. Financial futures include interest-rate futures, currency futures, stock-index futures, share-price futures, etc.
In the US, the major futures exchanges are the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (Merc). Other futures exchanges include the New York Futures Exchange (NYFE), the New York Mercantile Exchange (MYM), the New York Coffee, Sugar, and Cocoa Exchange (CSCE), the New York Cotton Exchange (CTN), the New York Commodity Exchange (COMEX), the New York Financial Exchange (FINEX), the International Petroleum Exchange (IPE), the Kansas City Board of Trade (KC), the MidAmerica Commodity Exchange (MCE) and the Minneapolis Grain Exchange (MPLS). The US futures activities are regulated by the federal Commodity Futures Trading Commission (CFTC) which operates through the various exchanges and through the National Futures Association (NFA).
In 1999, the US Senate and House of Representatives passed the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (Financial Services Modernization Act).
Federal laws enacted during the Great Depression such as the Glass- Steagall Act and Bank Holding Company Act block banks, stockbrokers and insurance companies from entering each other’s line of business. In order to create financial supermarkets that provide everything from checking accounts to auto insurance, the three industries had lobbied Congress for years to streamline regulatory hurdles that bar such operations. The passage of the Financial Services Modernization Act represents the most significant deregulation of the US financial services industry in over half of a century.
The Financial Services Modernization Act repeals the Glass-Steagall Act’s restrictions on bank and securities firm affiliations and amends the Bank Holding Company Act to permit affiliations among financial services companies, including banks, registered investment companies, securities firms and insurance companies. The Financial Services Modernization Act includes several amendments to the Investment Company Act and the Investment Advisers Act that are intended to ensure that the SEC has full authority over investment companies that are affiliated with banks. It also imposes privacy requirements and disclosure obligations on all financial firms, even if they are not affiliated with a bank or thrift.
REFERENCES
1. http://en.wikipedia.org/wiki/
2. http://www.fincen.gov/news_
3. http://en.wikipedia.org/wiki/
4. http://www.federalreserve.gov/
5. USA Business, The Portable Encyclopedia for Doing Business with the United States, World Trade Press, 1995
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