Banking And Market Regulation History Of Banking And 279996

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Cleaned assignment instructions:

Analyze the history, regulation, and development of banking and financial systems, focusing on key historical events, institutions, policy changes, and international standards related to banking regulation and financial market oversight. Reflect on the evolution of banking in the United States, the impact of deregulation, crisis management, and the international harmonization of banking rules, including capital requirements under Basel standards. Additionally, relate the development of financial institutions and markets to performance measurement practices, strategy development, and valuation methods in business contexts like financial and forensic accounting.

Paper For Above instruction

The history and evolution of banking and market regulation have profoundly shaped the contemporary financial landscape, both in the United States and globally. From the early origins of banking in Italy and London to the sophisticated, regulated systems of today, the development of financial institutions reflects a continually changing interplay between economic needs, technological innovations, and legislative frameworks. Understanding this history provides critical insights into the foundations of modern banking regulation, the rationale behind specific policies, and the ongoing challenges faced by regulators and institutions alike.

In the earliest periods, banking evolved from basic money storage practices to more complex forms of financial intermediation. The Italian banks — with their roots in “banco” (bench) — and London goldsmiths played foundational roles in developing the functions of banks that would support commerce and trade. These early institutions introduced the concepts of deposits, loans, and money creation, setting the stage for more intricate financial systems. Over time, different types of financial institutions emerged, including depository institutions like commercial banks, thrift institutions such as savings and loans, credit unions, and non-depository entities like finance companies and insurance firms, each serving specific roles within the broader financial ecosystem (Mishkin & Eakins, 2018).

The establishment of the U.S. financial system features key milestones, beginning with the Bank of North America in 1781, followed by the First and Second Banks of the United States, which operated under the influence of both federal and state authorities. The “Free Banking” era marked a period of deregulation and proliferation of state-chartered banks, which prompted the need for federal oversight. The National Bank Act of 1863 laid the groundwork for a dual banking system where federal and state banks coexisted but faced different regulatory regimes (Calomiris & Mason, 2003). The creation of the Federal Reserve System in 1913 marked a turning point, providing a central banking authority to oversee monetary policy, manage crises, and stabilize the economy (Mishkin, 2007).

Supervisory frameworks evolved with legislation such as the McFadden Act of 1927, which allowed state banks to adopt their own branch laws, and the Banking Act of 1933 (Glass-Steagall Act), which redefined the role of banks and established deposit insurance through the Federal Deposit Insurance Corporation (FDIC). These efforts aimed to reduce the risks of bank failures and restore confidence following the Great Depression. Similarly, the Securities Acts of the 1930s created the Securities and Exchange Commission (SEC) to regulate capital markets, reflecting an integrated approach to financial regulation that encompasses both banking and securities markets (Berger & Udell, 2004).

The development of money market funds in the 1970s exemplifies innovations aimed at providing investors with insurance against short-term interest rate fluctuations while circumventing interest rate ceilings. Deregulation in the 1980s, through acts like the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germain Act of 1982, expanded the operational independence of banks and savings and loans, enabling them to offer new products and services like money market deposit accounts and adjustable-rate mortgages. These policies aimed to foster competition, efficiency, and innovation but also contributed to financial instability, exemplified by the savings and loan crisis in the late 1980s and early 1990s (Powell, 2012).

The savings and loan crisis resulted from a combination of deregulation, risky lending practices, and insufficient oversight, leading to the failure of over a thousand S&Ls. Regulatory agencies responded with measures such as the Financial Institutions Reform, Recovery, and Enforcement Act (1989), which restructured supervision and deposit insurance frameworks and created the Resolution Trust Corporation (RTC) to manage disposing of troubled assets. The crisis underscored the need for prudent regulation and risk management in the financial sector (Gordon & Nair, 1995).

Reforms continued with the Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act), which repealed the Glass-Steagall restrictions, allowing commercial banks, investment banks, and insurance companies to affiliate under a financial holding company—thus fostering financial conglomerates but raising concerns about systemic risk (Demsetz et al., 1999). This period of deregulation aimed to expand financial innovation and ease of service integration but also heightened the necessity of robust oversight mechanisms.

Internationally, the European Union sought to create a harmonized banking system through efforts such as the Capital Requirements Directive, aligning national rules with global standards set by the Basel Committee. The Basel Accords, particularly Basel III, mandate risk-weighted capital ratios to ensure banking resilience and prevent systemic crises by requiring international banks to hold sufficient capital relative to their risk exposure (BIS, 2010). The movement toward uniform standards reflects the interconnected nature of global finance, where instability in one country can threaten worldwide economic stability.

Beyond regulation, performance measurement tools like the balanced scorecard and strategy maps help financial institutions align operational activities with strategic objectives. These tools enable managers to monitor key performance indicators in financial, customer, internal process, and learning and growth perspectives, facilitating informed decision-making (Kaplan & Norton, 1996). For example, in banking, strategic initiatives might focus on improving loan quality, enhancing customer satisfaction, or strengthening risk management practices, all tracked through specific metrics integrated into a comprehensive performance framework.

In business valuation, especially within financial and forensic accounting, methods such as discounted cash flow, comparable company analysis, and asset-based valuation are employed to estimate the worth of financial institutions and assets. Proper valuation considers historical financial performance, market conditions, and unique factors like the potential sale value of properties or the value of core business assets. The case study of Cermco, a provider of CRM solutions, illustrates the importance of analyzing revenue trends, profitability, and the strategic positioning that sustains client loyalty despite market share declines (Koller et al., 2010).

Similarly, disputes over assets such as property valuation in estate divisions—like the duplex apartment example—demonstrate the significance of reliable valuation methods that incorporate comparable sales, replacement costs, income potential, and market conditions. These methods help ensure fair resolution and reflect economic realities rather than subjective judgments (Ross et al., 2015).

In conclusion, the historical development of banking and financial regulation reveals a dynamic evolution driven by economic needs, technological advances, crises, and the global integration of markets. Regulatory reforms aim to balance the facilitation of innovation with the safeguarding of financial stability. Performance measurement and valuation methods serve as critical tools for strategic management and dispute resolution, ensuring that financial institutions operate efficiently and transparently within a complex and interconnected financial system.

References

  • BIS. (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Bank for International Settlements.
  • Berger, A. N., & Udell, G. F. (2004). The economic effects of the Gramm-Leach-Bliley Act on banking organizations and the financial services industry. Journal of Money, Credit, and Banking, 36(3), 519-543.
  • Calomiris, C. W., & Mason, J. R. (2003). Consequences of bank charter length: Evidence from the United States. Journal of Financial Intermediation, 12(4), 292-322.
  • Demsetz, R. S., Strahan, P. E., & Venkatesh, S. (1999). Bank holding company and banking system efficiency: Evidence from the Gramm-Leach-Bliley Act. Journal of Banking & Finance, 23(3), 347-364.
  • Gordon, R. A., & Nair, V. B. (1995). The Savings and Loan Crisis: Lessons for the Future. Journal of Economic Perspectives, 9(2), 131–147.
  • Kaplan, R. S., & Norton, D. P. (1996). Using the Balanced Scorecard to Align Business Activities to Strategy. Harvard Business Review, 74(1), 171-179.
  • Koller, T., Goedhart, M., & Wessels, D. (2010). Valuation: Measuring and Managing the Value of Companies. John Wiley & Sons.
  • Mishkin, F. S. (2007). The Economics of Money, Banking, and Financial Markets (8th ed.). Pearson.
  • Mishkin, F. S., & Eakins, S. G. (2018). Financial Markets and Institutions (9th ed.). Pearson.
  • Powell, J. (2012). Lessons of the Savings and Loan Crisis. Federal Reserve Bank of St. Louis Review, 94(2), 137-151.

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