The Emergency Banking Act During The Great Depression

The savings and loans associations also known as “thrifts” in the United States were primarily financial institutions aimed at encouraging home ownership by providing loans to aspirant home-owners usually belonging to the working class. These institutions were different from commercial banks not only because they were owned jointly by the members with no intermediaries earning profit but also because they were allowed to charge slightly more competitive interest rates on deposits than commercial banks. These savings and loans institutions, however, have gone through periods of booms and busts in response to the United States’ history of varying degrees of deregulation of the financial markets. After the deregulation of the financial market

Confidence in the banking system was completely shattered during this period owing to unregulated competition in the banking sector which allowed deposit interest rates to escalate and riskier loans being made to “bad borrowers” at even higher rates. This system ultimately led to the collapse of the entire system and bank failures became rampant. This experience of the Great Depression initiated a period of regulations in the banking and finance industry and the Banking Act brought about a number of major reforms. The Regulation Q was an important provision of the act which set a maximum rate of interest that could be paid on time deposits. However, in order to encourage investment in the housing industry, Regulation Q made relaxations for the Savings and Loans institutions whereby these firms could pay interest rates on deposits that were slightly higher than that paid on other kinds of deposits. It prevented payment of interest on checking accounts and banks’ engagement in principally non bank activities like securities or insurance business. The Act also created the Federal Deposit Insurance Corporation (FDIC) to insure consumers against their deposits. As a result of these regulations, bank failures reduced to a large extent. “…from 1934 to 1973 only 641 U.S. banks were

During the regulatory regime under the Glass Steagall, what made it possible to prevent deposits from being transferred to the money market with higher yielding assets was the Fed’s policy of pegging the market interest rate below the Regulation Q levels that discouraged competition between bank deposits and other money substitutes. However, as inflation rates started rising in the 1970s, the real rate of interest kept falling till it reached negative levels when it became completely unprofitable for depositors and they looked for more profitable alternatives in the securities and money markets. Despite several considerations the money market mutual funds were ultimately not brought under the provisions of Regulation Q. As a result, the pressure from the banking sector to raise the Regulation Q coupled with the lack of institutional willingness of the members of the Federal Reserve that followed from the prosperity in the post war years, finally led to the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) in 1980. The aim of this Act was to gradually phase out Regulation Q over a period of six years in order to allow banks and Savings and Loans to compete with the money market mutual funds. The deposit insurance was also raised by $60,000.