Mark Hauser, co-managing partner at Hauser Private Equity, takes an inventory of the US banking system and highlights protections for depositors.
Banks and similar financial institutions have historically been woven into the fabric of American life. For generations, individuals have held checking accounts, savings accounts, special-purpose savings accounts, and Certificates of Deposit at their community banks. Banks’ customers have purchased homes and started small businesses with locally sourced loans.
In the 21st century, brick-and-mortar banks are now joined by a growing number of online banks. Digital banking services have also seen increasingly wide use. Finally, banks use artificial intelligence and machine learning to automate some operations, process large datasets, and predict customers’ behavior.
Although technological advancements are important, customers’ deposits still form the foundation of banking operations. In Spring 2023, customers are understandably concerned about the safety of their funds. Here, private equity principal Mark Hauser explains the workings of the United States’ banking system. He also offers insights on depositor protections and regulatory oversight.
Overview of the United States Banking System
The United States banking system is an outgrowth of a model instituted in 14th-century Europe. In its simplest form, a bank provides a safe repository for individuals’ and business owners’ funds. Depositors receive a small amount of interest on their money.
Concurrently, the bank loans out the depositors’ money to individuals and business owners who need capital. The bank collects interest on these loans, charging a higher rate than it pays depositors.
Four Major Types of Banks
The United States’ banking industry contains a diverse group of financial institutions. Examples include retail banks, commercial banks, investment banks, and the United States’ central bank.
A retail bank (or community bank) maintains a main office plus multiple branch offices. Catering to the general public, retail banks typically offer savings and checking accounts, loan services, and credit card accounts.
Retail banks also facilitate investments such as Certificates of Deposit, Individual Retirement Accounts (or IRAs), and mutual funds. Mark Hauser notes that the biggest retail banks offer private banking and wealth management services.
Also called corporate banks, these financial institutions target business clients. Locally owned small businesses and large corporations may be among a commercial bank’s clients.
Commercial banks feature daily business banking services along with cash management and credit offerings. These financial institutions also handle commercial real estate transactions and employer services.
Investment banks take corporate banking to another level. Mark Hauser explains that these multifaceted financial institutions act as financial intermediaries in complex transactions. Investment banking clients typically include governments, large corporations, pension funds, hedge funds, and other financial institutions.
Most countries have an independent central bank. This government-authorized financial institution oversees a country’s monetary policy and money supply. The central bank also helps to regulate the banks’ capital and monetary reserve requirements. Finally, the central bank is tasked with ensuring the stability of the country’s national currency and economic system.
In the United States, the U.S. Federal Reserve System (or the Fed) performs these functions. Private equity executive Mark Hauser states that the Fed consists of 12 Federal Reserve Banks and 24 branches. Each Reserve Bank brings regional business and community needs into the Fed’s monetary policy decisions.
Core and Ancillary Banking Services
Today, banks in large cities, small towns, and rural areas have supplemented these three basic services with additional ones. Services may vary according to demand and potential profitability.
Savings accounts are minimal-interest savings vehicles. Many community banks also offer special-purpose savings accounts.
Consumers and businesses use checking accounts for deposits, cash withdrawals, and bill payments. These accounts rarely pay interest and often come with fees.
Consumer and Business Loans
A typical bank lends depositors’ money to individuals and businesses that need those funds. Mortgages, vehicle loans, business loans, home equity loans, and credit card accounts are examples of bank-generated loans.
Other Common Banking Services
- Cashier’s Checks
- Foreign Exchange Transactions
- Money Market Accounts
- Money Orders
- Safe Deposit Boxes
- Traveler’s Checks
- Wire Transfers
Credit Unions Play a Distinctive Role
Some Americans belong to a credit union, which is a financial services institution managed by its members. These non-profit organizations are often created for a specific group, such as state employees or military service members. The members buy co-op shares that are combined to provide loan funds.
When compared to banks, credit unions offer a much smaller range of banking services. In addition, the credit unions likely have fewer locations and ATM machines.
How Bank Depositors Can Protect Their Funds
Many consumers have checking and/or savings accounts at FDIC-insured banks. The Federal Deposit Insurance Corporation (or FDIC) is a standalone agency established by Congress. The FDIC is charged with ensuring public confidence and stability in the United States’ banking system.
The FDIC monitors insured banks to ensure they operate in a safe and appropriate manner. To promote depositors’ confidence, the FDIC insures their money up to $250,000 per depositor, in each ownership category. If a couple has $500,000 in aggregate deposits in one bank, these funds would be FDIC-insured.
Mark Hauser emphasizes that FDIC insurance is unlike an auto or life insurance policy. FDIC-insured depositors do not need to purchase insurance. Instead, they receive automatic insurance coverage for applicable funds.
Guidelines for Bank Depositors with Over $250,000 per Category
At an FDIC-insured bank, depositors may have insured accounts in multiple ownership categories. To illustrate, a depositor might have one account solely in their name. They may also have a joint account with their spouse and another account dedicated to retirement savings. Each account will be insured up to $250,000.
Alternatively, the individual may wish to consult with a private banker at their financial institution. They might also consider opening accounts at other FDIC-insured financial institutions. The funds will be insured up to a maximum of $250,000 in each bank’s qualifying account.
Individuals with very large amounts of liquid assets should consult with a trusted financial adviser. This highly qualified professional may be able to recommend ways to potentially protect these funds.
An Innovative Deposit Distribution Alternative
Some depositors have opted into a service that distributes their deposits across a network of banks. To illustrate, the IntraFi Network Deposits Program allows members to deposit their funds at their choice of network banks. The network administrators allocate each depositor’s money so that each account meets the $250,000 maximum threshold. Then, the administrators transfer those accounts to other network banks.
Private equity expert Mark Hauser notes that the IntraFi Network offers depositors a choice of three account types. These include a demand deposit account, a money market account, or a Certificate of Deposit.
Regulatory Oversight of United States Banks
United States banking regulations depend on the banks’ respective business structures. The banks can face state-level regulation, national-level regulation, or both.
Each state’s Department of Banking or Department of Financial Institutions regulates the banks in that state. Besides auditing and inspecting the banks, this agency determines each bank’s allowed interest rate and permitted operating practices.
The Office of the Comptroller of the Currency regulates national banks. This agency’s regulations mostly address banks’ asset quality, liquidity, and capital levels. In addition, the FDIC regulates banks that possess FDIC insurance.
What’s Behind Increased Banking Regulations
For perspective, the 2008 global financial crisis resulted in a drastic increase in banking regulations. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted as part of this effort.
As part of the Act’s provisions, large banks must now undergo annual “stress tests.” Finance expert Mark Hauser notes that these pivotal evaluations determine whether a bank has enough capital to keep operating under substandard economic conditions.
The Banking Industry’s 2023 Regulatory Environment
In 2022, numerous issues disrupted the United States economy. Interest rate fluctuations, extremely high inflation, the pandemic’s residual effects, and the Russia-Ukraine war were major influences. In addition, downturns in the stock and bond markets, and cryptocurrency market issues, have played a role in banking regulators’ priorities for 2023.
Three March 2023 Bank Failures Spur New Regulations
The March 2023 failure of three United States banks put all other issues on the sidelines, stresses Mark Hauser. The three financial institutions had decreased liquidity generation capacity while experiencing large-scale deposit withdrawals. Two of the banks entered FDIC receivership while the State of California is managing the third bank’s liquidation process.
After these events unfolded, the Treasury Department, the FDIC, and the Fed issued a joint statement. For the two banks in FDIC receivership, all depositors would have their funds covered even if they were over the $250,000 FDIC insurance limit. These time-critical measures were taken to promote the public’s (and investors’) confidence in the United States’ banking system.
Not surprisingly, the Biden administration has asked for stronger banking regulations. Banks will face more supervision of their liquidity risk management and interest rate risk activities. Banking regulators are expected to order more frequent bank liquidity reporting and stress testing.
Private equity principal Mark Hauser says these measures will ideally prevent further bank failures. Extra oversight will also help to strengthen the United States banking system over the long term.
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