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The passage of the Federal Reserve Act in 1913 was a watershed in U.S. banking history. It created the Federal Reserve System, consisting of a network of branches in large American cities, tied together by a Board of Governors headquartered in Washington, D.C.
The Fed would serve as the country's central bank, regulating its members (including all national banks) and overseeing a new, more flexible currency that could grow with the needs of the economy and would gradually take the place of national bank notes in the money supply. The last such notes were issued in 1929. Despite its name, the OCC was now officially out of the currency business.
No longer burdened with the administration of a complex monetary system, the OCC sharpened its focus on bank examination and regulation. It became essentially an organization of national bank examiners charged with doing one job: maintaining the safety and soundness of the banks they supervised.
While the OCC's work after 1913 was simplified in one respect, it was complicated by the surge in new bank formation. By 1921 there were more than 29,000 commercial banks in the United States, three-quarters of them state-chartered and many so thinly capitalized that the loss of a single large deposit or loan could bankrupt them. In addition, there were thousands of savings and loan institutions that specialized in making residential mortgages and that, consequently, were extremely vulnerable to fluctuations in house prices.
The OCC had long taken a stand against chartering new banks in communities that already had more banks than they could support. The shift in banking resources away from the national charter and federal authority nevertheless was a development the OCC could not ignore.
With the agency's support, Congress passed the McFadden Act of 1927, which empowered national banks to increase their loans to single individuals, to make real estate loans, to deal in securities, and to open branches. The Comptrollers in office between the two world wars were resolute in maintaining high supervisory standards, upholding the quality of OCC supervision, and refusing charters to banks they believed had little or no prospect of success.
All this mattered little when the Great Depression struck with devastating force after 1929. First to feel the effects were banks involved in stock trading—and those whose customers were. Unfortunately, the 1920s bull market on Wall Street had brought millions of Americans into the market for the first time, and many of them were wiped out when the market turned against them. Loan losses soared, and bank deposits dwindled. Whole industries shut down. As the crisis worsened, people lost their jobs, their homes, and their hopes.
On March 6, 1933, just two days after taking office, President Franklin D. Roosevelt declared a bank "holiday"—a respite designed to calm frazzled nerves, conserve assets, and begin the process of healing the nation's shattered banking system. The OCC played a major role in that effort. The temporary shutdown of the nation's banks was no holiday for state and national bank examiners, who worked under heavy pressure to review the condition of thousands of banks and decide whether to issue or deny them the licenses they needed to reopen. National banks failing the test were placed into OCC-supervised receiverships that liquidated the banks' assets. Banks judged to be salvageable were returned to private management, offered government capital until money could be raised privately, and placed under intensive supervision to nurse them back to health.
For many Americans, the crisis underscored the weaknesses of the existing regulatory framework, with its liberal if not runaway chartering, inconsistent supervision, and regulations that allowed banks to engage in the riskiest activities. Major changes came with the passage of the Glass–Steagall Act of 1933, which created "firewalls" separating investment and commercial banking, regulated many deposit products, and raised minimum capital requirements for national banks. Glass–Steagall also created a system of federal deposit insurance, which proved instrumental in restoring public confidence and luring funds back into the banks, where the money could be used to promote recovery. State banks that opted for protection under the federal deposit insurance umbrella were subject to co-supervision by the newly created Federal Deposit Insurance Corporation (FDIC) and state banking authorities—an important step toward more consistent supervisory standards.
By now, there were three major federal bodies regulating commercial banks—the OCC, the Federal Reserve, and the FDIC—as well as authorities in each state. Calls to resolve differences in how the agencies' examiners rated banks and evaluated their assets led to a 1937 interagency agreement that prescribed a more consistent treatment of loans and securities and common reporting forms. Differences persisted nonetheless, as each agency adopted its own policies within the shared framework.
A new era of conservatism and government involvement in banking was about to begin.
Next: 1936 - 1966