anking industry enjoys a close relationship to the economy and the political environment as a whole. Unlike many other industrialized nations, the United States does not have a central bank per se; instead, this function is fulfilled by the Federal Reserve which, in addition to setting the discount rate, also sets the reserve requirement, which is the percentage of assets which banks are required to keep on hand. In other economies, these decisions are made by government agencies directly, and can be used as part of thrift regulation.
Fiscal (taxation) policy can also affect the banking industry. When corporate taxes are increased, the amount that companies are able to leave on deposit with banks is decreased, which lowers the amount of money which can be invested elsewhere by the financial institutions. The "tax and spend" theorists hold that the increased revenue from corporate taxation can be spent elsewhere in the economy, thus creating jobs by increasing the revenues of companies; this would increase the amount of deposits in banks, as well.
Whiting, R. M. (1999, January-February). Glass-Steagall: Is repeal necessary? Bankers Magazine, pp. 37-42.
3. Today, the Fed is a market-driven and customer-driven entity. It has elements of both the public and private sector in its form, functions and operations. Its primary mandate is public policy, which goes back to the fact that it was created by an act of Congress rather than by the private sector. In this way, the Fed can be considered an instrument of the government that utilizes the language and mechanisms of the private sector (Goodfriend, 1994, p. 572).
The Federal Reserve does not set interest rates directly for mortgages or Treasury bills, or any other financial instruments marketed to consumers. Instead, the Federal Reserve adjusts the discount rate, which is the interest rate at which eligible institutions borrow funds directly from a Federal Reserve Bank. ...