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Bank Regulation. Bank Regulation. G&K Chp. 2 Need for Regulation Trends in Regulation. Need for Regulation. Safety and Financial Soundness Provide Monetary Stability Maintain Financial Market Efficiency Protect Consumers Maintain Payments System. What Regulation Cannot Do.

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Bank regulation1
Bank Regulation

  • G&K Chp. 2

  • Need for Regulation

  • Trends in Regulation


Need for regulation
Need for Regulation

  • Safety and Financial Soundness

  • Provide Monetary Stability

  • Maintain Financial Market Efficiency

  • Protect Consumers

  • Maintain Payments System


What regulation cannot do
What Regulation Cannot Do

  • Prevent Bank Failures

  • Eliminate Risk

    • In Economy

    • In Bank Operations

  • Guarantee Good Mgmt Decisions


Primary regulators
Primary Regulators

  • Federal Reserve (Fed)

    • http://www.ny.frb.org/banking/regulations.html

  • Federal Deposit Insurance Corp. (FDIC)

  • Office of the Comptroller of the Currency (OCC)

  • Office of Thrift Supervision (S&L’s)


Safety and soundness
Safety and Soundness

  • Supervision and Examination

    • Appraise Asset Quality, Mgmt & Mkt Risk

    • Asset Quality is mainly Loan Quality

      • Problem Loans, Payments and Reserves/Chg-Offs

    • Mgmt based on Policies and Procedures

    • Mkt Risk is Bank sensitivity to Int Rate Change

      • Also can include off-balance sheet activities and trading portfolio.


Safety and soundness1
Safety and Soundness

  • Negative Results of Examination

    • Informal Advisory

      • Suggested Actions for Improvement

    • Memorandum of Understanding

      • IDs specific violations and prescribes actions

    • Cease and Desist Order

      • Legal Document that IDs illegal or unfair practice and requires discontinuance under penalty of law


Deposit insurance
Deposit Insurance

  • Maintain confidence with Insurance of $100,000 per deposit account

  • FDIC historically ran two funds

    • Bank Insurance Fund (BIF) for Banks

    • Savings Assoc Insur Fund (SAIF) for S&Ls

    • Paid fees of around 20 cents per $100 deposit

  • There is now only one fund and after 1998, about 98% of banks pay no fees


Failures and insurance payout
Failures and Insurance Payout

  • Failure is relatively rare with 50 in 1982 and only 2 in 1998

  • Industry Failure was experienced by S&Ls in late 80’s and early 90’s with over 500 failures in 1990.

  • Instead, usually Too Big Too Fail (TBTF)

    • Gov’t Organized Take-over

    • DeFacto 100% Insurance on all accounts


Federal reserve involvement
Federal Reserve Involvement

  • Does not insure, but actions support system

  • Discount Window Loans

  • Support Financial Markets

  • Support during failure of non-FDIC insured institutions

  • Support in Repurchase Agreement and Farm Credit markets


Chartering and regulation
Chartering and Regulation

  • OCC (“national” bank) or appropriate state authority (“state” bank)

  • National banks regulated by OCC, Fed and FDIC and are required to carry FDIC Ins.

  • State banks elect Fed and FDIC supervision

  • OCC examines, approves mergers and branching

  • Fed sets reserves, approves mergers and branching, examines state banks


Bank regulation of 1930s
Bank Regulation of 1930s

  • The Banking Act of 1933 (Glass-Steagall Act)

    • Banks can’t do investment banking

    • Established the FDIC

    • Fed caps TD rates and prohibits int on DDs

    • Inc’d capital requirements on national banks

  • The Banking Act of 1935

    • Expand Fed powers on capital reqs and rates

    • OCC powers to charter national banks


Bank regulation of 1930s1
Bank Regulation of 1930s

  • The 1933 and 1935 banking acts restricted :

    • Pricing

    • Geography

    • Products

    • Capital


Bank reforms since 1980
Bank reforms since 1980

  • Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980

    • Uniform reserve requirements for all depository institutions.

    • Federal Reserve services available to all depository institutions.

    • Regulation Q to be phased out by the Depository Institutions Deregulation Committee (DIDC).

    • Deposit insurance limit raised from $40,000 to $100,000 per account.

    • Negotiable order of withdrawal (NOW) accounts approved (interest-bearing checking accounts with fixed limit of 6% interest rate).

    • Savings and loans allowed to make more consumer loans and given trust powers.


Bank reforms since 19801
Bank reforms since 1980

  • Garn-St Germain Depository Institutions Act of 1982

    • Money market deposit accounts (MMDAs) to compete with money market mutual funds (MMMFs).

    • FDIC/FSLIC assistance for troubled or failing institutions

    • Net worth certificates (or bank capital held by the government) was used by regulators to keep failing thrifts from being closed.

    • Asset powers of thrifts expanded in consumer and commercial lending to enable them to compete with banks.


Bank reforms since 19802
Bank reforms since 1980

  • Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

    • Regulatory restructuring FHLBB and FSLIC closed; OTS established under the U.S. Treasury. FDIC insures all deposits thru different depts.

    • Thrifts’ asset powers reduced by focusing more on home lending

    • “Cease-and-desist” powers of regulators.

    • Enabled cross-bank guarantees in multi-bank holding companies.


Bank reforms since 1990
Bank reforms since 1990

  • Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991

    • Prompt corrective action (PCA) by regulators

    • 6% capital limit

    • Restrictions of the ability of the FDIC to protect uninsured depositors in a large bank failure (i.e., lessened the “too big to fail” or TBTF problem).

    • Risk-based deposit insurance scheme implemented.

    • Raised deposit insurance fees to build up federal insurance reserves.


Bank reforms since 19901
Bank reforms since 1990

  • Omnibus Budget Reconciliation Act of 1993

    • Provided that insured depositors a priority over noninsured depositors/creditors claims.

    • Increases “market discipline” and protects smaller depositors.

  • Riegle-Neal Interstate Banking and Branching Act of 1994

    • Interstate banking allowed in 1995 through multi-bank holding companies.

    • Interstate branching allowed in 1997.


Bank reforms since 19902
Bank reforms since 1990

  • Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)

    • Ended 1933 Glass-Steagall prohibitions on separation of banks from investment banking

    • Ended 1956 Bank Holding Company Act’s prohibitions on insurance underwriting.

    • Banks, brokerage firms, and insurance companies can merge.

    • Financial holding companies allowed to engage in a wide variety of financial services (i.e., financial supermarkets).

    • Banking and commerce remain separate.


Regulation for a new millennium
Regulation for a New Millennium

  • USA Patriot Act of 2001

    • “Know your customer”

    • Monitor accounts for money laundering w/ reporting requiremts (SARs).

    • Monitor accounts from shell companies

  • Unresolved Issues

    • Capital Adequacy – Basel II

    • Failure and Deposit Insurance Reform

    • Financing and Advisement of Hedge Funds


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