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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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Presentation Transcript
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)
  • 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