The Regulation Of The Financial Institutions’ Sector

1. 18 The Regulation Of The Financial Institutions’ Sector C h a p t e r Money and Capital Markets Financial Institutions and Instruments in a Global Marketplace Eighth Edition Peter S. Rose McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu

2.  Learning Objectives  • To explore why financial institutions are one of the most regulated industries in the modern world. • To discover the many types of regulation, and to understand how the financial institutions have been affected. • To examine the recent global trend toward deregulation.

3. The Reasons Behind Regulations • Concern for the safety of the public’s funds. • To promote public confidence in the system. • To ensure equal opportunities and fairness in the public’s access to financial services. • To prevent excessive money creation, and hence excessive inflation. • To aid “disadvantaged” economic sectors. • To ensure that important financial services are provided reliably and at a reasonable cost.

4. Do Regulations Benefit or HarmFinancial Institutions? • Regulations subsidize the growth of financial institutions and protect them from competition. • Regulations tend to increase public confidence. • Regulations spawn innovative escapes (regulatory dialectics) through loopholes in the regulations. • Regulations can benefit financial institutions.

5. Do Regulations Benefit or HarmFinancial Institutions? • Regulatory dialectics are not the most productive form of innovation. • The time and energy spent on regulatory compliance activities are costly. • Regulations can harm financial institutions.

6. The Regulation of Commercial Banks • Due to their importance in the financial system, commercial banks are typically the most regulated of all financial institutions. • Responsibility for regulating U.S. banks today is divided among three federal banking agencies – the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation – and the state banking commissions of the 50 states.

7. The Federal Reserve System • Supervises and regularly examines all member banks operating in the U.S. • Imposes reserve requirements on deposits held by all depository institutions and grants temporary loans of reserves. • Must approve all applications of member banks to merge, establish branches, or exercise trust powers.

8. The Federal Reserve System • Supervises international banking corporations organized by U.S. banks and foreign banks operating in the U.S. • Regulates and examines all bank and financial holding companies in the U.S. • Conducts monetary policy to control the growth of money and credit in the financial system.

9. The Comptroller of the Currency • Issues charters for new national banks. • Regulates and regularly examines all national banks. • Must approve all national banks’ applications for new branch offices, trust powers, mergers, and consolidations. • Declares insolvent national banks closed.

10. Federal Deposit Insurance Corporation • Insures deposits of savings institutions (thrifts) and banks conforming to its regulations up to $100,000, and acts as receiver for all national banks declared insolvent and for state banks if requested by a state banking commission. • Must approve applications by insured banks to set up branches, merge or exercise trust powers • Requires all insured banks to submit reports on their financial condition. .

11. State Banking Commissions • Issue charters for new state banks. • Supervise and regularly examine all state-chartered banks. • Approve applications by state banks to form a holding company, acquire subsidiaries, or establish branches. • Declare insolvent state-chartered banks closed and appoint a receiver to liquidate or otherwise dispose of the assets of failed state banks.

12. Regulations ControllingThe Geographic Expansion of Banks • The new geographic markets that banks can enter have been tightly controlled. • National Bank Act (1863-4) • Banking Act (1933) • Bank Holding Company Act(1956,amended 1970) • Bank Merger Act (1960, amended 1966) • Financial Institutions Reform, Recovery, and Enforcement Act (1989) • Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)

13. Regulation of the Services Banks Can Offer • Regulations controlling the services banks can offer have also been tight out of concern for bank safety and a desire to protect certain nonbank financial institutions from tough bank competition. • Glass-Steagall Act (Banking Act) (1933) • Financial Services Modernization (Gramm-Leach-Bliley) Act (1999)

14. The Rise of Disclosure Laws in Banking • One rapidly expanding area of U.S. banking regulation today concerns disclosure rules. • Truth in Lending Act (1968) • Home Mortgage Disclosure Act (1975) • Community Reinvestment Act (1977) • Truth in Savings Act (1991) • FDIC Improvement Act (1991) • Financial Services Modernization (Gramm-Leach-Bliley) Act (1999)

15. The Growing Importance ofCapital Regulation in Banking • Another major trend reshaping the regulation of banks and other financial institutions today centers upon their capital. • Basle Agreement (1988) • FDIC Improvement Act (1991)

16. The Unfinished Agenda for Banking Regulation • Slowly, banking is experiencing an era of deregulation, as legal constraints are lifted on a variety of banking activities. • Supervision of financial institutions in the future will rest primarily upon: • government examinations (of market data and the firms’ risk management systems) • capital requirements, and • market discipline.

17. The Regulation of Nonbank Thrift Institutions • Credit Unions • Chartering: National Credit Union Administration (NCUA) / state • New branches: No approval required • Mergers & acquisitions: NCUA / state • Deposit insurance: NCUA Share Insurance Fund / state • Supervision: NCUA / state • Depository Institutions Deregulation and Monetary Control Act (1980)

18. The Regulation of Nonbank Thrift Institutions • Savings and Loan Associations • Chartering: Office of Thrift Supervision (OTS) / state • New branches: OTS / FDIC / state • Mergers & acquisitions: OTS / FDIC / state • Deposit insurance: FDIC / state • Supervision: OTS / state • Financial Institutions Reform, Recovery and Enforcement Act (1989) • FDIC Improvement Act (1991)

19. The Regulation of Nonbank Thrift Institutions • Savings Banks • Chartering: Office of Thrift Supervision (OTS) / state • New branches: OTS / state • Mergers & acquisitions: OTS / FDIC / state • Deposit insurance: FDIC / state • Supervision: FDIC / state

20. The Regulation of Nonbank Thrift Institutions • Money Market Funds • Chartering: Securities and Exchange Commission (SEC) • New branches: No approval required • Mergers & acquisitions: No approval required • Deposit insurance: no government insurance • Supervision: SEC (selected activities)

21. The Regulation of Insurance Companies • While not quite as heavily regulated as commercial banks, insurance intermediaries face tough regulatory rules that are imposed primarily by state insurance commissions.

22. The Regulation of Pension Funds • Because pension funds have risen rapidly to hold the bulk of the retirement savings of workers, they are heavily regulated by the courts and government agencies today. • Employee Retirement Income Security Act (1974) • Pension Benefit Guaranty Corporation, or “Penny Benny” (a federal agency)

23. The Regulation of Finance Companies • The bulk of regulation of finance companies is at the state level and focuses principally upon the making of consumer loans.

24. The Regulation of Investment Companies • Investment companies or mutual funds are regulated predominantly by the federal government in the U.S. • Securities and Exchange Commission • Investment Company and Investment Advisers Acts (1940)

25. Trends inThe Regulation of Financial Institutions • Regulation seeks to promote the safety and stability of financial institutions in order to preserve the confidence of the public and avoid institutional failures. • However, regulation can become a costly burden that significantly increases the operating costs of financial institutions and limits the cleansing effects of failure and competition.

26. Trends inThe Regulation of Financial Institutions • Increasingly, • market discipline is playing a bigger role, • regulators are cooperating more (because the distinctions between the financial institutions are blurring), • the focus of regulation is moving away from control over the services offered and geographic expansion to controlling risk taking, and • there is increasing attention to public disclosure.

27. Money and Capital Markets in Cyberspace • The government commissions and agencies that regulate financial institutions have become increasingly visible on the world wide web: • http://www.federalreserve.gov • http://www.occ.treas.gov/ • http://www.fdic.gov/ • http://europa.eu.int/index_en.htm • http://www.wdfi.org/ • http://www.banking.state.ny.us/ • http://www.insurance.state.pa.us/ • http://www.sec.gov/

28. Chapter Review • The Reasons Behind the Regulation of Financial Institutions • Do Regulations Benefit or Harm Financial Institutions? • The Regulation of Commercial Banks • The Federal Reserve System • The Comptroller of the Currency • Federal Deposit Insurance Corporation • State Banking Commissions

29. Chapter Review • The Regulation of Commercial Banks … continued • Regulations Controlling the Geographic Expansion of Banks • Regulation of the Services Banks Can Offer • The Rise of Disclosure Laws in Banking • The Growing Importance of Capital Regulation in Banking • The Unfinished Agenda for Banking Regulation

30. Chapter Review • The Regulation of Nonbank Thrift Institutions • Credit Unions • Savings and Loan Associations • Savings Banks • Money Market Funds • The Regulation of Insurance Companies • The Regulation of Pension Funds • The Regulation of Finance Companies

31. Chapter Review • The Regulation of Investment Companies • An Overview of Trends in the Regulation of Financial Institutions