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The Impact of Government Policy and Regulation on the Financial-Services Industry

The Impact of Government Policy and Regulation on the Financial-Services Industry. 2- 2. Key Topics. The Principal Reasons for Bank and Nonbank Financial-Services Regulation Major Bank and Nonbank Regulators and Laws Emergency Economic Stabilization Act and the Global Credit Crisis

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The Impact of Government Policy and Regulation on the Financial-Services Industry

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  1. The Impact of Government Policy and Regulation on the Financial-Services Industry

  2. 2-2 Key Topics • The Principal Reasons for Bank and Nonbank Financial-Services Regulation • Major Bank and Nonbank Regulators and Laws • Emergency Economic Stabilization Act and the Global Credit Crisis • The Central Banking System • Obama’s Financial Reform Plan

  3. 2-3 Reasons for the Regulation of Banks • Protection of the Safety of the Public’s Savings • Control of the Supply of Money and Credit • Ensure Equal Opportunity and Fairness in Access to Credit • Promote Public Confidence in the Financial System • Avoid Concentration of Power • Support of Government Activities • Help for Special Segments of the Economy

  4. 2-4 Principal Regulatory Agencies Under the Dual Banking System • Federal Reserve System • Comptroller of the Currency • Federal Deposit Insurance Corporation • Department of Justice • Securities and Exchange Commission • State Banking Boards or Commissions

  5. 2-5 What is Regulated? • Initial creation of depository institutions • Initial licensing and chartering • Location and number of physical branches, offices • Initial board of directors and officers • Minimum cash and capital requirements to open • On-going operations • Mergers and acquisitions • Opening or closing of offices, branches • Many operations procedures • What financial services/products may be offered • Assets • Diversification of assets • Quality of assets • Liquidity of assets • Level of cash reserves

  6. What is Regulated? –Cont. 2-6 • Liabilities & equity • Types of liabilities created • Distribution of financing of assets • Quality of liability and equity accounts • Minimum capital requirements • Others • Community involvement • Degree of market share in each market area • Non-discriminatory operating policies • Regulatory Process • Examinations • Reports • CAMELS Rating: C apital adequacy; A sset Quality; M anagement Quality; E arnings – amount & stability; L iquidity; S ensitivity to market risk

  7. Goals and Functions of Bank Regulations 2-7 • Laws Limiting Bank Lending and Risk • Laws Restricting and Expanding Services Banks and Other Depository Institutions Can Offer • Laws Prohibiting Discrimination in Offering Services • Laws Mandating Increased Information Transparency and More Accurate Financial Reporting • Laws Regulating Branch Banking • Laws Assisting Federal Agencies in Dealing with Failing Depository Institutions

  8. 2-8 National Banking Act (1863,1864) • Passed During the Civil War to Help Fund the War • Created A New Division of the Treasury, the Comptroller of the Currency • Created National Banks with a Federal Charter

  9. 2-9 Federal Reserve Act of 1913 • Passed After a Series of Financial Panics at the Beginning of the Century • Created the Federal Reserve System • Gave the Fed the Authority to Act as the Lender of Last Resort • Created to Provide a Number of Services to Member Banks • Today the Fed Controls the Money Supply

  10. 2-10 Glass-Steagall Act 1933 • Passed During the Great Depression • Separated Investment and Commercial Banking • Created the FDIC • Fed Given the Power to Set Margin Requirements • Prohibited Interest to be Paid on Checking Accounts

  11. 2-11 FDIC Act 1935 • Addressed the Issues Left Out of the Glass-Steagall Act • Gave the FDIC the Power to Examine Banks and Take Necessary Action

  12. 2-12 Social Responsibility Acts • 1968 – Full Information on Terms of Loans Must be Given • 1974 – Cannot Be Denied a Loan Based on Age, Sex, Race, National Origin or Religion • 1977 – Cannot Discriminate Based on the Neighborhood in Which Borrower Resides • 1987 and 1991 – Banks Must Disclose Full Terms on Deposit and Savings Accounts

  13. 2-13 Depository Institution Deregulation and Monetary Control Act (DIDMCA) 1980 • First of Deregulation Acts • Phased Out Interest Rate Ceilings • Allowed Interest to be Paid on Checking Accounts (NOW Accounts) • Term Transaction Account Created – All Institutions with These Accounts Subject to Reserve Requirements

  14. 2-14 Garn-St. Germain Act 1982 • Continued the Deregulation of DIDMCA • Created Money Market Deposit Account • FDIC Could Arrange Mergers Across State Lines if Needed • Loan Limits were Liberalized • Banks in Need of Capital Could Get It From the FDIC

  15. 2-15 Competitive Equality in Banking Act (CEBA) 1987 • Allowed Creation of Special Bridge Banks for Failed Institutions • Bridge Banks Are Special National Banks Operated by the FDIC • Bridge Banks Created When Bank is Essential to the Community

  16. 2-16 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) 1989 • Created in Response to Large Number of Bank and S&L Failures • Combined FDIC and FSLIC into the FDIC and Dismantled S&L Regulatory Body • Created the RTC to Take on the Assets of Failed S&Ls • $50 Billion Authorized to Handle Failed Institutions (Later Increased) • Allowed Bank Holding Companies to Purchase Savings Banks

  17. 2-17 FDIC Improvement Act 1991 • Move Towards Re-regulating the Industry • Requires Regulators to Take Prompt Corrective Action (PCA) When a Bank has Problems • Prompt Corrective Action Based on the Capital Position of the Bank • Requires Regulators to Develop New Standards for the Banks They Regulate

  18. 2-18 Riegle-Neal Act 1994 • Riegle-Neal Interstate Banking and Branching Efficiency Act repealed provisions of the McFadden Act of 1927 • Bank Holding Company Can Acquire Banks Nationwide • Consolidation of Interstate BHCs into Branches

  19. 2-19 Gramm-Leach-Bliley Act 1999 • Permits Banking-Insurance-Securities Affiliations (with regulator’s approval and are well capitalized) • Consumer Protections for Consumers Purchasing Insurance Through a Bank • Must Disclose Policies Regarding the Sharing of Customers’ Private Information • Customers are Allowed to ‘Opt Out’ of Private Information Sharing • Fees for ATM Use Must be Clearly Disclosed • Identity Theft is Made a Federal Crime

  20. 2-20 The USA Patriot Act 2001 • Requires Banks and Financial Service Providers to Establish the Identity of their Customers • Requires Banks and Financial Service Providers to Check the Customer’s ID Against Government-Supplied Lists of Possible Terrorists and Terrorist Organizations • Report Suspicious Activity (SARs) in Customer’s Account to the US Treasury

  21. 2-21 Fair and Accurate Credit Transactions (FACT) Act 2003 • Passed in Response to Increased Problem of Identity Theft • Federal Trade Commission Must Make it Easier for Consumers Victimized to File Theft Report • Individuals and Families are Entitled to One Free Credit Report Each Year • www.annualcreditreport.com/cra.index.jsp

  22. 2-22 Check 21 2004 • Reduces the Need for Banks to Transport Paper Checks • Can Provide a Customer with ‘Substitute’ Check Which Contains Image of Front and Back of Original Check • Allows for Electronic Transmission of ‘Substitute’ Checks for Clearing of Checks

  23. 2-23 Federal Deposit Insurance Reform Act 2005 • First Significant Increase FDIC Coverage in 25 years • Raises FDIC Insurance Limits from $100,000 to $250,000 for Retirement Accounts • Federal Regulators are Empowered to Periodically Adjust Deposit Insurance Limits for Inflation • Merges Bank Insurance Fund (BIF) and Savings Association Insurance Funds (SIF) into Single Deposit Insurance Fund (DIF)

  24. 2-24 Emergency Economic Stabilization Act of 2008 • Passed in Response to Home Mortgage and Financial System Problems • Temporarily Increases FDIC Deposit Insurance Coverage from $100,000 to $250,000 for All Deposits until Year-end 2009 • Allows the US Treasury to Add Capital to Banks to Enhance Lending • www.treas.gov/press/releases/hp871.htm

  25. 2-25 Unresolved Regulatory Issues • Does the regulatory safety net set up to protect small depositors encourage financial firms to take on added risk? • Does deregulation exacerbate the too-big-to-fail problem? • As firms become larger and more complex, can the government regulators effectively oversee what these firms are doing? Can we simplify the current regulatory structure? • What is functional regulation and will it really work under the current structure?

  26. 2-26 Regulating Nonbank Financial-Service • Credit Unions • National Credit Union Administration • Savings Associations • Office of Thrift Supervision • Money Market Funds • Securities and Exchange Commission • Insurance Companies • State Insurance Commissions • Finance Companies • State Governments • Mutual Funds • Securities and Exchange Commission • Securities Brokers and Dealers • Securities and Exchange Commission • Financial Conglomerates • Functional Regulation

  27. 2-27 The Federal Reserve System • Fundamental Functions • Conduct monetary policy • Provide and maintain the payments system • Supervise and regulate banking operations • Organization • Board of Governors • Federal Open Market Committee • 12 Federal Reserve Banks • Member Banks

  28. 2-28 The Federal Reserve Policy Tools • Monetary Policy Tools • Open Market Operations (OMO) • Discount Rate • Reserve Requirements

  29. 2-29 European Central Bank • Central Policy is to Maintain Price Stability • Structure is Similar to the Federal Reserve • Eleven Member Nations

  30. Obama’s Financial Reform Plan 2-30 • For the regulation of financial firms, the proposal: • Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests. • the Treasury will re-examine capital standards for banks and bank-holding companies. • Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes. • Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks. • Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms. • Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs.

  31. Obama’s Financial Reform Plan 2-31 • For the regulation of financial markets, the proposal: • Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges • Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products. • Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets • Urges the SEC to strengthen its regulation of credit-rating firms. • Tells regulators to reduce their reliance on credit-rating firms.

  32. Obama’s Financial Reform Plan 2-32 • For regulations protecting consumers and investors, the proposal: • Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators. • Requires non-binding shareholder votes on executive compensation packages. • To give the government more tools to manage crises, the proposal: • Creates a mechanism that allows the government to take over and unwind large, failing financial institutions. • In the international sphere, the proposal: • Improve the quality, quantity, and international consistency of capital. • Improve cooperation on supervision of globally interconnected financial firms.

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