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BANK REGULATION

BANK REGULATION . CHAPTER 18. REGULATORY STRUCTURE OF THE BANKING SYSTEM . Comptroller of the Currency Chartering and Auditing Oversight for Intrastate branching, mergers, acquisitions, and consolidations Federal Reserve System Setting reserve requirements

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BANK REGULATION

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  1. BANK REGULATION CHAPTER 18 Dr David P Echevarria

  2. REGULATORY STRUCTURE OF THE BANKING SYSTEM • Comptroller of the Currency • Chartering and Auditing • Oversight for Intrastate branching, mergers, acquisitions, and consolidations • Federal Reserve System • Setting reserve requirements • Controls borrowing at the discount window • Oversight for state-chartered member banks • State Banking Commissions • Limitations on inter- and intra-state banking as well as branching • Non-Insured states have considerably less FED and US Government oversight Dr David P Echevarria

  3. REGULATION OF BANK OWNERSHIP • Bank Holding Companies (BHC) http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx • 1970 Amendments to Bank Holding Company Act (1956) • Permits BHC to enter non-banking activities • Permits BHC to acquire banks in different states • Financial Services Modernization Act (1999) • Repeals Glass-Steagal Act (1933) • Permits affiliations with Insurance and Brokerage firms • Engage in any financial activity via subsidiaries of BHC • Most important – cleared way for consolidation of industry Dr David P Echevarria

  4. BALANCE SHEET REGULATIONS • Regulation of Deposits; DIDMCA (1980) • All depository institutions can offer NOW accounts; dealing with disintermediation • De facto entry of banks into money market activities • Regulation of Loans • Attempting to limit portion of loan portfolio in high leverage transactions • Limiting amount of loans to any individual client Dr David P Echevarria

  5. BALANCE SHEET REGULATIONS • Regulation of Capital • Capital = Total Assets minus Total Liabilities • The greater the capital of a bank, the greater the stability (5 - 8 % is typical) • Recent development in the EC have begun to result in uniform capital requirements • Basel Accord, 1988: Greater risk level require greater capital (equity) Dr David P Echevarria

  6. INTEREST RATE REGULATIONS • Deposit Rate Regulations • The Problem of disintermediation; rate caps result in deposit flight • After 1980, rates largely deregulated on most accounts (Regulation Q) • Loan Rate Regulations • Truth-in-Lending regulations • Reporting of transactions in mortgage markets Dr David P Echevarria

  7. GEOGRAPHIC REGULATIONS • Intrastate Regulations • Few limits on intra-state banking and branching • Acquisitions by out-of-state BHC still a touchy issue, particularly in capital deficit areas • Interstate Regulations • McFadden Act; prevent concentration of banking power • Competition spurs lower rates and more services to borrowers and depositors • Some Mutual Funds now performing limited banking-type services via MM funds • Large national brokerage houses offer a variety of bank-like services; ML CMA Dr David P Echevarria

  8. REGULATION OF NONBANKING ACTIVITIES • Bank Provision of Insurance Services • Potential for unfair competition for credit insurance • Many other ways to bundle services to clients Dr David P Echevarria

  9. HOW REGULATORS MONITOR BANKS (CAMEL) • Capital Adequacy • The greater the capital ratio, the stronger the bank • Ability to absorb losses is a function of capital • Asset Quality and Average Maturity of the Loan Portfolio • How much credit risk exposure • 5-Cs of Credit • Management • Regulatory conformance • Internal controls Dr David P Echevarria

  10. HOW REGULATORS MONITOR BANKS (CAMEL) • Earnings strength and Trends • ROA measure • Liquidity • Vault resources • Borrowings (from Fed or Fed Funds) to cover reserve short-falls Dr David P Echevarria

  11. REGULATORY ISSUES IN BANKING • FDIC INSURANCE PRICING ISSUE • Proposals to Reform Deposit Insurance • THE INTERSTATE BANKING ISSUE • Arguments for Interstate Banking • Arguments against Interstate Banking • THE "TOO BIG TO FAIL" ISSUE • Argument for Government Rescue • Argument against Government Rescue • Bear-Stearns? Was the Fed right to come to the "rescue" of BSC? Dr David P Echevarria

  12. HOMEWORK QUESTIONS • What functions does the Comptroller of the Currency perform? • What are primary objectives of Federal Reserve System? • What oversight exists for state chartered banks? • Why are Bank Holding Companies (BHC) an important? • How do regulators affect intra-state and inter-state banking? • How did regulators deal with the disintermediation issue? • What metrics do auditors and regulators use to ensure bank performance? • What does it mean when banks engage in off-balance sheet activities? Dr David P Echevarria

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