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Bank Regulation

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 Regulation

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  1. Bank Regulation

  2. Bank Regulation • G&K Chp. 2 • Need for Regulation • Trends in Regulation

  3. Need for Regulation • Safety and Financial Soundness • Provide Monetary Stability • Maintain Financial Market Efficiency • Protect Consumers • Maintain Payments System

  4. What Regulation Cannot Do • Prevent Bank Failures • Eliminate Risk • In Economy • In Bank Operations • Guarantee Good Mgmt Decisions

  5. 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)

  6. 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.

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. Bank Regulation of 1930s • The 1933 and 1935 banking acts restricted : • Pricing • Geography • Products • Capital

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. 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.

  20. 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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