3222011 Financial Institutions Type of Intermediary Primary Liabilities Primary Assets Depository Institutions banks Commercial Banks Deposits Business and consumer loans mortgages US ID: 636986
Download Presentation The PPT/PDF document "Unit 2: Banking Bank Regulation" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Unit 2: Banking
Bank Regulation3/22/2011Slide2
Financial Institutions
Type of Intermediary
Primary Liabilities
Primary Assets
Depository
Institutions (banks)
Commercial Banks
Deposits
Business
and consumer loans, mortgages, US
Govt
securities and municipal bonds
Savings and Loans Institutions
Deposits
Mortgages
Mutual
Savings Banks
Deposits
Mortgages
Credit Unions
Deposits
Consumer
LoansSlide3
Financial Institutions
Type of Intermediary
Primary Liabilities
Primary Assets
Contractual Savings Institutions
Life Insurance Companies
Premium from Policies
Corporate bonds and mortgages
Fire and Casualty Insurance Companies
Premium from Policies
Municipal bonds, corporate
bonds and stocks, US
Govt
securities
Pension Funds, Government Retirement Funds
Employee and Employer Contributions
Corporate bonds and stock
Investment Intermediaries
Finance Companies
Commercial
paper, stock, bonds
Consumer and business loans
Mutual Funds
Shares
Stocks and bonds
Money Market Mutual
Funds
Shares
Money market instrumentsSlide4
Financial Institutions
Value of Assets (Billions of $)
Type of Intermediary
1970
1980
1990
2007
2010Q1
Depository
Institutions (banks)
Commercial Banks
517
1481
3334
11809.5
14438
Savings and Loans Institutions and Mutual Savings Banks
250
792
1365
1815.0
1262.3
Credit Unions
18
67
215
758.7
892.4Slide5
Financial Institutions
Value of Assets (Billions of $)
Type of Intermediary
1970
1980
1990
2007
2010Q1
Contractual Savings Institutions
Life Insurance Companies
201
464
1367
4952.5
4919.0
Fire and Casualty Insurance Companies
50
182
533
1381.0
1386.1
Pension Funds
(Private)
112
504
1629
6410.6
5726.7
State and local Government Retirement
Funds
60
197
737
3198.8
2793.9
Investment Intermediaries
Finance Companies
64
205
610
1911.2
1665.8
Mutual Funds
47
70
654
7829.0
7311.9
Money Market Mutual
Funds
0
76
498
3033.1
2930.7Slide6
Financial Institutions
Pre-1970 commercial banks monopoly on checking accounts more diversified
thrifts could pay higher interest rates
mostly mortgages
investment banks
could invest in equity securitiesSlide7
Financial Institutions
thrift institutions (thrifts) –savings and loan associations (S&Ls), mutual savings banks, and credit unions
credit unions –cooperative lending institutions organized around a particular group
(e.g., union members, employees, etc.)Slide8
S&Ls and Savings Banks assets: focused on mortgages liabilities: focused on savings accounts
mutually owned (not shareholder owned) eliminates debt/equity distinction decreases moral hazard regulated separately from other banks
Financial InstitutionsSlide9
Financial Institutions
Credit Unions type of mutual 1 vote regardless of # of shares volunteer management
usually small qualify as non-profits
exempt from corporate income tax
regulated separately from other banksSlide10
Financial Institutions
The lines between thrifts and commercial banks have become blurred as regulations have changed opening up thrifts to more assets and liabilities, deposit insurance has been extended to thrifts, and S&Ls became stockholder owned rather than mutual owned post-WWII.Slide11
Financial Institutions
closed end investment company –stock owned: issues fixed # of shares and has a secondary market(e.g., stock on exchange)
open end investment company –
mutually owned: variable # of shares, not saleable on secondary market, direct link between share/asset value
(e.g., mutual fund, hedge fund)Slide12
Regulatory Agencies
Regulatory Agency
Subject of Regulation
Nature of Regulation
Office of
the Comptroller of the Currency
Federally charted
commercial banks
Charters and examines the books of federally
chartered commercial banks and imposes restrictions on assets they can hold
National Credit Union Administration (NCUA)
Federally
chartered credit unions
Charters and examines the books of federally
chartered credit unions and imposes restrictions on assets they can hold
State banking and Insurance Commissions
State
chartered depository institutions
Charters and examines the books of state chartered banks
and insurance companies; imposes restrictions on assets they can hold and imposes restrictions on branchingSlide13
Regulatory Agency
Subject of Regulation
Nature of Regulation
Securities
and Exchange Commission (SEC)
Organized Exchanges and Financial Markets
Requires
disclosure of information; restricts insider trading
Commodities Futures
Trading Commission (CFTC)
Futures Markets Exchanges
Regulates procedures for trading in futures markets
Federal Deposit Insurance Corporation (FDIC)
Commercial banks, mutual savings banks,
savings and loans associations
Provides insurance
for each depositor. Currently it is set to $250000 per depositor, until 12/31/2013, whereas it will revert back to the pre-crisis level of $100000 per depositor; examines the books of insured banks and imposes restrictions on assets they can hold
Office of
Thrift Supervision
Savings and Loans Associations
Examines the books of savings and loans associations
and imposes restrictions on assets they can hold
Federal
Reserve System
All depository institutions
Examines the books of commercial banks that are members of the system; sets reserve requirements for all banks
Regulatory AgenciesSlide14
Regulatory Agencies
Office of Thrift Supervision (OTS) analogous to Comptroller of the Currency national charters and regulations for thrifts created in 1989
renamed Federal Home Loan Bank Board abolished in 2010
rolled into Comptroller of the CurrencySlide15
Regulatory Agencies
Federal Savings & Loan Insurance Corporation(FSLIC) analogous to FDIC federal deposit insurer to S&Ls created in 1934
abolished in 1989
insolvent due to S&L crisis
S&L deposit insurance went to FDICSlide16
Regulatory Agencies
Federal Home Loan Bank System (FHLBS) analogous to Federal Reserve lender of last resort to S&Ls 12 regions
dual chartering (national/state) national S&Ls (OTS) must join FHLBS
state S&Ls may join FHLBS
80% of S&Ls joined FHLBS
created in 1932
Federal Home Loan Bank ActSlide17
Regulatory Agencies
S&Ls FHLB Board (charter) FHLBS (LOLR) FSLIC (insurance)
banks
Comptroller of Currency (charter)
Federal Reserve (LOLR)
FDIC (insurance)
Pre-1989 division:Slide18
Regulatory Agencies
Thrifts have been all but eliminated by the Dodd-Frank Act of 2010. Thrift charters still exist, but thrifts are now regulated by the Comptroller of the Currency, the Federal Reserve, and the FDIC.Slide19
Narrative History (branching)
Restrictions on branch banking have been present since 1863. Some states allowed intrastate branching, so banks switched from national to state charters in those states. The McFadden Act put national banks on equal footing allowing intrastate branching where state banks could. In 1994 both intrastate and interstate branching was allowed. Slide20
Financial Legislation (branching)
McFadden Act of 1927 prohibited interstate branch banking put national and state banks on equal footing if state banks branch, national can too
Riegle-Neal Interstate Branking
and Branching Efficiency Act of 1994
allowed interstate branch banking
allowed intrastate branch bankingSlide21
Narrative History (the Fed)
The Federal Reserve was created so the United States would have a central bank that could conduct monetary policy and act as a LOLR. Bank holding companies were unregulated, so the Bank Holding Company Act gave oversight to the Federal Reserve in 1956.Slide22
Financial Legislation (the Fed)
Federal Reserve Act of 1913 created the Federal ReserveBank Holding Company Act of 1956 clarified status of bank holding companies
Federal Reserve regulates bank holding companiesSlide23
Narrative History (wall)
The Glass-Steagall Act was a response to the stock market crash of 1929. It imposed a wall between commercial banks and investment banks: commercial banks could not invest in equity securities (stocks). The Gramm-Leach-Bliley Act of 1999 repealed this restriction, but it was re-imposed by the Dodd-Frank Act of 2010.Slide24
Financial Legislation (wall)
Banking Act of 1933 (Glass-Steagall Act) and 1935 created the FDIC separated banking and securities industries
prohibited interest on checkable deposits checkable deposits for commercial banks only
regulation Q: interest-rate ceilings on deposits
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
removed separation of banking and securitiesSlide25
Narrative History (regulation Q)
Regulation Q was imposed by the Glass-Steagall Act of 1933. In the 1970s banks were hurt by interest rate caps and disintermediation, so they called for deregulation. Mutual savings banks created Negotiable Orders of Withdraw (NOW accounts) in 1972, which behaved like checking accounts. Banks complained. The DIDMCA of 1980 repealed regulation Q.Slide26
Financial Legislation (regulation Q)
Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 gave thrifts wider latitude in activities (deposits) approved NOW and sweep accounts phased out interest-rate ceilings on deposits
imposed uniform reserve requirements
eliminated usury ceilings on loans
increased deposit insurance to $100,000Slide27
Financial Legislation (misc)
Depository Institutions Act of 1982 (Garn-St. Germain Act) emergency powers for FDIC and FSLIC depository institutions can offer MMDAs
granted thrifts wider latitude in lending (assets)Competitive Equality in Banking Act (CEBA) of 1987
provided $10.8 billion to the FSLIC
regulatory forbearance in depressed areasSlide28
Narrative History (S&Ls)
Savings & Loans were deregulated with other thrifts in the early 80’s. Deposit insurance created a moral hazard problem (fixed premiums irrespective of risk) leading to risky investments. S&Ls had higher interest rate risk and a lower equity cushion. When insolvent they would gamble even more to get even again (zombie S&Ls).Slide29
Narrative History (S&Ls)
In the late 1980’s many S&Ls failed. The Federal Savings and Loan Insurance Corporation (FSLIC) did not have enough money to pay out deposit insurance claims. When it went bankrupt the federal government passed FIRREA: bailed out S&Ls, re-imposed restrictions on S&L activities, and put S&Ls under the FDIC for future deposit insurance.Slide30
Financial Legislation (S&Ls)
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 funds to resolve S&L failures eliminated FSLIC and FHLB Board created Office of Thrift Supervision
created Resolution Trust Corporation raised deposit insurance premiums
re-imposed restrictions on S&L activitiesSlide31
Narrative History (FDIC)
The FDIC created moral hazard in part because its premiums were unrelated to the riskiness of assets. This was partly fixed by imposing risk-based premiums. In addition banks were monitored closer to identify solvency problems earlier. Congress stopped the “too big to fail” policy, but it left a loophole in the Federal Reserve legislation that Bernake exploited.Slide32
Financial Legislation (FDIC)
Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 recapitalized the FDIC limited “too big to fail” policy established risk-based premiums for FDIC
increased examinations, capital & reporting reqs.
Federal Reserve supervision of foreign banksSlide33
Financial Legislation (FDIC)
Federal Deposit Insurance Corporation Reform Act of 2005 merged Bank Insurance Fund & Savings Ass. Fund increased deposit insurance on IRAs to $250k revised risk-based premiums for FDICSlide34
Narrative History (stocks)
The SEC was created in 1934 to regulate stock trades. The stock crash of 1929 precipitated this legislation. Accounting shenanigans by the Enron Corporation in 2001 led to the Sarbanes-Oxley Act of 2002, which imposed accounting regulations on publicly traded companies. Slide35
Financial Legislation (stocks)
Securities Act of 1933 / Securities Exchange Act of 1934 required financial reports for investors prohibited securities misrepresentations and fraud created Securities and Exchange Commission (SEC)
Sarbanes-Oxley Act of 2002 Public Company Accounting Oversight Board (PCAOB)
prohibits certain conflicts of interest
requires CEO/CFO certification of financial statementsSlide36
Financial Legislation (brokers)
Investment Company Act of 1940 regulated investment companiesInvestment Advisers Act of 1940 regulated investment advisersSlide37
Narrative History (2010)
In response to the Great Recession (the sub-prime crisis) Congress enacted a comprehensive financial reform bill in July of 2010. It undoes a lot of past deregulation and imposes many new regulations. The unintended consequences of this legislation are not yet clear.Slide38
Financial Legislation (2010)
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 consolidates regulatory agencies eliminates thrift charter creates Financial Stability Oversight Council
creates Bureau of Consumer Financial Protection Volcker rule
regulates derivatives
regulates hedge fundsSlide39
Financial Legislation (2010)
Volcker Rule prohibits banks from proprietary trading trading own money instead of client money prohibits banks from investing in hedge funds
limits liabilities banks can holdSlide40
Financial Stability Oversight Council
Secretary of the Treasury (chair) Chair of the Federal Reserve Comptroller of the Currency Director of the Bureau of Consumer Financial Protection
Chair of the SEC
Chair of the FDIC
Chair of the CFTC
Director of the Federal Housing Finance Agency
Chair of the National Credit Union Administration Board
independent member (with insurance expertise)