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Unit 2: Banking Bank Regulation Unit 2: Banking Bank Regulation

Unit 2: Banking Bank Regulation - PowerPoint Presentation

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Unit 2: Banking Bank Regulation - PPT Presentation

3222011 Financial Institutions Type of Intermediary Primary Liabilities Primary Assets Depository Institutions banks Commercial Banks Deposits Business and consumer loans mortgages US ID: 636986

financial banks amp act banks financial act amp institutions insurance federal savings fdic legislation assets created reserve mutual commercial

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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)