Banking Industry ECO 473 Money amp Banking Dr D Foster Rationales for Government Regulation Maintaining depository institution liquidity Assuring bank solvency by limiting failures ID: 510740
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Regulating theBanking Industry
ECO 473 – Money & Banking – Dr. D. FosterSlide2
Rationales for Government RegulationMaintaining depository institution liquidity.
Assuring bank solvency bylimiting failures. Promoting an efficient financial system.
Protecting consumers.Slide3
Federal Regulation: 1933–1970The Banking Act of 1933 (Glass-Steagall Act):Created the Federal Deposit Insurance Corporation (FDIC).
Placed interest rate ceilings on checking deposits of commercial banks.Separated commercial and investment banking.Branching restrictions.Slide4
Partial Deregulation: 1971–1989Disintermediation in the 1970s.
1980 - Depository Institutions Deregulation and Monetary Control Act (DIDMCA):Six-year phaseout of interest rate ceilings. Permitted NOW accounts.Increased FDIC coverage to $100,000.Slide5
Partial Deregulation: 1971–1989The Garn–St.
Germain Act of 1982:Authorized money market deposit accounts.Increase the DIDMCA limit on consumer loans and commercial paper.Authorized savings institutions to make commercial real estate loans.
Gave these institutions the power to purchase “unsecured loans,” including low-rated, “junk” bonds.Gave the FDIC power to permit troubled financial institutions to merge with healthier partners.Slide6
Partial Deregulation: 1971–19891989 - Financial Institutions Reform, Recovery & Enforcement Act (FIRREA):
Authorized taxpayer funds to cover cost of liquidating failed thrifts.--Insurance wasn’t enough!Abolished current thrift regulatory structure.--Created Office of Thrift Supervision.--Created the Resolution Trust Corp. to liquidate thrifts.
Moved thrift insurance (FSLIC) into FDIC.Required insurance fund = 1.25% of insured deposits.Slide7
Deposit Insurance ComplicationsThe moral-hazard problem of deposit insurance:S&L crisis.
Too-big-to-fail policy:Continental Illinois.
The FDIC Improvement Act Of 1991-- Allowed for earlier intervention by the FDIC.-- Let FDIC set/change premiums to boost fund.
-- Mandated risk-based premium structure.Slide8
The Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)Act removes Glass-Steagall restrictionsand permits:
Securities firms and insurance companies to own commercial banks.Banks to underwrite insurance andsecurities, including shares of stock.Slide9
Capital RequirementsCapital requirements:
Minimum equity capital standards. Risk-based capital requirements: Risk factors that distinguish different depository institutions. [Degree of capitalization.]
Risk-adjusted assets:A weighted average of bank assets to account for risk differences across types of assets. [Type of capitalization.]Slide10
Regulatory IssuesOff-balance-sheet banking: Loan commitment; credit default swaps.
Asset valuation: Historical cost vs. market valueDerivatives: Replacement cost exposure. Credit/market/operating risks.
New wave of regulation:SOX; Dodd-FrankSlide11
Regulating theBanking Industry
ECO 473 – Money & Banking – Dr. D. Foster