Banking Regulation

Banking Regulation

Federal Reserve Membership (1913)

• National Banks are Required to be members of the Federal Reserve System (Membership is optional for state banks)

• Federal Reserve members are required to purchase stock in the federal reserve system.
• Federal Reserve members provide input to the election of Federal Reserve Board Members
• The Federal Reserve provides check clearing services

Federal Deposit Insurance (1934)

• Federal reserve members are required to purchase deposit insurance. Insurance is optional for state banks (98% of all banks have deposit insurance)

• FDIC insured banks are charged up to 27 cents per $100 of eligible deposits
• All deposits up to $100,000 are insured by the FDIC.

Regulating International Banking

Bank For International Settlements (1930)

• Established to handle German WWI reparations, the BIS has become a center for international cooperation.

• Played a central role in the Bretton Woods Exchange Rate System
• Integral in the Establishment of the Euro

• The BIS is like a central bank for central banks.

Risk weighted assets

Top Ten World Banks

Problems with International Regulation

• The key issue is that the banking industry in Japan and Europe is Fundamentally different from the US.

European Banking

• Unlike the US, European Banks are allowed to engage in securities markets (universal banking)

• In fact, in Europe, banks are generally significant shareholders in European companies.

• Banks rely much more on equity than deposits.

Japanese Banking

• Japanese industry is organized into industrial groups (keiretsu)

• Mitsubishi
• Mitsui
• Sumitomo
• Fuyo
• Daiichii
• Kangyo
• Sanwa

Japanese Banking

• These “groups” are both vertically and horizontally integrated and are comprised of a very large number of companies:

• Sumitomo has 15 divisions ranging from electronics to mining to consumer goods.
• Sumitomo controls assets equal to $50T.

Japanese Banking

• Each “group” has its own bank which handles its finances. This “main” bank

• Owns equity in member firms
• Monitors member firms
• Provides credit for member firms.