Regulation of banking outline
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- Bu səhifədəki naviqasiya:
- National Banking Act
- 2. demand deposits fractional reserves
- 2. role of banks in money supply
- 3. role of banks in paymt system
- 4. model bank balance sheet
- III. Regulation of Business of Banking
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REGULATION OF BANKING OUTLINE FALL 1998 MILLER I. Introduction & Overview a. introduction -issues
a. structures covered - banks, S&L, savings banks, credit unions, other depositories, MMMF, pension funds 1. common function - make loans to others b. factors affecting - mrkt, politics, law, tech c. govt regulation policies 1. public policy - regulation serves compelling social need & will benefit society as whole a. issue 1 - what compelling interest is b. issue 2 - to what extent regulation serves this interest 2. public choice/interest group - regulation product of lobbying of banks or other special interests a. inconsistent w/public interest approach 3. historical accidents - regulations w/unintended effects but lasted throughout yrs, explanation of last resort a. ex 1 - dual banking of nationally & state chartered banks from need for $ for Civil War b. ex 2 - banks & savings institutions b. historical overview -concerns over yrs
a. thrift institutions (S&L) developed to fill niche demand instead of commercial banks rising to the need b. credit unions - to facilitate savings of workers in particular industry, for charity, for increase of profit c. community developmt banks (CDB)
a. cause - each segmt wanted regulator that would be favorable to them -history
a. 1913-30 - good b. 1930-38 - bad c. 1938-80 - good d. 1980-90 - bad e. 1990-present - good
a. Bank of US - central bank b. second central bank - 1816-1836 c. free banking w/out need for special charter - 1836-1863 d. National Banking Act - fed chartered banks authorized to issue uniform national currency e. Fed Reserve Act - 1865-1913 - banking industry w/3 features no necessarily according to specified plan but persisted 1. dual banking - state & fed chartering 2. unit banking - one bank or have few branch offices in close geo space 3. mrkt segmentation - commercial banks & thrift institutions f. Fed Reserve Act - 1913 g. industry consolidation - chain banking, bank holding co, bank mergers - 1914-1933 h. banking crisis leading to New Deal reform - 1929-1933 1. Glass Stegall - separation of commercial (no securites activities) & investmt banking (no deposit taking) 2. fed deposit insurance 3. limit on deposit interest - no interest on checking & limited on savings a. purpose - reduce cost of funds for banks 4. holding co. regulation 5. branch banking - intrastate banking ok i. stable yrs 1934-1980 - geo bank expansion, consumer protection & anitdiscrimination regulation, growth of thrift industry j. revolution 1979-present - fast paced mrkt changes 1. deposit interest rates unregulated 2. geo restraints dismantled 3. relaxation of separation of banking & securities activities 4. differences btwn different financial institutions relaxing - commercial banks, S&Ls, credit unions, securities firms, insurance co., pension funds 5. bank failure becomes serious problem especially in S&L leading to multi-billion bailout by taxpayers c. what is a bank 1. 3 definitions of bank
a. pro - easy to apply b. con - other institutions providing same services but not under certain charter excluded
a. pro - looks at substance (transaction services, make loans) b. con - not very analytical, doesn’t take into account other types of services provided
a. pro - looks at underlying economic forces b. con - abstract definition -categories of institutions
-financial intermediation
a. financial intermediation - pooling $ from investors & investing into other enterprises - loans 1. bank takes position btwn investor & ultimate investmt 2. functions a. facilitates liquidity - direct & intermediate 1. direct - securities firms - assist investor into making direct investmt 2. intermediate - here, others are mutual & pension funds, insurance co. b. moves capital from suppliers (depositors) to users (companies) 3. reason for intermediation instead of direct like securities firms a. risk diversification permitted - banks can more easily or cheaply than individual investor same return for lower risk b. expertise - banks have expertise in identifying good investmt opportunities, directly liable c. economies of scale - bank can command higher interest rate on larger investmts that is more difficult for individual d. illiquid asset conversion into liquid one - bank can invest in illiquid investmt & offer own investors liquid claims on its assets & also converting illiquid assets of borrowers into liquide assets 4. difference btwn bank & other financial intermediaries - all move liquidity from supplier to user a. suppliers don’t sacrifice liquidity b/c have demand deposit b. deman deposit implications 1. banks make loans from these demand deposits 2. demand deposits correlated w/other banks w/potential for bank panic b. transaction services - facilitate wealth transfers via bookkeeping entries of debits & credits to buyer & seller accounts 1. alternatives a. barter system 1. con - inefficient b/c no unit of account, no unit of account sufficiently sm, matching problem btwn wants of parties involved b. fiat currency - created by govt w/out own instrinsic value 1. pros - provides universal measure of value, sufficiently sm, no matching problem 2. cons - inflation, can be stolen or los, no interest paid in consideration of time value of $ 2. pros of transaction services - can pay interest, stop paymt if stolen or lost, transfers are easier to make 3. bookkeeping a. debits & credits b. assets & liabilities - both have to equal each other, liabilities includes net worth (residual value) c. parties w/account at same bank - changes to balance sheets of 2 parties & bank d. parties w/account at different banks 1. banks have accounts w/each other & clear transaction btwn 2 banks & then bank & its customer 2. banks can have account at 3rd bank or last resort is Fed Reserve System c. relationship btwn intermediation & transaction services 1. firms providing transaction services tend to have customer deposits & tend to invest such deposits a. most efficient if transaction services provided where parties have accounts at bank 2. bank makes $ by lending money & customers get some of it via free checking services (transaction accounts) -sum
a. susceptibility to bank runs & panics b. role in money supply c. role in paymt system
2. demand deposits & fractional reserves -transaction services - from demand deposits of customers
a. debt - fixed promise to repay 1. demand deposits a. reason 1. entice depositors - more security 2. provide transaction services - 2. similar to other debt instrumts - bonds (10-30yrs), debentures (5-15yrs), notes (less than 1yr), commercial paper (mos.), repurchase agreemts (days - loan to bank via customer purchasing something from bank w/resale back to bank at slightly higher price), secured loan, demand deposit (overnight repurchase agreemt that rolls over every day), deposits (no maturity) b. equity - ownership of firm, claim to residual value (dividends, capital gains from participation in corp growth)
a. similarity - raise funds & invest where $ goes to 3rd party b. difference - nature of claim on investing party 1. mutual fund - also takes demand deposit but it’s equity interest & not debt a. demand equity - fund only agreeing to pay depositor’s fractional share of fund’s current net asset value 2. other firms - debt payable fixed at certain amt, time so firm can predict liquidity needs 3. bank - demand debt were liquidity needs can’t be adequately predicted but mitigated by statistics & fractional reserves a. fractional reserves b. law of lg #s - lger the group, less likely that sufficient #s of depositors will w/draw funds at same time to cause bank failure each depositor less effect as # of depositors goes up 1. problem - only works when there is no correlation among depositors, not like in bank panic 2. collective irrationality - w/drawing funds is individually rational once bank run has started but not collectively rational d. bank runs, $ supply & paymt system 1. bank runs & panics -intro
-costs of bank runs
a. premature sales of assets whereas if held onto would be more profitable b. cost of having fire sale c. inequitable result - rich (purchasers of asset) at expense of poor (depositors)
a. rewarding first w/drawers who may have instigated or exacerbated bank run b. most people would prefer pro-rata share of losses & recovery
a. solvent bank may not be able to survive run b. depositors have to run bank once bank run starts even though know that bank is solvent
a. reasons 1. fear of liquidity shortage - depositors will be unable to complete transactions 2. concern that banks are exposed to other banks - banks engage in syndications w/other banks & have accounts at each other 3. potential signal of bad economic conditions in industry or general economy - may be indicating that other banks are in similar bad situation 4. mass psychology - individuals may panic when see long lines at bank when w/drawal cost is low -positive things about bank runs
a. fraud potential - not as easy to monitor in banks b/c assets are fungible, moreso if banks are private & not public b. discipline of other co. - possibility of takeover, proxy fights, law suits but take longer
a. banks most qualified to monitor each other
a. ie, S&L crisis in 1980s - may not have lost so much if insolvent S&Ls were permitted to fail
2. role of banks in money supply -bank role in creation & destruction of money - via demand deposit accounts that are functional equivalent of money
a. increased money supply via loan on bks (credits another’s account) b. limits 1. reserve requiremt a. reasons for reserve requiremt 1. meet own business needs - some depositors will demand cash back 2. legal requiremt - required to keep certain % of capital in vault or on account at Fed Reserve 3. cushion - to maintain reserve levels after considerations of depositor w/drawals
-govt control of money supply via high powered money
a. open mrkt operation - Fed can purchase or sell T securities 1. this can also affect interest rate b. reserve ratio - Fed can change this ratio c. discount rate - Fed can change discount/interest rate
a. introduction of cash 1. 1/reserve ratio - amt of money produced when govt injects money into supply b. make credit to other bank’s Fed Reserve accounts
a. removal of cash from circulation b. debit to bank’s Fed Reserve account
3. role of banks in paymt system -paymt system - system by which checks are cleared
a. local clearing house - local banks can exchange checks drawn on other banks b. by debiting & crediting accounts held at Fed Reserve 4. model bank balance sheet -assets - include investmts in other productive enterprises -banks usually highly leveraged (high debt compared to equity)
a. magnifies ROE
a. higher risk - interest rate on debt
a. banks can better predict ROA than other businesses - interest rate paymts on loans pretty certain (except for when default occurs) so don’t need to maintain higher % of capital as equity to avoid risk of bankruptcy 1. other firms - ROA less certain so need to retain higher % of equity as cushion b. banks can look to shortterm sources of capital in emergencies c. fed deposit insurance - so not subject to same depositor monitoring w/insistence on high equity cushion -bank risks
a. hedging interest rate risk - securitize mortgages, make rate adjustable, fund fixed rate mortgage w/fixed term loans & not demand deposits e. structure of banking regulation -banking regulatory agencies
-articles
a. 3 reasons why banks are special 1. offer demand deposit checking accounts a. makes banks susceptible to runs - bank mismgt rumors can lead to runs b. bank runs can lead to bank panics c. bank paymt system necessary to financial well-being
a. ignores the fact that there is FDIC 1. reasons a. perhaps FDIC isn’t the answer b/c moral hazard & insufficient b. competing agencies FDIC & Fed 2. offers back-up liquidity a. liquidity source depends on consistent & impartial judge in credit allocation b. commingling of commerce & bank bad b/c will lead to inefficient allocations of credit 1. other issues a. who owns bank b. who banks own
3. transition belt for monetary policy - bank role in creation & destruction of money
b. conclusions 1. regulation ensures that dangers are avoided 2. Fed should to the regulating
a argumt - regulation should consider costs of potential danger & costs of regulation 1. justifications a. banks have to compete w/other institutions that are not subject to same constraints & restrictions 1. banks have to deposit $ w/Fed & don’t get interest on it 2. banks have to pay FDIC insurance premium b. banks aren’t back-up sources of liquidity b/c liquidity is controlled by Fed b. conclusions 1. want level playing field for all financial competitors 2. less bank regulation will make everyone better off
-intro
a. chartering process -regulatory barriers to entry into banking
a. min $1m capital b. business plan c. reputable board of directors
a. regulatory approval required b. state/fed charter required - must be obtained from state in which principal offices
a. banks warrant separate treatmt b/c reliance on fed insurance b. greater social interest in bank failures as opposed to little public interest on corp failures c. local authorities can better supervise than out of state authorities - more pertinent knowledge d. local co. depend more on banks as sources of capital so bank failure will have more dramatic consequences for community (credit crunch) 1. contagion potential 2. liquidity source 3. role in paymt system 4. role in monetary policy
1. public perception that banks should be risk-free investmt 2. would rather error on side of rejecting qualified banks than on letting in unsuccessful bank
a. bank’s future earning prospects b. gen character of mgt c. adequacy of capital structure - $1m min d. convenience & needs of community to be served 1. Scott article - thinks that this is only factor that really makes sense a. danger of having too many banks - can lead to intense competition & therefore failures that impact community negatively
2. Peltzman article - study concluding that w/out this requiremt twice as many banks wouldh ave been formed 3. Edwards & Franklin - study concluding that regulators don’t apply requiremts as strictly when economic conditions are good 4. significant rejection rate for nationally chartered banks 1980-1990s - 642 approved, 146 denied, 23% rejection rate a. reasons for rejection - dependent on personal economic philosophy of Comptroller 1. now - overbanking factor out now but community reinvestmt interest are in 2. liberal - lower rejection rate, business plan & community reinvestmt considered important 3. conservative - higher rejection rate, overbanking considered important e. financial history & condition of bank f. compliance w/other laws - National Banking Act
a. Camp v. Pitts (1973) - court not effective method of disputing agency decision to deny charter b/c standard of review of arbitrary or capricious
a. benefits of vague standard 1. impossible to define clear rules when economic conditions may change - setting in stone may be more arbitrary b. costs of vague standard 1. increase social costs b/c more marginally qualified people will apply b/c standard unclear 2. too much discretion to regulators who can be arbitrary & vindictive 3. danger of corruption
a. Miller - question effectiveness of regulating entry & not close ongoing supervision 1. if ongoing supervision effective then why need screen at beginning
a. cost of denying good banks < cost of letting in banks that do poorly b. costs higher to regulator if let in bank that fails than turning away good bank b. dual banking system -bank choices - 6 different combos vs. 1 corp (state charter)
-Scott article
1. regulators being too lenient to encourage more banking in their jurisdictions
1. banks can chose among 50 different states 2. state interests in ensuring safety & soundness of bank not as pertinent a. customers of banks aren’t solely from local area b. fed insurance provided 3. state can’t be relied upon to look after fed interests (fed insurance) a. state respond to local constituents 1. borrowers - don’t want bank to close b/c new bank might be more strict 2. mgrs - don’t want bank to close b/c of their rep 3. shareholders - don’t want bank to close b/c chance to recover $ -Butler & Macey article
a. argumt that state & fed regulators cooperate so no potential escape for banks b. even if there is no cooperation among the 2 fed has right of preemption via supremacy clause of constitution
a. bank regulators interested in turf vs. corp regulators in money b. bank regulators can more easily monitor each other c. bank regulators more likely to bld relationship of trust b/c have had history of relying on each other -alternatives to dual banking system
a. pros 1. exclusive fed interest in FDIC 2. uniformity 3. reduces costs 4. reduces race to bottom b. cons
1. no race to top potential 2. less responsive to innovation 3. more subject to political influence 4. fed regulators can’t really address community interests
a. based on idea that banks are not that different from other corp so regulation should be more alligned w/corp regulations III. Regulation of Business of Banking -intro
a. A - banks investmts b. L - deposits & deposit insurance c. capital adequacy affects both sides of balance sheet - considers net worth (equity) to assets
a. activities restrictions 1. off balance sheet activities of national banks -banks subject to ultra vire doctrine - K outside scope of approved body of activity is null & void -National Bank Act, 12 USC Yüklə 175,5 Kb. Dostları ilə paylaş:
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