Regulation of banking outline
Yüklə 175,5 Kb.
|
- Bu səhifədəki naviqasiya:
- 2. restrictions on extension of credit
- 12 USC § 84
- 12 USC § 85
- Equal Credit Opportunity Act
- Community Reinvestmt Act (CRA)
- § 1-208 UCC
- 12 USC § 1813(l)(1)
- 1. traditional min capital rules
- 2. capital adequacy ratios
§24(7) - powers of national banks
a. 6 standard corp powers - power to K, engage in litigation, appoint officers & directors, prescribe bylaws, remain in existence indefinitely b. incidental power clause - power to exercise all incidental powers necessary to carry on business of banking
a. business of banking b. activities incident/necessary to business of banking
1. some guidance by Congress - examples a. discounting & negotiating promissory notes, drafts, bills of exchange & other evidences of debt b. receiving deposits c. buying & selling exchanges d. loaning on personal security e. obtaining, issuing & circulating notes
2. court interp a. generalize to economic functions served by activities b. issue 1. if generalize too much, effectively no activity restriction 2. court usurping power Congress did not intend to give it 3. gen question - what new activities should banks be allowed to engage in given statute -travel agency services - Arnold Tours v. Camp (1972) - Hamley - yes
a. court approach - statute to be flexible enough to meet demands of growth & changing times/requiremts b. travel agency permitted but banks cannot charge for it 1. connection btwn travel service & bank service - one stop service, banks issue travel check, banks can process necessary documts more efficiently 2. reasons a. potential conflict of interest 1. bank might make loan to A & then encourage its customers to buy products from A so that A can repay loan to bank 2. bank may make preferential loans to co. in which it can affect in this way b. determination btwn costs (risks) of permitting such services to benefits to bank’s customers
a. customs of trade - activities banks historically engaged in are w/in business of banks -personal property leasing - M&M Leasing Corp. v. Seattle First (1977) - Sneed - limited
a. limit - permitted only when transaction constitutes loan of money secured by leased property 1. not loan of money if bank assumes material burdens & subject to significant risks not ordinarily incident to secured loan b. here closed end leasing of motor vehicle & other personal property not permitted 1. leverage lease - bank finances A purchase of B but bank retains ownership & A makes lease paymts to bank 2. types of leases a. open end lease - lessee pays difference btwn actual & residual value, risk of price fluctuation on lessee b. closed end lease - lease for entire useful life of thing, residual value is salvage value 1. type of closed end lease - lease not for entire useful life & lessee doesn’t have risk of price fluctuation
3. similar to loan but banks takes ownership interest b/c a. bank doesn’t have to go through foreclosure b. lease doesn’t count towards bank lending limits b/c own property c. banks can get investmt tax credits for leverage lease (tax credits sold to bank by lessee via leverge lease) -data processing services - Natinoal Retailers v. Valley National Bank (1979) - Boldt - no
a. here data processing service for cash register & computer inventory mgt permitted by Comptroller of currency b. reasons 1. banks have always been involved in data processing as financial intermediaries but cash register analysis is stretch 2. Judge doesn’t want rapid change to be made by Comptroller 3. policy consideration a. bank will have too much info about retailer retailer doesn’t have to use this service b. bank will have different types of relationships w/same customer/borrower more efficient lending may be facilitated by access to such info -insurance agency activities - yes
a. reason 1. list of examples not exhaustive 2. core business of banking includes activities traditionally performed a. annuity looks like investmt tool so bank looks like financial planner & not insurance co. 1. annuity - fixed paymt over term of yrs 2. classic annuity overlaps w/insurance plans b/c tied to investor’s life span 3. deferential attitude toward administrative decision under Chevron a. court not interfere w/administrator decision if reasonable basis b. 2 separate issues 1. banks acting as agents rather than principal 2. annuity as permissible activity by banks
a. reason 1. statute doesn’t say that banks located in such towns are limited to selling insurance only in that town 2. court deference to administrative decision -risk-bearing activities
a. could assert customer’s defenses b. for all intents & purpose they do b/c can issue stand-by & traditional LOC
a. ie, buyer will get LOC for benefit of seller to ensure seller that buyer has good credit similar to loan to account party so w/in business of banking 1. bank anticipates that it will have to pay b. parties 1. customer/buyer - account party 2. bank - issuing bank 3. beneficiary - 3rd party who gets benefit of LOC c. LOC benefit 1. account party gets financing for its purchase 2. issuing bank gets fee from account party 3. beneficiary certainty of getting paid
a. reason 1. issuer has primary obligation that is dependent solely on presentation of certain documts & not upon nonperformance of some party so treated stand-by LOC as traditional LOC b. creation of lawyer b/c banks not permitted to act as guarantor c. here buyer wants to buy cemetary whose assets include a promissory note from another party, other party gets bank to issue stand-by letter of credit for buyer’s ease of mind, other party defaults & bank refuses to pay b/c argues that stand-by letters of credit not w/in their power 1. potential problem - bank may be acting as guarantor b/c it hopes that it won’t have to pay
-securities investmts
a. type 1 - security backed by full faith & credit of state or federal govt - govt bonds 1. bank can own, broker, & deal (underwrite & distribute ) b. type 2 - securities issued by govt entities but not backed by full faith & credit clause 1. not that important c. type 3 - debt security from any nongovt source as long as it is mrktable & of investmt grade 1. banks can own limited to 10% of capital plus surplus per issuer & broker but cannot deal 2. excludes junk bonds
a. exception 1. can broker equities 2. can hold equities in foreclosure briefly until dispose 3. can hold equity in sub 3. can hold equity investmt in bank service co. limited to less than 10% of its capital plus surplus 4. can hold equity investmt in sm business investmt co. limited to 5% of its capital plus surplus
2. restrictions on extension of credit -loans
a. reason 1. safer than other kinds of investmts a. loans have more predictable returns - interest & principal paymt according to certain schedule b. most loans were secured when rules first passed in 1930s
a. loans are risky - S&L crisis, Japanese bank crisis b. equity has more long-term returns than debt c. more unsecured loans b. limited to achieve different policy goals 1. insider lending limits - to prevent banks from investing assets in excessively risky or inappropriate ways, to protect depositors & FDIC fund 2. usury limits - to protect borrowers 3. lender liability rules - to protect public from harmful consequences of bank lending activities
a. insider lending limits - covers officers, directors & employees to balance costs & benefits of insider lending 1. §375(a) - bank can make loans to executive officers when: a. it would be authorized to make such loan if borrower were not insider b. loan is not on more favorable terms c. officer submits detailed financial statemts d. loan becomes due & payable on demand if officer exceeds limits on loans from other banks 2. §375(b) - limits on loans to officers, directors, others who directly or indirectly alone or in concert own or control 10% of any class of voting stock of bank, & companies or political campaign committees controlled by insider 3. assumption that likely to make themselves loans w/favorable terms & will hide problems if they arise
4. reason permitted a. traditional - not many alternatives in sm towns for loans
b. better to regulate than have it done in disguise - can’t prevent but more able to regulate if visible c. could be good investmt for bank - encourage loyalty & bank can more easily monitor its insiders than other banks b. lending limits to any single borrower - to achieve asset diversification 1. 12 USC §84 a. limits total outstanding loans to any person b. limits loan to any person 15% of bank’s net worth (unimpaired capital & surplus) c. 15% limit can be increased to 25% if collaterized by readily mrktable collateral w/value at least equal to funds outstanding 1. readily mrktable collateral - mrkt value determined by reliable & continuously available price quotations
1. sm bank compliance via syndicated loans w/following benefits a. conforms to lending limits b. diversifies risk
a. diversification requiremt not achieved w/such limitations b/c can still concentrate assets in 1 industry, just not to 1 borrower b. collateral can’t include items that aren’t continuously valued ie, paintins & diamonds 2. loans made to different entities may be aggregated & considered made to same borrower - Del Junco v. Conover (1982)
a. usury 1. state limit on interest rate banks can charge to borrowers a. general rules 1. loans to corp exempt from usury law b/c corp considered sophisticated players 2. merchants exempt so they can charge whatever interest on sales of their products 2. national banks a. 12 USC §85 1. national banks can charge the highest of: a. state rate, state in which national bank is located b. 1% above discount rate on 90day commercial paper at local district Fed Reserve Bank c. 7% if there is no fixed state interest rate b. national banks also get same interest rate limits as state banks but also capped by them - Tiffany v. National Bank of Missouri (1847) 1. some domestic state banks may be allowed higher rate by state c. bank located in state 1 w/higher interest rate limit can charge this same rate to borrowers in other states w/lower interest rate limits - Marquette National Bank (1978) 1. key word is state rate where bank is located 2. applicable when bank issues credit cards to residents of another state d. late fees subject to same rules b/c functional equivalent of interest rate - Smiley v. Citibank (1996) 1. national bank can charge late fees permitted by state in which it’s located to residents of another state where such fees are not permitted 2. court gives deference to Comptroller interp of interest - includes any paymt compensating creditor for extension of credit, making credit line available, borrower’s breach 3. not as applicable today b/c interest rates are low
a. anti-discrimination rules 1. Equal Credit Opportunity Act - creditor can’t discriminate in credit transaction on basis of race, color, religion, natl origin, sex, marital status, or age a. Reg. B by Fed Reserve Board further explanation b. creditor - anyone who regularly extends, renews or continues credit c. elemts for finding of violation 1. purposefulness a. satisfied by effects test & not necessary to show intent b. US v. Chevy Chase Federal Savings Bank (1994) - lending institution violated ECOA by denying credit to people living in neigborhood that is predominantly black 2. activities on face that demonstrate discrimination d. exception - profit-making organizations can have special purpose credit programs to meet special social needs e. presumption 1. can discriminate on other basis against all or against historically favored groups 2. can’t discriminate against historically disfavored groups on the above basis b. community reinvestmt rules 1. Community Reinvestmt Act (CRA) a. requiremts - fed financial supervisory agency have to consider institution’s record of mtg credit needs of entire community consistent w/safe & soundness in their evaluation of application 1. application covers application of new charters, deposit insurance, M&A approval, branching, relocation
b. purpose - to ensure credit supply isn’t cut off to low-income communities, one of the most important statute in this area c. justifications 1. banks have obligation to return credit to local communities 2. banks have obligation to extend credit to loaw income & minority communities d. enforcemt procedures 1. on-site examinations by fed agency e-es 2. ratings by Comptroller based on bank’s performance in lending, investmt & service tests a. lending - evaluates bank’s performance in mtg credit needs of assessmt area covering home mortgages, sm business loans, sm farm loans & community developmt lending b. investmt - evaluates bank record of making investmts benefitting community c. service - evaluates effectiveness of delivering retail banking services & extent & innovativeness of community developmt services
e. compliance methods by banks 1. enlist support of community 2. alter operations f. resistance by banks & others 1. costly compliance 2. higher ratings don’t guarantee approval 3. statute doesn’t accomplish its purpose but deters geo diversification 2. alternatives a. Klausner - propose mrkt for tradable CRA obligations so would lead to more efficient allocation b. Korean idea - revolving credit cooperatives where participants each offer $ to fund & votes on borrower who pays interest to fund 1. issues a. need initial capital b. participants need stable relationship c. Indian idea - 1 lender makes loan to 4 borrowers who are jointly & severally liable for full amt
a. parties to which bank may be liable 1. customers of bank - see below 2. 3rd parties - bank can be liable to 3rd parties if bank activity is outside normal activity of lender - Connor v. Great Western S&L (1968) - Traynor, & statute a. case - construction of faulty homes where contractor was insolvent so homeowners sued bank that had extensive involvemt in lending money to contractor to bld houses, had first right of refusal to serve mortgage needs of potential buyers, took title to property b. basis of liability - general requiremt of good faith imposed by various sources 1. state UCC rules a. requires good faith in performance or enforcemt of K 1. good faith - honesty in conduct of transaction concerned 2. creditor can’t be too rigid - will be in violation of good faith 3. creditor can’t be too flexible - will be deemed to have waive some of its rights under K b. creditor must show good faith that prospect of paymt is impaired when it chooses to accelerate loan b/c debtor violates provision of loan agreemt - under §1-208 UCC, Brown v. Avemco (1970) 1. issue - §1-208 UCC covers only at will acceleration whereas here acceleration was in debtor’s control via no violation of agreemt 2. court responds that acceleration is in creditor’s discretion based on policy considerations given facts of case a. creditor failed to take action upon receiving notice of default b. creditor refused to accept tender that would have made in whole c. creditor refused to negotiate w/debtor c. if creditor negotiates in restructuring then implicit agreemt to provide notice before other action is taken - Alaska State Bank v. Fairco (1983) 1. can K this 2. K restatemt a. lender breaches K if fails to satisfy fair dealing requiremt 3. tort - tortious interference w/K a. elemts of liability 1. existence of valid or prospective K 2. knowledge of such K 3. improper interference of K by 4. interference proximately caused damages b. creditor tortious intereferes w/debtor’s business when it attempts to control the election of debtor’s directors, business relations via threat of finding constructive default on loan - State National Bank of El Paso v. Farah (1984) 4. fed bankruptcy law a. bankruptcy court cannot subordinate creditor’s claim on the grounds that creditor acted inequitably against debtor when it terminated debtor’s line of credit especially when there was no K breach - Kham & Nate’s Shoes v. First Bank of Whiting (1990) 1. reasons a. bank didn’t create borrower’s need for funds b. bank not obligated under K to made loan to full extent even if there was assurance of full repaymt 5. fed environmental fund - harzardous waste disposal liability under Superfund CERCLA (bank liability for its borrowers) a. general rule that owner or operator of property liable for clean-up costs b. exception - for owners w/security interest w/out participation in mgt of operations 1. participation of financial mgt to extent where there is inference of capacity to influence waste disposal decision not fall w/in exception & will lead to liability - US v. Fleet Factors Corp (1991) - Kravitch 2. some actual mgt necessary for liability to attach - In re Bergsoe Metal Corp (1990) - Kozinski 3. work-outs & monitoring do not count as participation c. currently less of problem 1. fewer hazardous materials 2. better disposal by co. for fear of liability d. problem for lender 1. inappropriate waste disposal not readily apparent 2. handled by requiring borrower to have such insurance c. damages if breach of good faith is found 1. K - standard damage is restitution of pecuniary loss 2. tort - damages proximately caused by tortious interference 3. bankruptcy - pursuant to trustee’s power to subordinate debt d. complications due to relationship btwn bank & borrower 1. lend $ - based on info investigation, continuous monitoring, if default restructures loan or enforces K via repossession or foreclosure 2. investmt advisor
-intro - refers to liability side of bank’s balance sheet, mostly deposit insurance -no limitation of deposit interest rates -Fed Deposit Insurance Act - FDIA
a. insurer - has obligation to pay out insurance amt to insured deposits when bank fails b. receiver - receives & manages assets as fiduciary for creditors of bank when bank fails
a. fed chartered banks - required b. state chartered banks - permitted
a. insures up to $100k deposit per account in the same bank 1. depositor can insure full account amts if limited to $100k in each institution b. what counts as deposits 1. 12 USC §1813(l)(1) - deposit is unpaid balance of money or equivalent held by bank in usual course of business whereupon bank is obligated to provide credit & is primarily liable a. evidenced by LOC, checks, promissory notes upon which person obtaining credit is primarily liable 2. stand-by letters of credit do not count as deposit that can be insured for policy reasons - FDIC v. Philadelphia Gear Corp (1986)- O’Connor a. statute technically satisfied but court holds that stand-by LOC is not promissory note under fed law b/c not represent surrender of hard earnings to bank for which FDIC insurance was to protect
a. moral hazard created - no incentive on bank’s or depositor’s part to ensure low cost of risk of failure 1. some potential mitigation of moral hazard a. bank shareholders have something to lose so will monitor mgt only up until equity gone b. methods of addressing 1. private insurance ways of addressing this issue not present in FDIC insurance a. risk-adjusted premiums - higher premiums for higher risk insureds b. deductible - insureds liable for first X amt c. policy limits - insured up to X amt d. exclusions - not insured result via certain things e. difference w/private insurance 1. insuring creditor of actor & not actor as in private insurance 2. some variation of private insurance features - imposing risk of loss on depositors to induce them to monitor bank activities via deductible, limit on insurance amt, insure only demand deposits & not time deposits a. issues 1. depositors aren’t best party to monitor especially when form of monitoring is bank runs 2. winners will be lg banks b/c govt won’t let lg banks fail & more info available on lg banks 3. losers are sm banks & people needing sm loans b. analysts can rank banks to depositors will deposit in banks w/better ratings 1. issue - faulty ratings system & may still lead to bank runs c. deductible of first X amt 1. issue - more harm to poor depositors, still need sufficiently high deductible to have effect on richer depositors, politically infeasible d. deductible of certain % of deposit - better alternative 3. mrkt discipline - encourage bank investors to monitor bank behavior by putting them at risk of loss a. shareholders - want bank to take big risk b/c down side capped at amt of initial investmt whereas upside potential unlimited so not good parties to rely on b. debtholders - sub debt best party among debtholders to monitor 1. sub debt - first to be wiped out after equity 2. sub debt - represented by 1 TRS as class who is charged under trust indenture to monitor bank & protect rights of holders
3. senior debt - will most likely get money back if bank becomes insolvent b/c at top of creditor list 4. issue a. banks don’t issue much sub debt b. even if they did, may lead to too much conservatism c. depositors - not best party 1. no incentive to monitor b/c existence of insurance a. suggestions 1. reduce deposit insurance ceiling - sm depositors fully protected & lg depositors incentive to monitor 2. coninsurance syst - depositors fully insured up to certain amt & then partially thereafter 2. not sophisticated - no easy access to info a. suggestions 1. can require banks to file disclosure statemts - still complicated 3. discipline in form of runs & creates more problems than cure a. suggestions 1. info availability so depositor action doesn’t result in bank runs - still subject to problem above 4. risk adjusted premiums - impose different premiums on different banks based on relative risk levels a. currently FDIC has some risk adjusted premiums but not significant b. great in theory if can accurately measure risk c. issue - pricing risk difficult 1. extensive monitoring necessary 2. probabilities of events occuring difficult to assess 3. amt of harm caused by certain events difficult to assess d. alternatives 1. private reinsurance mrkt a. issue - high cost & private sector may not have sufficient assets to cover bank failures b/c they sometimes tend to be correlated 2. public agent can monitor a. issue - examiners not well trained b/c of budgetary constraints, examiners have no profit motive to price accurately 3. combination of private & public insurance - private can insure sm part & set prices that public can look to 4. bank mgrs via salary, bonuses, rep are best parties to price risk a. reason - banks linked by fed fund mrkt (inter-bank mrkt) & if in bad health will be booted out of this mrkt gives indication of status of bank 5. early regulatory intervention for troubled banks to minimize loss a. 1991 FDICIA legislation included 1. undercapitalized banks required to submit capital restoration plan to supervisory agency 2. significantly undercapitalized banks not submitting such plan or do not adhere to terms of such plan may be required to recapitalize via merger or sale of assets/debt 3. critically undercapitalized banks subject to onerous regulatory constraints - limited to material transactions in usual course of business w/out regulatory approval 4. agency can close bank prior to insolvency 1. right at point where bank reaches insolvency, if bank shut down all deposits can be paid off - when net worth becomes 0 (where assets just equal liabilities) 2. fed regulatory role only to monitor bank’s capital & handle closure c. issue
1. things happen too quickly before agency has time to intervene 2. difficult to determine point of economic solvency especially since so highly leveraged 3. costs of premature closure a. banks in temporary financial difficulty will be closed b. loss of value of going concern c. receivership costs d. investors less likely to invest b/c risk of early closure 6. narrow banks - offer fully insured deposit accounts w/restricted use via 100% collateralized w/mrktable securities & also not insured accounts w/out such restrictions a. benefits 1. no bank runs if public believes in collateral & collateral is diversified 2. no bank panic if all banks are in this arrangemt 3. banks can make risky investmts via separate division, sub, etc. & can fund them w/other securities instead of deposits 4. cost of monitoring & compliance lower 5. insider trading & asset concentration can be addressed via diversification b. costs 1. collateral subject to interest rate fluctuations & can be devalued 2. mgr can steal $ 3. banks don’t like b/c calls for micromgt by govt 4. would potentially drain $ out of riskier investmts 5. public knows that fed will not let broad bank fail so will deposit into uninsured accounts b/c potential for significantly higher returns than insured account 6. narrow banks aren’t effective conduits of monetary policy 7. addresses bank run problem but not decrease risky behavior of banks overall c. currently not accepted but not completely fallen out of favor 7. govt can issue debt payable on demand handled via bk entry system - effectively govt will become bank for all a. features 1. can issue debt in any denomination 2. can redeem via drafts cleared through checking system 3. govt can hire bank to maintain b. benefits 1. eliminates moral hazard 2. safe w/out need for insurance 3. interest rates will be paid on these deposits 4. similar to narrow bank c. issues 1. money still needs to be recycled to others for use - govt borrows $ for its own use, so is govt going to borrow this $ & then lend out to others same agency costs unless govt is going to handle lending out of its own money 2. costly for govt - govt can still lose $ b/c it will become its equity investmt d. capital regulation -intro
a. formulas b. accounting for different types of assets & liabilities 1. assets = liability + net worth 2. net worth = equity capital, core capital 1. traditional min capital rules -beginning - min capital requiremts, ie, $1m -course of existence - if capital status impaired, Comptroller can:
2. capital adequacy ratios -leverage ratios
a. higher % required for less rated banks
a. doesn’t control riskiness of banks b. doesn’t consider different levels of risk of different assets c. doesnt’ consider other capital w/equity like features that protect depositors - ie, sub debt d. appropriate % determined more by political rather than economic factors -risk-adjusted capital guidelines
a. regulatory requiremts 1. bank has to maintain 4% of tier 1 capital to total risk-adjusted assets a. tier 1 - core capital - common stock, noncumulative perpetual preferred, minority equity interests in sub 2. bank has to maintain 8% of tier 2 capital to total risk-adjusted assets a. tier 2 - supplemtal capital - loan & lease losses, perpetual preferred excluded above, sub debt, intermediate preferred, other hybrid capital & notes 1. limited to tier 1 amt b. risk adjusmts to assets 1. general assets a. 0 risk weight - govt bonds & cash b. 20% risk weight - conditionally guaranteed govt obligations c. 50% risk weight - more risky loans of govt revenue bonds & first mortgage residential loans d. 100% risk weight - all private loans & bank-owned real estate 2. off balance sheet items a. conversion to credit b. adjust for risk of borrower
a. still decided politically but on intl scale undre BIS (Bank of Intl Settlemts) -general applicable to both ratios - leverage & tier 1/2 ratios
a. to constrain ability to expand b. justification 1. assumption that expansion even if into just very safe investmts is dangerous b/c potential for bank to try & grow out of its problems 2. w/out this limit, banks could grow indefinitely
a. sm write down in asset side can have significant impact b. bank options 1. can increase equity via new issue 2. can sell off sufficient # of loans to being back into compliance -savings association capital rules under FIRREA
a. S&L b. savings banks
|