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 The Bank Regulatory Environment
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| tarix | 31.08.2018 | | ölçüsü | 43,5 Kb. | | #65733 |
| Why banks are regulated? Why do banks fail? Bank reforms of the 1930s Bank reforms since 1980 Banking and commerce arrangement in other countries -
Why are banks regulated? To protect the safety of the public’s savings To control the supply of money and credit in order to achieve a nation’s broad economic goals (such as high employment and low inflation) To ensure equal opportunity and fairness in the public’s access to credit and other vital financial services To promote public confidence in the financial system, so that savings flow smoothly into productive investment, and payments for goods and services are made speedily and efficiently To avoid concentration of financial power in the hands of a few individuals and institutions To help sectors of the economy that have special credit needs (such as housing, small business, and agriculture Regulators Office of the Comptroller of the Currency Established 1863. Charter national banks (about 1/3 of total banks). Examine national banks and has the power to approve or disapprove their merger applications Regulate all national banks are members of the Fed and 992 state banks have chosen to become members. Ensures the deposits of member banks. Levies insurance premiums, manages the deposit insurance fund, and carries out bank examinations. Why do banks fail? Credit risk, interest risk, and foreign exchange risk The small capital base of banks makes them sensitive to negative earnings. Banks use loan loss reserves to absorb expected losses on loans and from other sources. However, unexpected losses must be charged against equity capital and can cause the bank to become insolvent and/or closed by regulators. A bank run exists when depositors withdraw funds due to some individual or general financial panic. The fact that bank deposits are often payable on demand (or in a very short period) creates an inherent risk of bank runs. Failure to control a bank run can produce a collapse of the banking system (as it did in the early 1930’s), resulting in a potential collapse in the economy, and the collapse of individual banks (Continental Illinois, Bank of New England). Financial repression by the government by means of excessive control of the banking sector can raise failure risk. Fraud includes theft as well as lending to customers favored by friendship or political interest rather than economic profit for the bank. Bank reforms of the 1930s Large scale failures prior to and during the Great Depression in the period 1921-1933 caused Congress to pass new legislation regulating banks: The Banking Act of 1933 (Glass-Steagall Act) Separated banking from investment banking (underwriting securities) Established the FDIC Permitted the Federal Reserve to regulate time deposit rates and prohibited interest on demand deposits Increased the minimum capital requirements on national banks The Banking Act of 1935 was primarily intended to strengthen the Federal Reserve and its monetary management power. The act gave the Federal Reserve expanded reserve requirement authority and the power to regulate the rate of interest paid by member banks on time and savings deposits (Regulation Q). The act also marked the end of easy entry into banking Office of the Comptroller of the Currency (OCC) given expanded powers over granting new national bank charters. New applicants for banks must show that it would be successful and not damage other banks. Bank reforms since 1980 The 1933 and 1935 banking acts restricted pricing of deposits, geography (entry and expansion), products (securities activities of commercial banks), and minimum capital requirements in banking. After WWII the banking industry became progressively more competitive and innovative. Regulation Q placed limits on deposit costs Deposit outflows to money market mutual funds in periods of inflation and high interest rates. Geographic restrictions on interstate banking and branch banking Highly concentrated loan portfolios and difficult to service customer needs of large firms with operations throughout the country. Product restrictions on securities powers Large firms seeking debt finance increasingly used the securities markets to raise funds and not banks. Bank reforms since 1980 Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 Uniform reserve requirements for all depository institutions. Regulation Q to be phased out by the Depository Institutions Deregulation Committee (DIDC). Deposit insurance limit raised from $40,000 to $100,000 per account. Negotiable order of withdrawal (NOW) accounts approved (interest-bearing checking accounts with fixed limit of 6% interest rate). Savings and loans allowed to make more consumer loans and given trust powers. While there were many reasons for the legislation, including the need to “level the playing field” for reserve requirements, the principal motivating factor was the need to provide more asset and liability flexibility to savings and loans. These thrift institutions which had borrowed short term and invested long-term into fixed rate residential mortgages were experiencing disintermediation and losses on their portfolio. Bank reforms since 1980 Garn-St Germain Depository Institutions Act of 1982 Money market deposit accounts (MMDAs) to compete with money market mutual funds (MMMFs). These accounts had no interest rate ceilings and limited check writing privileges like MMMFs. FDIC/FSLIC assistance for troubled or failing institutions. Allowed sound commercial banks to acquire failed savings banks. Asset powers of thrifts expanded in consumer and commercial lending to enable them to compete with banks. These powers increased risk-taking activities of thrifts beyond their traditional home lending activities. Bank reforms since 1980 Regulatory structure: OTS (Office of Thrift Supervision) established under the U.S. Treasury. Also, FSLIC closed and SAIF (Savings Associations Insurance Funds) under FDIC to insure thrifts’ deposits. BIF (Bank Insurance Fund) under FDIC to insure banks’ deposits. Thrifts’ asset powers reduced by focusing more on home lending Increased the capital requirement for thrifts FIRREA reversed most of the deregulation for thrifts that had been provided by DIDMCA and Garn–St. Germain. It sharply reduced the investment and lending powers of thrifts and essentially returned their lending powers to those prior to deregulation. FIRREA attempted to focus thrifts on mortgage lending again, especially on single family residential lending. The change in goals reflected the financial disaster at thrifts in the 1980’s associated with deregulation and the feeling that the cost to the deposit insurance fund and to taxpayers was excessive. By reducing thrift risk-taking and providing stronger enforcement powers for the regulatory agencies, FIRREA tried to prevent a reoccurrence of the thrift crisis. Bank reforms since 1980 Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 Prompt corrective action (PCA) by regulators allowed to increasingly restrict the activities of undercapitalized institutions. If a bank falls below 6% total risk-adjusted capital, it is considered to be undercapitalized. If a bank is critically undercapitalized (when the equity capital falls below 2%), it must be closed by the FDIC. Restrictions of the ability of the FDIC to protect uninsured depositors in a large bank failure (i.e., lessened the “too big to fail” problem). Introduced risk-based deposit insurance premiums beginning 1993 Raised deposit insurance fees to build up federal insurance reserves. Bank reforms since 1980 Omnibus Budget Reconciliation Act of 1993 did not grant FDIC insurance coverage to deposits of state and local governments gave insured depositors a preference in claims over uninsured depositors encouraged uninsured depositors to evaluate the banks where they held funds Riegle-Neal Interstate Banking and Branching Act of 1994 Interstate banking allowed in 1995 through multibank holding companies. Interstate branching allowed in 1997. Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) Ended 1933 Glass-Steagall prohibitions on separation of banks from investment banking and 1956 Bank Holding Company Act’s prohibitions on insurance underwriting. Banks, brokerage firms, and insurance companies can merge. Financial holding companies allowed to engage in a wide variety of financial services (i.e., financial supermarkets). Banking and commerce remain separate. The dual banking system Bank charter type, BHCs, and overlapping regulation: OCC charters national banks (N.A. or national association) -- about 2,500 of 8,900 banks in 2000. State banking commission can issue state charters for banks. Dual national and state banking system. Bank holding companies are corporations that hold stock in one of more banks and other financial service firms. BHCs are regulated by the Federal Reserve. Overlapping regulatory authorities of Federal Reserve, OCC, FDIC, and state banks. Securities Exchange Commission (SEC) also involved in securities regulation of banking organizations. Regulators charter, regulate (set rules), supervise (influence safety and soundness), and examine (CAMELS and compliance with regulations) banking organizations.
Capital adequacy: the amount of capital htat banks are required to maintain Asset quality: risk associated with managing assets Management: the capability of the board of directors, management’s ability to monitor and control risk Earnings: the profitability of the bank Liquidity: the bank’s ability to meet its short-term financial obligations Sensitivity to market risk Regulatory dialectic (Kane) between regulators to control bank risk taking and banks to circumvent regulations for profit.
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