copyright © 2000 addison wesley longman slide #18-1 chapter eighteen banking regulation

Copyright © 2000 Addison Wesley Longman Slide #18-1

Chapter Eighteen

BANKING REGULATION


How Asymmetric Information Explains Banking Regulation

1.Govt. Safety Net 包括 Deposit Insurance 及 lender of last resort

A. Prevents bank runs due to asymmetric info: depositors can‘t tell good from bad banks, 同時會有 contagion effect

B. Creates moral hazard incentives for banks to take on too much risk

C. Creates adverse selection problem of crooks and risk-takers wanting to control banks

D. Too-Big-to-Fail increase moral hazard incentives for big banks and is unfair

2.Restrictions on Asset HoldingsReduces moral hazard of too much risk taking

FDIC 對倒掉的銀行 (1)payoff method(2) purchase and assumption method

存款人會損失一些



3. Bank Capital RequirementsA. Reduces moral hazard: banks have more to lose

when have higher capital

B. Higher capital means more collateral for FDIC

Leverage ratioRisk-based capital requirement:1988basel Accord, 1992 全面實施1998 開始實施 VAR

5% 以上 (Well capitalized)3% 以下：常被檢查限制

為了 trading risk 10 天內最大損失的 3 倍tier3 capital 短期證券到期時若銀行為 undercapitalized , 則投資人拿不到錢。



4. Bank Supervision: Chartering and Examination

A. Reduces adverse selection problem of risk takers or crooks owning banks

B. Reduces moral hazard by preventing risky activities

C. New trend: assessment of risk management 要銀行自已監管風險

5. Disclosure RequirementsBetter info reduces asymmetric info problem

File “call report” CAMEL

紐西蘭經驗，讓市場監督董事負無限責任沒有存款保險充分揭露各種資訊

問題：存款人有能力解讀 ? 有能力者不願當董事 ! 大部分為外商銀行



6. Consumer Protection

A. Standardized interest rates (APR)

B. Prevent discrimination: e.g., CRA

7. Restrictions on Competition to Reduce Risk-Taking

A. Branching restrictions

B. Separation of banking and securities industries: Glass-Steagall

International Banking Regulation

1. Bank regulation abroad similar to ours

2. Particular problem of regulating international banking

E.g., BCCI scandal資產被掏空販毒、獨裁者洗錢哪國來監督 ?


Major Banking

Legislation in U.S.


The 1980s Banking Crisis

Why?1. Decreasing profitability: banks take risk to

keep profits up

2. Financial innovation creates more opportunities for risk taking

3. Innovation of brokered deposits enables circumvention of $100,000 insurance limit

Result: Failures and risky loans

面臨：資金來源的競爭 :MMMF 資金去路的競爭 :CP 市場、證券化、 junk bond market

Real estate loan, M&A loan

80 年代末期，每年倒 200 家


Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991

1. FDIC recapitalized with loans and higher premiums

2. Reduce scope of deposit insurance and too-big-to-fail

3. Prompt corrective action provisions

4. Risk-based premiums

5. Annual on-site examinations and stricter reporting

6. Enhances Fed powers to regulate international banking

限制 brokered deposit 的投保範圍

Well capitalizedAdequately capitalizedUnder capitalizedSignificantly undercapitalizedCritically undercapitalized

Carrot-and –stick∵ 不會再“姑息”


Evaluating FDICIA and Other Reforms

Limits on Scope of Deposit Insurance1. Eliminate deposit insurance entirely

2. Lower limits on deposit insurance

3. Eliminate too-big-to-fail

4. Coinsurance ( 只有部分的存款才有被保險 )

Prompt Corrective Action1. Critics believe too many loopholes

2. However: regulator accountability increased by mandatory review of bank failure resolutions

將 regulator 攤在陽光下檢驗


Risk-based Insurance PremiumsHard to implement

Other Proposed Changes1. Regulatory consolidation

2. Market-value accounting

Evaluating FDICIA and Other Reforms


Banking Crises Worldwide


Cost of Banking Crises in Other Countries


Calculating Capital RequirementsFirst National Bank

Assets Liabilities Reserves $ 3 m Checkable deposits $ 20 m

Treasury Nontransactions

securities $10 m deposits $ 60 m

Government agency Borrowings $ 11 m

securities $ 7 m Loan loss reserves $ 2 m

Municipal bonds $10 m Bank capital $ 7 m

Residential

mortgages $10 m

Real estate loans $20 m

C&I loans $35 m

Fixed assets $ 5 m


Leverage Ratio = Capital/Assets

= $7m/$100m = 7%

Bank is well capitalized

Calculating Capital Requirements


Calculating Risk-Adjusted RequirementsRisk Adjusted Assets = 0 x $ 3 million (Reserves)

+ 0 x $10 million (Treasury securities)

+ .20 x $ 7 million (Agency securities)

+ .50 x $10 million (Municipal bonds)

+ .50 x $10 million (Residential mortgages)

+1.00 x $20 million (Real estate loans)

+1.00 x $35 million (Commercial loans)

+1.00 x $ 5 million (Fixed assets) 或 commercial paper

+1.00 x $20 million (Letters of credit)

$91.4 million (Total risk-adjusted assets)

或 interbank deposit或 fully backed mortgage bond

off-balance sheet activities


Core Capital Requirement = 4% x risk-adjusted assets

= 4% x $91.4m = $3.66m

< $7m of core capital

Total Capital Requirement= 8% x risk-adjusted assets

= 8% x $91.4m = $7.31m

< $9m of total capital

= $7m of core + $2m of loan loss reserves

Calculating Risk-Adjusted Requirements

(tier1)

(tier1+tier2)

4% OK6% well capitalized

8% OK10% well capitalized

Tier2 capital 包括 loan loss reserve 及 subordinated debt

copyright © 2000 addison wesley longman slide #18-1 chapter eighteen banking regulation

Documents

banking regulation slide

addison wesley longman

separation of banking

bank regulation

trading risk

asymmetric information

big banks

major banking legislation