impact of govt. policies

8/9/2019 Impact of Govt. Policies

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Impact of Government Policy and

Regulation


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Impact of Government Policy andRegulation

Key Topics

Reasons for Regulation

Major Regulators and Laws

Riegle-Neal and Gramm-Leach-Bliley Acts

Key Unresolved Regulatory Issues

Central Banking System

Federal Reserve System and LeadingCentral Banks of Europe and Asia

Impact of Central Bank Policy Tools


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Why are banks regulated?

Most regulated industry

protect the public's savings

control the money supply

ensure adequate supply ofloans and to ensure fairness

maintain confidence in thesystem

avoid monopoly powers

provide support for governmentactivities

support special sectors of theeconomy


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Dual Regulatory System

State closer control over banksoperating in their states

Federal ensure banks are treatedfairly across state lines


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Chief Regulators

Controller of the Currency

Federal Reserve System

Federal Deposit Insurance Corporation

Department of Justice

Securities and Exchange Commission

State banking commissions


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Why do banks fail?

Banks small capitalbase

Financial repressionby the government

Bank runs

Fraud


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Capital adequacy

Well-capitalized 10%

Adequately capitalized 8%

Undercapitalized 6%

Significantly undercapitalized < 6%

Critically undercapitalized < 2%


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Bank growth and failure

Assets Liabilities

Loan $102@9% Deposits $90@7%

Loan loss reserve -2$100 Equity $12

-Loan loss prov. - 2Totals $100 $100

Net income = $9.18 - $6.30 = $2.88ROA = $2.88/$100 = 2.88%

E/A = $10/$100 = 10%Well-capitalized


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Assets Liabilities

Loan $102@9% Deposits $110@7%Loan 10@9%

Loan 10@9%Loan loss reserve -2$120 Equity $12

-Loan loss prov. - 2Totals $120 $120

Net income = $10.98 - $7.70 = $3.28ROA = $3.28/$120 = 2.73%

E/A = $10/$120 = 8.33%Adequately capitalized


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Assets Liabilities

Loan $102@9% Deposits $110@7%Loan 10@9%

Loan 0 Equity $ 12Loan loss reserve 0 -Loan loss prov. - 2$112 -Excess loan loss - 8

Totals $112 $112

Net income = $10.08 - $7.70 = $2.38ROA = $2.38/$112 = 2.13%

E/A = $12/112 = 1.79%Critically undercapitalized


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Early significant banking regulation

National Bank Act of 1864 National banking system

Created OCC to charter and

regulate Circulate currency

Federal Reserve Act of1913

Central payment system Monetary policy

Lender of last resort

Based on Koch and MacDonald 2006


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Bank reforms of the 1930s

Large scale failures prior to and during theGreat Depression in the period 1921-1933caused Congress to pass new legislation

regulating banks


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Glass-Steagall Act of 1933

Separated banking from investment banking andinsurance

Established the FDIC

Fed may regulate time deposit rates and prohibitinterest on demand deposits

Increased the minimum capital requirements onnational banks


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Banking reforms of the 1930s

Restrictions

Pricing - rates on deposits

Geography entry and interstate banking Services scope and nature of business;

investment banking

Capital minimum capital requirements

and other balance sheet restrictions


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Social Graces and Morales-Social

Responsibility Laws

Truth-in-lending Act

Equal CreditOpportunity Act

CommunityReinvestment Act


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Late 1970s

Banking stable since the1930s regulation

Banks compete withtoasters, silverware, andentertaining customers

Inflation in late 1970sdue to oil prices


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Late 1970s

Regulation Q placed limits on depositcosts

Geographic restrictions on interstatebanking and branch banking

Product restrictions on securities powers

Junk bond markets open to medium-sizedfirms

Credit cards replace checking


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Depository Institutions Deregulation and

Monetary Control Act (DIDMCA) of 1980

Uniform reserve requirements for all depositoryinstitutions.

Federal Reserve services available to all

depository institutions. Regulation Q to be phased out

Deposit insurance limit raised to $100,000 peraccount

Negotiable order of withdrawal (NOW) accountsapproved (6% interest rate max)

S&Ls to make consumer loans


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Garn-St Germain Depository

Institutions Act of 1982 Money market deposit accounts (MMDAs) to

compete with money market mutual funds

(MMMFs). FDIC/FSLIC assistance for troubled or failing

institutions

Asset powers of thrifts expanded in consumer

and commercial lending


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Riegle-Neal Interstate Banking and

Branching Act of 1994

Interstate banking allowed throughacquisitions, mergers, or branchingacross state lines.


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Gramm-Leach-Bliley Act (Financial

Services Modernization Act of 1999

Ended prohibitions on investment bankingand insurance underwriting.

Banks, brokerage firms, and insurancecompanies can merge.

Financial holding companies allowed toengage in a wide variety of financial

services (i.e., financial supermarkets).


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21st Century Regulations

USA Patriot and Bank Secrecy Acts

Sarbanes-Oxley Accounting StandardsAct SOX


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21st Century Regulations

Fair and Accurate Credit Transactions(FACT)

Check 21 Bankruptcy Prevention and Consumer

Protection Act of 2005

Federal Deposit Insurance Reform Actof 2005


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New Regulatory Strategies

Refocused torisk and capital,

away fromservices andgeography.

Public disclosure


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Unresolved Regulatory Issues

Moral hazard problem of depositinsurance

Deregulation increases chances ofbank failure

Conglomerates raiding bank funds forother businesses

Quality of regulators in complex world


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Unresolved Regulatory Issues

Overlapping of regulation infirms with multiple types offinancial services

Mixing banking with traditionalbusinesses

International regulation issues


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Central Banking System

Monetary policy

Open market operations

Reserve requirements Interest rates (discount rate)

Currency values


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Questions?

impact of govt. policies

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