EXAM 1

Other Financial Services

- Trust services - Personal - Corporate - Cash or treasury management services - Off-Balance Sheet Activities: contingent liability: contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event. - Standby letter of credit: A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party. - Financial futures - Interest rate swaps - Insurance Activities - Credit life - Annuities - Other - Securities - Brokerage - Mutual funds - Securities dealer - Underwriting: receiving payment for the willingness to cover a potential contingent risk

Douglas Amendment

A BHC cannot acquire a bank located in a second state (host state) unless the laws of host state specifically permit such acquisition. Thus, again, federal law permitted states to determine their own banking structure. (Douglas Amendment repealed by the Riegle-Neal Interstate Banking Act of 1994.)

Bankers' banks

A bank that is owned by other banks that performs "correspondent" services for its customers. A bankers' bank may have a national or state charter, and does not provide banking services to the public. Came into being in the 1980s, largely as the result of the expansion of multibank holding companies, statewide branching and interstate banking.

Bank Holding Company Act of 1956

A commercial bank is a financial institution that offers deposits subject to withdrawal on demand and makes commercial loans.

Practical Definition of Commercial Bank

A commercial bank is an organization that is chartered by the federal government (Office of the Comptroller of the Currency) or by a state to engage in the business of commercial banking. This definition recognizes that a few banks are chartered to perform a limited purpose, such as trust banking, credit cards (MBNA), motor vehicle loans. Such banks are often called limited-purpose banks or monoline banks.

Formation of Non-bank Banks in the 1980s

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.

Competitive Equality Banking Act of 1987

Among other things, the Act put a halt to further non-bank bank expansion (though) some 160 non-bank banks were "grandfathered" under the law) by subjecting the the parent companies of such institutions to the same regulatory restrictions that traditional banking organizations face. CEBA defined a commercial bank as an institution that is a member of the Federal Deposit Insurance Corporation (FDIC).

National bank (general rule)

An amount equal to 15% of the bank's capital and if the loan is fully secured by readily marketable collateral 25% of capital.

Arkansas state bank

An amount equal to 20% of the bank's capital

Correspondent Banking

An interbank relationship whereby one bank (respondent or downstream bank) keeps a deposit and pays fees another bank (correspondent or upstream bank) in return for services.

Banker's Banks

Banks owned by other banks that performs services for banks. Doesn't deal with the public. Authorized by the Garn-St Germain Act of 1982. Performs same functions as correspondent banks. Creation and growth primarily due to the growth of BHCs, relaxation of restrictions on branching, and interstate banking.

Correspondent banks

Banks that provide services to other banks and by outsourcing (providing services to credit unions, insurance companies, money market mutual funds, etc.). Correspondent banking has declined as a result of the formation of multibank holding companies, state-wide branching and interstate banking.

Community banks

Banks with consolidated assets of less than $10 billion. (Dodd-Frank Bill of 2010). Community banks service local communities and towns offering a personalized menu to customers

Wholesale banks

Concentrate on dealing with medium and large businesses.

Financial Intermediation

Depositors Bank Loans and Investments

. Payments

Dispense coin and currency - "over the counter" and ATMs - Checkable deposits - Sweep accounts: where funds are automatically managed between a primary cash account and secondary investment accounts. Transfer funds usually overnight out of the customers checking accounts into their savings deposits accounts that do not carry the legal reserve requirements - Debit cards - Credit card transactions - Preauthorized payments - Internet banking - Wire payments - Fedwire

• Financial stability and advance warning system

Dodd-Frank created the "Financial Stability Oversight Council" This council of regulators monitors the financial system for "systemic risk" and determines which entities pose significant systemic risk. Generally, the Council makes recommendations to regulators for the implementation of the increased risk standards, also known as prudential regulation, to be applied to bank holding companies with total consolidated assets of $50 billion or more and to designated nonbanks.

Global, international, or money center banks

Large banks that serve markets that serve markets throughout the world.

Full service banks

Most medium and large banks that provide a wide range of financial services. Many community banks (banks that have less than $1 billion in assets - which is one definition of a community bank) often advertise "full service" banking.

Regional banks

Multi-billion dollar banks that provide services in a number of states.

Bank Services

Payments Intermediation Other Financial Services

Retail or consumer banks

Serve the credit needs of their local communities, i.e., small businesses and consumers.

• Ends Too Big to Fail Bailouts

Supposedly ends the possibility that taxpayers will bail out financial firms that threaten the economy by: creating a "safe" way to liquidate failed financial firms; imposes more stringent capital requirements; updates the Fed's authority to allows system-wide support but no longer prop up individual firms.

• Elimination of the Office of Thrift Supervision (OTS)

The Dodd-Frank Act abolishes the OTS but does not eliminate the thrift charter itself. The OTS is merged into the OCC, and the powers of the OTS are divided and transferred among the existing banking agencies as follows: - The OCC has supervisory authority over federally chartered thrifts, and rulemaking authority for federally- and state- chartered thrifts, except for areas delegated to the Federal Reserve. - The FDIC has supervisory over STATE chartered thrifts. - The Federal Reserve has supervisory and rulemaking authority for savings and loan holding companies.

• Restrictions on interchange fees

The Dodd-Frank Act directs the Federal Reserve to set interchange rates ("swipe fee") in electronic DEBIT-CARD transactions involving issuers with more than $10 billion in assets. (Note the "small" bank exemption.)

• Audit of the Federal Reserve

The General Accounting Office (GAO) will conduct a ONE-TIME audit of all Federal Reserve 13(3) emergency lending that took place during the financial crisis. In the future, the GAO will have ongoing authority to audit 13(3) emergency lending, discount window borrowing anf open market transactions.

Legal lending limit

The maximum amount of credit that a bank is permitted by law to have outstanding to one borrower or associated borrowers.

• Mortgage reform and anti-predatory lending

This Act places new regulations on mortgage originators and imposes new disclosure requirements and appraisal reforms, the most important of which are: the creation of a mortgage originator duty of care, the establishment of certain underwriting requirements so that at the time of origination the consumer has a reasonable ability to repay the loan; the creation of document requirements intended to eliminate "no document" and "low document" loans, the prohibition of steering incentives for mortgage originators; a prohibition on yield spread premiums, and prepayment penalties in many cases; and a provision that allows borrowers to assert as a foreclosure defense a contention that the lender violated anti-steering restrictions or the reasonable repayment requirements.

Dual Banking System

Two levels of government charter banks: the federal government (Office of the Comptroller or OCC) and state government (Arkansas State Bank Department).

Unit Banks

Unit banking refers to a bank that is a single, usually small bank that provides financial services to its local community. A unit bank is independent and does not have any connecting banks — branches — in other areas.

Monoline or limited-purpose

a company specializing in a single type of financial service, such as consumer credit, home mortgages, or a sole class of insurance.

Bank Holding Companies

have to get permission from the FED. • Definition: A company that owns or controls one or more banks - OBHC & MBHC. • Reasons for growth

transaction account

is a deposit account that may be used to make more than six third-party payments per month. For a bank this includes the demand deposit account, NOW account, and the ATS account. Doesn't include the money market deposit account, which may be used to make six third-party payments per month but no more than three of such payments by check.)

Branch banking

refers to a bank that is connected to one or more other banks in an area or outside of it; to its customers, this bank provides all the usual financial services but is backed and ultimately controlled by a larger financial institution

Wildcat Banking

refers to the practices of banks chartered under state law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States, also known as the Free Banking Era.

Why Banks are So Heavily Regulated

• Banks are the key element of nation's payments system • Banks are privately owned and can create and destroy money, and the importance of protecting the soundness of monetary system • Banks are major lenders to all sectors of the economy • Banks hold a significant level of savings in time and savings deposits • Promote confidence in the banking system • Prevent undue concentration of financial resources and power • Protect the Bank Insurance Fund (BIF) of the FDIC (Federal Deposit Insurance Corporation) • Protect the consumer

Check 21 of 2004

• Brought check collection into the electronic age • In the check collection process, allows a check to be replaced with a "substitute check"—i.e., an electronic image that is processed. "truncated"

State Banks

• Charter application made to a state agency. In Arkansas, to the Arkansas State Bank Department. • Not required to be member of Fed; can be if it chooses to join Fed and met Fed's membership requirements. Arkansas requires state banks to have FDIC insurance.

National Banks

• Charter application made to the Comptroller of Currency (Administrator of National Banks). • Must have "national" or initials standing for national in name. • Must be member of the Fed and have FDIC insurance.

State Member Banks

• Chartered by a state • Are members of the Fed and thus the FDIC • Primary regulators are the Fed and the state • Are examined by the Fed and the state

Nonmember Insured Banks

• Chartered by a state • Have FDIC insurance • Primary regulators: are examined by the state and the FDIC

Nonmember Noninsured Banks

• Chartered by a state • State is primary regulatory agency • Examined by the state

National Banks

• Chartered by the Comptroller of the Currency (OCC) • Must have the word national or the initials indicating national in their name • Must be members of the Federal Reserve System • All member banks must have FDIC insurance • Primary regulator is Comptroller of Currency and are examined by national bank examiners

The Bank Merger Act of 1960, as Amended

• Closer federal regulation of bank mergers - impact on competition • Determined which federal bank regulator would approve/deny merger: Comptroller of the Currency if the resulting bank is a national bank; Fed is the resulting bank is a state member bank; FDIC if the resulting bank is a nonmember insured bank. Thirty-day waiting period and Department of Justice.

Federal Reserve Act of 1913

• Created the Federal Reserve System - U.S. central bank • All national banks must be members; state banks may elect to become members - if they desire to and also meet Fed's membership requirements

The Sarbanes-Oxley Accounting Standards Act of 2002

• Created the Public Company Accounting Oversight Board to enforce higher standards in the accounting profession and to promote accurate and objective audits of the financial reports of public companies. • Publishing false or misleading information about the financial performance and condition of publicly owned companies is prohibited. • Top corporate officers much vouch for the accuracy of their company's financial statements.

National Currency and Bank Act of 1864

• Created the dual banking system because it provided for the chartering of national banks • Created the Office of the Comptroller of the Currency - headed by the Comptroller of the Currency • National banks are chartered by the Office of the Comptroller of the Currency • C of C is primary regulator and also examines national banks • Didn't provide for branching by national banks, and the various Comptrollers of the Currency didn't permit branching until authorized by federal law

The Bank Holding Company Act of 1956, as Amended

• Defined bank holding company as a company which owns or controls one or more banks. (One bank holding company owns or controls one bank; multibank holding company owns or controls two or more banks. Either type may engage in permissible nonbanking" activities.) • The Federal Reserve regulates BHCs—Must have permission of Fed to form BHC, for BHC to acquire a bank. Thirty-day waiting period. Fed examines all BHCs. BHC may engage in nonbanking activities "so closely related to banking as to be a proper incident thereto." The Fed determines such activities.

Federal Deposit Insurance Reform Act of 2005

• Merged BIF and SAIF into a single deposit insurance fund (DIF) • Raised deposit insurance on qualified retirement accounts from $100,000 to $250,000.

The Banking Act of 1933 (Sometimes mistakenly called the Glass- Steagall Act. Glass-Steagall constituted four provisions of the Banking Act of 1933.)

• National banks were prohibited from underwriting corporate securities (they had won this privilege in the McFadden-Pepper Act) and revenue municipal bonds. Could continue to underwrite certain securities, including general obligation municipal bonds, U.S. Government securities, privately-placed commercial notes. • Prohibited member banks from becoming affiliated with a firm "engaged principally" in the securities business • Prohibited securities firms from taking deposits • Prohibited national banks from investing in stocks and limited their ability to act as an agent (broker) in buying and selling securities. (Note: Several large banks obtained restricted securities underwriting powers from the Fed in the 1980s and 1990s.) • Established the Federal Deposit Insurance Corporation (FDIC). Currently, banks pay an insurance premium to the FDIC based upon amount of deposits and level of risk. • Prohibited payment of interest on demand deposits (DDAs). (Prohibition of payment of interest on DDAs repealed by the Dodd-Frank Act of July 21, 2010, effective July 21, 2011.)

The Fair and Accurate Credit Transactions Act (FACT) of 2003

• Passed in an effort to deal with the growing problem of identity theft. • The Federal Trade Commission was directed to make it easier individuals victimized by ID theft to file a theft report and required the nation's credit bureaus to help victims resolve the problem. • Individuals and families are entitled to receive at least one free credit report each year from each of the three national credit bureaus (Experian, EquiFax, and Transunion) to determine if they have been victimized by this form of fraud.

Bank Secrecy Act of 1970

• Passed originally to combat money laundering • Bank must file a Currency Transaction Report (CTR) with the IRS on cash transactions in excess of $10,000 during the same business day (24 hour period). The amount over $10,000 can be either from one transaction or a combination of transactions. •Certain businesses that ordinarily deal in large amounts of cash may be exempted. • Part of the U.S. Patriot Act of 2001 amended the Bank Secrecy Act: •"Know your customer." The bank must develop and deploy a Customer Identification Plan (CIP) that gives rise to screening computer software and office procedures that makes sure that it knows who its customers are and can spot suspicious financial activity that may facilitate terrorism. • Establish the identity customers opening new accounts or holding accounts whose terms are changed—usually accomplished by asking for a driver's license or other acceptable picture ID and obtaining the Social Security number of the customer. Check the customer's ID against a government-supplied list of terrorist organizations and report any suspicious activity in the customer's account. If the bank detects a suspicious customer activity it must file a SAR (suspicious activity report) with the Financial Crimes Enforcement Network, inside the Treasury Department.

The FDIC Improvement Act of 1991

• Permits the FDIC to borrow from the Treasury to remain solvent • Called for risk-based insurance premiums; implemented in 1993 • Defined the actions to be taken when depository institutions fall short of meeting their capital requirements

McFadden-Pepper Act of 1927

• Permitted national banks to branch citywide if the state allowed state banks to branch at least to that extent. Amended by the Banking Act of 1933 to allow member banks to branch to the same extent as state nonmember banks so long as the branching was within the state. Thus, member banks were prohibited from engaging in interstate branching. • This Act allowed states to determine their own banking structure.

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA)

• Phased-out interest rate ceilings on deposits over a six-year period • Authorized NOW accounts (negotiable order of withdrawal) ( NOW account is an interest-bearing transaction account) • The fundamental purpose of the Act was to make savings and loan associations, savings banks and credit unions more competitive and viable by expanding their range of permissible services - i.e., make them more like commercial banks.

Correspondent Services

• Provision of cash • Check clearing and collection • Fed funds transaction: overnight transaction to another bank • Securities portfolio • Pass-through accounts • Loan participations and credit overlines

Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994

• Repealed the Douglas Amendment and provided that BHCs could acquire banks located anywhere in the U.S. beginning in Sept. 1995 • Permitted interstate BHCs to consolidate their affiliated banks acquired across state lines into branches • Prohibition of member bank interstate branching repealed. But banks must follow state law in determining the area in the state over which they may branch. A state may prohibit an out-of-state BHC from branching into the state without first acquiring a bank domiciled in the state. Example: Arkansas. Thus, a state may prohibit de novo interstate branching. (The Dodd-Frank Act permits state and national banks to engage in de novo branching into any state.)

Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)

• Repeals part of the Glass-Steagall Act. Permits well-managed and well-capitalized banking companies to affiliate with securities firms and insurance companies (and conversely). • Such affiliations may occur in two ways (firewall protection): 1. Through a Financial Holding Company (FHC) - with banks, insurance companies or agents, and securities firms each operating as separate companies but whose stock is owned by the same holding company. 2. Through subsidiary corporations whose stock in owned by the bank. In both instances, the BHC or bank must obtain regulatory approval. • FHCs are authorized, with regulatory approval, to take temporary equity interests in commercial projects.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

• Replaced the Federal Savings and Loan Insurance Corporation with Savings Association Insurance Fund (SAIF) • SAIF was administered by the FDIC; the insurance fund for bank deposits was renamed Bank Insurance Fund (BIF). In 2005, the two insurance funds were merged into a single Deposit insurance fund (DIF). • Replaced Federal Home Loan Bank Board with the Office of Thrift Supervision (OTS) - the federal regulator of thrifts • Allows S&Ls to convert to commercial banks if they can meet regulatory standards

The Dodd-Frank Wall Street Reform and Consumer Protection Act, July 21, 1010

• Supposedly, this Act will impact the financial services industry more extensively than any banking legislation since the 1930s. Some provisions go into effect at different times, and many regulations under the Act must be promulgated. Moreover, this law affects the financial services industry overall. Many of the provisions affect the nation's money center and large regional institutions and will have less impact on community banks. This discussion will be limited primarily to banks and thrifts, especially community institutions. • Repeals that part of the Banking Act of 1933 and Regulation Q of the Federal Reserve System that prohibits the payment of interest on demand deposit accounts (DDAs), effective July 7, 2011. • Permits national and state banks to engage in interstate de novo branching into any state, thus changing some provisions of the Reigle-Neal Act of 1994. • Change in the FDIC insurance assessments base. FDIC insurance assessments were previously based on an institutions deposit base. Under Dodd-Frank they will be based on an institution's average consolidated total assets minus its average tangible equity. This should benefit community banks because they rely more heavily on deposits for funding than larger banks. Thus the larger banks will be responsible for funding a greater portion of the cost of FDIC insurance. • Effective July 21, 2010, the standard maximum deposit insurance amount is permanently increased to$250,000. • Beginning Dec. 31, 2010 (the scheduled termination date for the existing Transaction Account Guarantee Program, or TAGP) and continuing through Jan. 1, 2013, Dodd-Frank will provide unlimited insurance for funds held in non-interest bearing transactions accounts. • The reserve ratio of the FDIC deposit insurance fund (DIF) is no longer capped at 1.5%, and the FDIC is no longer required to refund excess amounts in the DIF to insured institutions. Additionally, the reserve ratio in a given year may not be less than 1.35% of estimated insured deposits, or the comparable percentage of the assessment base. The FDIC has until Sept. 30, 2020, to raise the reserve ratio to 1.35%. • The Act establishes the new Consumer Financial Protection Bureau within the Federal Reserve System. The Fed must fund the CFPB but cannot intervene in matters before the CFPB, interfere with its officers or employees, or interfere with its rulemaking authority. The CFPB director will be appointed by the President with the advice and consent of the Senate. The CFPB was created to take over most of the consumer protection functions related to certain existing federal protection laws that are overseen by the federal banking agencies. The consumer protection laws now within the control of the CFPB include (among others): the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. The CFPB will have broad rulemaking authority over federal consumer protection laws, and the courts are required to give them great deference to its interpretations. The CFPB also has authority to issue rules covering unfair, deceptive or abusive practices. The CFPB will have authority over persons engaged in offering or providing a consumer financial product or service, which includes among other things: extending and servicing loans, taking deposits, providing most real estate settlement services, providing check cashing services, providing consumer credit counseling or loan modification services, collecting or providing consumer report information, and collecting debt. Notable exceptions include persons regulated by the SEC, auto dealers, and persons providing certain real estate brokerage activities. Community banks will have far less contact with the CFPB than their larger competitors. While the CFPB has exclusive examination authority and primary enforcement authority over federal consumer financial laws for institutions with more than $10 billion in assets, it can merely "participate with the PRIMARY federal regulators" in examinations of smaller banks and will have NO enforcement authority over these institutions. (Thus, community banks WILL be subject to the CFPB's consumer financial rules but WILL CONTINUE to be examined by their PRIMARY federal regulator

The Financial Services Regulatory Relief Act of 2006

•Authorizes payment of interest on funds maintained by a depository institution at a Federal Reserve bank

The Emergency Economic Stabilization Act of 2008 ("Bailout Bill")

•Granted the Treasury the means to purchase up to $700 billion in "troubled" assets and equity from financial institutions. This became the "Troubled Asset Relief Program" or TARP. •Allowed the FDIC to increase deposit insurance for all deposits to $250,000 until year-end 2009.

BHC Regulation

•Must apply to Fed to form BHC, and Fed must approve BHC purchase of another bank or another BHC. Fed regulates and examines BHCs at federal level. •Fed determines permissible nonbanking activities of BHCs (Activity must be "so closely related to banking as to be an incident thereto.") •Douglas Amendment to the Bank Holding Co. Act of 1956 (Repealed by the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994)