Fin 4324 Ppt ch 2
Equal Credit Opportunity Act
Individuals and families could not be denied a loan merely because of their age, sex, race, national origin, or religious affiliation, or because they were recipients of public welfare
Federal Deposit Insurance Corporation (FDIC)
Insures deposits of federally supervised depository institutions conforming to its regulations -must approve all applications of insured depositories to establish branches, merge, or exercise trust powers -requires all insured depository institutions to submit reports on their financial condition
Why are banks closely regulated?
-Banks are among the leading repositories of the public's savings -Banks are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments -Banks have a long history of involvement with federal, state, and local governments
Responsibilities Federal Reserves
-Supervises and regularly examines all state-chartered member banks and bank holding companies operating in the United States and acts as the "umbrella supervisor" for financial holding companies that are no -Imposes reserve requirements on deposits (Regulation D) -Must approve all applications of member banks to merge, establish branches, or exercise trust powers -Charters and supervises international banking corporations operating in the United States and U.S. bank activities overseas conducting monetary policy overseeing and regulating financial markets
Banking Act of 1933 (Glass-Steagall)
-The Glass-Steagall Act defined the boundaries of commercial banking by providing constraints that were effective for more than 60 years
What are the principal roles of the fed?
-serve as a lender of last resort -help stabilize the financial markets and the economy
Key services of the Federal Reserve Banks to depository institutions in their districts
1.Issuing wire transfers of funds between depository institutions 2.Safe-keeping securities owned by depository institutions and their customers 3.Issuing new securities from the U.S. Treasury and selected other federal agencies 4.Making loans to qualified depository institutions through the "Discount Window" 5.Dispensing supplies of currency and coin 6.Clearing and collecting checks and other cash items 7.Providing information to keep financial-firm managers and the public informed about developments affecting the welfare of their institutions
All banks chartered by the Comptroller of the Currency must conform to what?
All banks chartered by the Comptroller of the Currency (national banks) and those few state banks willing to conform to the Fed's supervision and regulation are designated member banks
Dodd-Frank Regulatory Reform bill
Emphasized providing consumers with more complete and understandable language to convey service prices and avoid misleading information
Think of examples of moral suasion.
Examples: ▫Central bank officials testifying before legislative committees to explain what the bank is doing and what its objectives are ▫Letters and phone calls sent to those institutions that seem to be straying from central bank policies ▫Press releases urging the public to cooperate with central bank efforts to strengthen the economy
State Boards or Commissions
- Issue charters for new depository institutions - Supervise and regularly examine all state-chartered banks and thrifts
Comptroller of the Currency
- Issues charters for new national banks - Supervises and regularly examines all national banks - must approve all national bank applications for branch offices, trust powers, and acquisitions
Firms and regulators always get along? T/F
False. There is an ongoing struggle between regulated firms and regulators
Regulatory Dialectic
Financial-service managers will search to find ways around new rules in order to reduce costs and allow innovation to occur
What are the most lightly regulated financial institutions?
Hedge Funds, Private Equity Funds, and Venture Capital Companies
Why do some firms want bank regulation? According to one of the earlier theories
It brings benefit in the form of monopolistic rents because regulations often block entry into regulated industry
Why do some firms like regulation? According to one of the more recent theories
It can increase customer loyalty toward regulated firms
What happens to the growth of loans when the central banks sell securities?
It decreases; interest rates tend to rise It decreases money supply in the market because dealers are buying the securities
Commodities Futures Trading Commission
Monitors the use of derivative instruments by financial firms exposed to significant risk
Securities and Exchange Commission
Must approve public offerings of debt and equity securities by banking and thrift companies and oversee the activities of bank securities affiliate
Department of Justice
Must review and approve proposed mergers and holding company acquisitions for their effects on competition and file suit if the competition would be significantly damaged by these proposed organizational changes
What body regulates credit unions?
National Credit Union Administration (NCUA)
What has become the principal tool of central banking?
Open Market Operations
Community Reinvestment Act
Prohibits U.S. banks from discriminating against customers residing within their trade territories merely on the basis of the neighborhood in which they lived
What does research suggest about central banks and its independence?
Recent research suggests that more independent central banks have been able to come closer to their nation's desired level of economic performance (particularly better control of inflation)
The Riegle-Neal Interstate Banking Law (1994)
Repealed previous provisions that prevented full-service interstate banking nationwide ▫For the first time in U.S. history, American banks could accept deposits and follow their customers across state lines
Competitive Equality in Banking Act and the Truth in Savings Act
Require banks to more fully disclose their service policies and the true rates of return offered on the public's savings and the fees associated with credit services
What mainly regulates Life and Property/Casualty Insurance Companies?
State insurance commissions
What serves as an important source for short-term loans for depository institutions?
The Central Bank
Who are OMOs conducted between?
The Fed's trading desk and selected primary dealers who meet the qualifications
How many districts are in the Federal Reserve System?
There are 12 districts contained in the Federal Reserve System, with a Federal Reserve Bank chartered in each district
What is the Fed's most important job today?
To control money and credit conditions to promote economic stability
Central banks also occasionally use changes in reserve requirements as a monetary policy tool. T/F?
True
Institutions must place a small percentage of each dollar of deposits in reserve, either in the form of vault cash or in a deposit at the central bank. T/F?
True
The European Central Bank (ECB) is relatively free and independent of governmental control as it pursues its main goal of avoiding inflation. T/F?
True
The Fed does NOT depend on the government for funding. T/F?
True, The Fed is free to pursue these goals because it does not depend on the government for its funding ▫Passes along most of its earnings to the U.S. Treasury
Central banks rarely change reserve requirements T/F?
True. ▫Powerful impact, cannot easily be reversed and because banks are less dependent on deposits as a source of funds
The Bank of Japan (BOJ), the people's bank of China (PBC) and central banks in other parts of Asia appear to be under close control of their governments. T/F?
True. Several of these countries have experienced higher inflation rates, volatile currency prices, and other significant economic problems in recent years
Banks are regulated through what type of banking system?
a dual banking sytem ▫Both federal and state authorities have significant regulatory powers
When was the FDIC the object of criticism?
during the 1980s and 1990s
What happens to the growth of loans when the central banks buy securities?
it increases; interest rates tend to fall It increases money supply in the market because dealers are getting cash for the securities
What did the Banking Act of 1933 do?
separated commercial banking from investment banking and insurance
What is the European Union central bank called? (Don't think too deep)
the European Central Bank (ECB)
What does the Federal Open Market Committee target to meet its monetary policy goals?
the federal funds rate attached to overnight loans of reserves between depository institutions in the hope that changes in the federal funds rate will spread to other interest rates in the economy
What happens temporarily when the Fed loans reserves?
the supply of legal reserves expands temporarily, which may cause loans and deposits to expand
Board of Governors of the Federal Reserve System
this governing body must contain no more than 7 persons each selected by the President and confirmed by the senate for terms not exceeding 14 years ▫The board chairman and vice chairman are appointed by the president from among current board members, each for four-year terms (though these appointments may be renewed)
moral suasion
when the central bank tries to bring psychological pressure to bear on individuals and institutions to conform to its policies
What is the central bank's primary job?
•A central bank's primary job is monetary policy
21st Century Banking Laws
•The FACT Act of 2003 •The Check Clearing for the 21st Century Act (Check 21 Act) •The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 •The Federal Deposit Insurance Reform Act of 2005 •The Emergency Economic Stabilization Act of 2008 •The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 •The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 (FINREG) •Basel I and II, and Basel III
What is the central bank of the U.S.?
•The central bank of the United States is the Federal Reserve System (the Fed)
What regulates security brokers and dealers and investment banks? (in a broad sense, not a specific body)
▫A combination of federal and state supervision applies to these traders in financial instruments who buy and sell securities, underwrite new security issues, and give financial advice
The Federal Reserve Act (1913)
▫A series of financial panics in the late 19th and early 20th centuries led to the creation of the Federal Reserve System (the Fed)
Major provisions of the Riegle-Neal Act included:
▫Adequately capitalized and managed holding companies can acquire banks anywhere in the United States ▫Interstate holding companies may consolidate their affiliated banks acquired across state lines into full-service branch offices ▫No single banking company can control more than 10 percent of nationwide deposits or more than 30 percent of deposits in a single state (unless a state waives this latter restriction)
Open-Market Operations (OMOs)
▫In the United States, OMO involves the buying and selling of U.S. Treasury bills, bonds, and notes and selected federal agency securities
What does monetary policy involve?
▫Involves making sure the supply and cost of money and credit from the financial system contribute to the nation's economic goals ▫By controlling the growth of money and credit, the Fed and other central banks around the globe try to ensure that the economy grows at an adequate rate, unemployment is kept low, and inflation is held down
Member institutions of the federal reserve system must purchase what?
▫Member institutions must purchase stock (up to 6 percent of their paid-in capital and surplus) in the district Reserve bank and submit to comprehensive examinations
When regulating finance companies, what do most states focus on?
▫Most states focus upon the types and contents of loan agreements they offer the public, the interest rates they charge (with some states setting maximum loan rates), and the methods they use to repossess property or to recover funds from delinquent borrowers
The Financial Services Modernization Act (The Gramm-Leach-Bliley Act (1999))
▫One of the most important U.S. banking statutes signed into law ▫Overturned long-standing provisions of the Glass-Steagall Act and the Bank Holding Company Act ▫Permitted banking companies to affiliate with insurance and securities firms under common ownership ▫Securities and insurance companies could form financial holding companies that control one or more banks ▫Banks were permitted to sell insurance and security services, provided they conform to state and federal rules ▫This law's purpose was to allow qualified U.S. financial-service companies to diversify their service offerings and reduce their overall business risk exposure
Federal Open Market Committee (FOMC) primary task
▫Primary task is to set policies that guide the conduct of open market operations ▫The buying and selling of securities by the Federal Reserve banks
Prior to 1993, what did the FDIC do?
▫Prior to 1993, the FDIC imposed fixed insurance premiums on all deposits eligible for insurance coverage, regardless of the riskiness of an individual depository institution's balance sheet ▫This fixed-fee system led to a moral hazard problem
What regulates Finance companies?
▫Regulated at the state government level for many decades ▫The depth of state regulation varies across the United States
Due to light state regulation of finance companies, what has happened?
▫Relatively light state regulation has led to a recent explosion in the number of small-loan companies
Consumer Credit Protection Act (known as Truth in Lending)
▫Required that lenders spell out the customer's rights and responsibilities under a loan agreement
The USA Patriot Act
▫Requires that financial-service providers establish the identity of customers opening new accounts or holding accounts whose terms are changed ▫Service providers are required to check the customer's ID against a government-supplied list of terrorist organizations and report any suspicious activity in a customer's account ▫Made a series of amendments to the Bank Secrecy Act ▫Passed originally in 1970 to combat money laundering
What body regulates money market funds?
▫Securities and Exchange Commission (SEC)
What regulates Savings and Loans and Savings Banks ("Thrifts")?
▫State-chartered associations are supervised and examined by state boards or commissions ▫Federally chartered savings associations fall under the jurisdiction of the Office of Thrift Supervision ▫The Dodd-Frank Act merged the Office of Thrift Supervision with the Office of the Comptroller of the Currency so that thrift institutions and national banks would have the same regulatory agency at the federal level
In reference to hedge funds, private equity finds and venture capital companies, what did the DOdd-Frank Act call for?
▫The Dodd-Frank Act of 2010 calls for greater separation between commercial banks and these riskier private investors
Why was to FDIC created?
▫The Federal Deposit Insurance Corporation (FDIC) was created to guarantee the public's deposits up to a stipulated maximum amount in order to enhance public confidence in the banking system ▫Initially $2,500 and today it is up to $250,000
Who makes up the Federal Open Market Committee (FOMC)?
▫The Federal Reserve Board members make up a majority of the voting members of the FOMC ▫The other voting members are 5 of the 12 Federal Reserve bank presidents, who each serve one year in filling the remaining five official voting seats on the FOMC ▫Except for the president of the New York Federal Reserve Bank, who is a permanent voting member
What regulates hedge funds, private equity funds, and venture capital companies?
▫The SEC in the United States has broad oversight of the information these firms provide to the public when they choose to sell securities in the open market that are accessible to small investors ▫Regulation in this sector is virtually invisible, in part because it is relatively new and because it normally does not seek out many funds from small investors
What body regulates mutual funds?
▫The U.S. Securities and Exchange Commission (SEC) requires these businesses to register with that agency, submit periodic financial reports, and provide investors with a prospectus that reveals the financial condition, recent performance, and objectives of each fund
What does the Board of directors for the fed do?
▫The board regulates and supervises the activities of the 12 district Reserve banks and their branch offices ▫It sets reserve requirements, approves all changes in the discount (loan) rates posted by the 12 Reserve banks, and takes the lead in the system in determining open market policy
What is the CHIEF regulator of security broker and dealers and investment banks?
▫The chief federal regulator is the SEC ▫Requires these firms to submit periodic reports, limits the volume of debt they take on, and investigates insider trading practices
What were the first major federal government laws and when were they passed?
▫The first major federal government laws in U.S. banking were the National Currency and Bank Acts, passed during the Civil War
What caused many finance companies to close in 2010? Why?
▫The passage of the Dodd-Frank Act in 2010 caused many to close as the maximum interest rates that these entities could charge was drastically reduced
What did the first US banking laws set up?
▫These laws set up a system for chartering new national banks through a newly created bureau inside the U.S. Treasury Department, the Office of the Comptroller of the Currency (OCC)
What did the FDIC Improvement Act (1991) permit?
▫This legislation permitted the FDIC to borrow from the Treasury to remain solvent, called for risk-based insurance premiums, and defined the actions to be taken when depository institutions did not meet capital requirements
Unresolved Regulatory Issues
▫What should we do about the regulatory safety net set up to protect small depositors from loss, usually through government-sponsored deposit insurance? ▫Can we train regulators to be as good as they need to be in a more complex financial marketplace? ▫With the financial-services industry consolidating and converging into fewer, but bigger, firms, can we get by with fewer regulators? ▫Can we simplify the current regulatory structure and bring greater efficiency to the task? ▫As financial firms reach their arms around the globe, what nation or nations should regulate their activities?
How has the government become more involved in regulating Life and Property/Casualty Insurance Companies?
▫When insurers form holding companies to acquire commercial and investment banks or other federally regulated financial businesses, they may come under the Federal Reserve's review ▫Under the Dodd-Frank Act, a new federal insurance office was set up to help reduce the systemic risk caused by innovative, but sometimes highly risky, activities of the largest insurers (such as AIG) and prevent disruptive insurance failures
What happens when the discount window loans is repaid by banks?
▫When these discount window loans are repaid, the borrowing institutions lose reserves and may be forced to curtail the growth of their deposits and loans
Why are OMOs considered to be the most important policy tool for many Central banks?
▫because it can be used every day and, if a mistake is made or conditions change, its effects can be quickly reversed
Who are all discount and loan rates set by?
▫by each Reserve bank's board of directors and must be approved by the Federal Reserve Board
What happens when the fed raises reserve requirements?
▫means that financial firms must set aside more of each incoming dollar of deposits into required reserves, and less money is available to support making new loans ▫On the other hand, lowering reserve requirements releases reserves for additional lending
What are the three main tools the Feds use to manipulate interest rates, legal reserves, and currency values?
▫open market operations, the discount rate on loans to qualified financial institutions, and legal reserve requirements on various bank liabilities
