Throckmorton Money & Banking Exam 2
DIDMCA (1980) raised the limit of FDIC insurance to...
$100,000 per person, per bank
Dodd-Frank (2010 ) raised FDIC insurance coverage to...
$250,000 per person, per bank
Gramm-Leech-Bliley Act (1999)
(also known as Financial Services Modernization Act of 1999) - repealed part of the Glass-Stegall Act that separated commercial and investment banking functions. It was an Act to enhance the competition in the financial services industry by providing a prudential framework for affiliation of banks, security firms, and other financial service providers. - Made amendments to the BHC Act of 1956, and allowed Financial Superstore.
Emergency Economic Stabilization Act (2008) ..from handout in class.
(commonly referred to as the bailout of the U.S. Financial System following the Great Recession) I. Stabilizing the Economy: a law enacted in response to the subprime mortgage crisis authorizing the U.S. Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially MBS's, and supply cash directly to banks. II. Home Ownership Protection: EESA requires Treasury to modify troubled loans (usually a result of predatory lending practices) to help families keep their homes. - also directs other Fed. Agencies to modify the loans they own or control. - improves HOPE for Homeowners Program by expanding eligibility and increasing tools available to Dept. of Housing and Urban Development. III. Taxpayer Protection: prevents taxpayers from suffering for Wall Street's mistakes. - requires companies that sell some of their bad assets to the govt. to provide warrants so taxpayers will benefit from any future growth of the company through participation in this program. - president must submit legislation that covers any losses to taxpayers resulting from this program. IV. No Windfalls for Executives: Executives responsible for bad decisions cannot dump their bad assets on the govt. and walk away. - limits "golden parachutes" and requires unearned bonuses to be returned. - to participate in the program, agencies lose certain tax benefits, and in some cases, must lower executives pay. V. Strong Oversight: legislation gives Secretary of Treasury $250 billion immediately, then the President must authorize the need for more if that isn't enough ($100 billion first, then $350 billion, subject to Congressional disapproval) - Treasury must report use of funds and progress in crisis. - Also establishes an Oversight Board to the Treasury.
Extra Info. from Class Notes under Title V..
- 1977 State of Tennessee Constitutional Convention: discussed cap of 10% interest. The provision was removed from the Constitution and 12 Amendments were passed. - the changes were due to "archaic provisions of the Constitution" > eliminated Constables, Cattle Rangers, and the old way of electing the Sheriff > eliminated the fact that Governors could not hold consecutive terms, but kept the provision that they may hold unlimited terms of office. > allowed loans of $1,000 or less to have a maximum interest rate of 10% (called "protection of the small borrower")
Extra Info. from Class Notes under Title VI..
- 1982-1986 - there were over 400 bank failures - 1983-1984 - TN led the nation in bank failures (12 in 83' and 11 in 84', this was largely due to the Butcher family banks) - Bank Failure Figures: > from 1982-1986: National (435) | TN (34) > from 2008-2014: National (362)
National Bank Act (1864)
- Act ended the Free Banking Era - Actually made up of 2 separate acts, one in 1863 and one in 1864. > they encouraged the development of a national currency backed by bank holdings of U.S. Treasury Securities AND established the "Office of the Comptroller of Currency (OCC)": which was authorized to examine, create, and regulate nationally chartered banks. > also declared that only nationally chartered banks could issue their own currency.
Commercial Bank Balance Sheet
- Assets: include the following.. - Cash Assets (Cash and Reserve Deposits) - Loans - Securities - Liabilities: include the following.. - Deposits (long term OR other), can be transactional or nontransactional - Borrowings - Ownership = Assets - Liabilities
Banking Act of 1933 (Glass-Stegall)
- Created the FDIC as a TEMPORARY agency. - Separated commercial and investment banking functions (later replaced by Gramm-Leach-Bliley Act of 1999) and established them as separate lines of commerce. - Mandated "Federal Reserve Regulation Q": which prohibited interest on demand deposits (replaced by Dodd-Frank in 2010) and established a maximum rate of interest on time and savings deposits (replaced by DIDMCA in 1986). - Also, amended the Clayton Act to outlaw "interlocking directorates": which is the practice of members of corporate boards of directors serving on multiple corporations' board of directors.
First Bank of the United States (1791-1811)
- FBofU.S. had a 20 year charter and was championed by Alexander Hamilton; and the opposition was led by Thomas Jefferson and James Madison. - In addition to the FBofU.S., two other things were established alongside it: the U.S. Mint and it imposed a Federal Excise Tax - Had $10 million in capital; The bank was publicly and privately owned; w/ private ownership holding 80% of the capital - The U.S. Government borrowed the first 2 million (20%) by financing it from the bank and the remaining $8 million was open to the public (private firms/people). By 1811, 70% was owned by foreigners - Rechartering failed by 1 vote in both the House and the Senate
Truth About the CRA and the current financial Crisis?
- Most high-cost loans were originated by lenders NOT having a CRA obligation and lacked Federal Regulatory Oversight. - In 2006, only 1 of the top 25 subprime lenders was an insured depository with a CRA obligation.
Free Banking Era (1836-1864)
- Officially started in Michigan in 1835. - Only lasted from 1852-1858 in the state of Tennessee, ended with the "TN Free Banking Law (1852)" being repealed in 1858. - This era refers to the "Free Banking Laws": where various state banking systems were based on these laws. The Free Bank. Laws made it unnecessary for new entrants to secure charters (which were each subject to vote by the State Legislatures) which restricted their undertakings. - U.S. "Free Banks" were denied the right to establish branch networks, and had to "secure" their notes by purchasing them, and then surrender certain securities to State Banking Authorities which were deemed eligible for this purpose. - Basically if you had money you could start a bank, they were known as "wildcats." - There was a very high bank failure rate during this era.
Emergency Banking Act (1933)
- Roosevelt inaugurated in March, 1933 (last time we would inaugurate in March) - Day after inauguration declared a Federal Bank Holiday, which was made statutory by the Emergency Banking Act. - the Banking Holiday declared that banks were to cease all operations, leaving Americans having no access to banking services for 8 days. - The Act allowed banks to sell preferred stock; basically you could sell the amount of preferred stock equal to the common stock outstanding. (Bailout Revision) - amended the Reconstruction Finance Corporation Act (1932).
Second Bank of the United States (1816-1836)
- SBofU.S. also had a 20 year charter, and was also 20% public and 80% private. Had $35 million in Capital. - The Fed. Government owned 20% of the bank, making it the single largest shareholder in the bank. - 4,000 private investors owned 80%; including 1,000 Europeans, but the bulk of the stock was owned by a few wealthy Americans - In 1832, Andrew Jackson vowed to not allow the bank to recharter in 1836. - The essential function of the bank was to regulate public credit issued by private banking institutions through duties for the U.S. Treasury.
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) - 1989
- dissolved the FSLIC (Federal Savings and Loans Insurance Corporation) and moved its' function to the FDIC. - Eliminated the FHLBB (Federal Home Loan Bank Board) a. created Federal Housing Finance Board (FHFB) to supervise the Fed. Home Loan Banks (FHLB's) b. created Office of Thrift Supervision (OTS): a bureau of the U.S. Treasury Dept. to supervise thrifts; created to charter, regulate, examine, and supervise savings institutions. c. created Resolution Trust Corporation (RTC): formed to resolve or dispose of insolvent/failed thrift institutions.
Early Tennessee Banking
- goes as far back as 1796 A. Legislative Acts: were required in order to charter banks - Bank of Nashville (1807) was the first nationally chartered bank in TN B. State Involvement: began in 1811, when the State Govt. got involved w/ owning banks, and patterned the Bank of the State of Tennessee after the Bank of Nashville. This bank had $400,000 in capital. - it was voluntarily liquidated in 1828. - in 1820, the State guaranteed $1 million in Capital. - in 1830, $200,000 discovered to be missing; the cashier and the clerk were arrested but not prosecuted due to plea bargaining their way out of the prosecution. - Union Bank of TN ($3 million in Capital) and Planters Bank of TN ($2 million) were both founded in 1836, each holding 30 year charters. - Bank of Tennessee (1838) - 100% state owned - In 1865 and 1866 the banks were declared insolvent because they had participated in Confederate Bonds. - Bank of Cookeville (1890) - finally established after the founding of Cookeville was so long before in 1856.
Reconstruction Finance Corporation (RFC) Act (1932)
- it was a bailout act to help businesses recover - The RFC was a government corporation in the U.S. that operated between 1932 and 1957. It provided financial support to state and local governments and made loans to banks, railroads, mortgage associations, etc. - Jesse Jones - Robertson County - appointed the leader by FDR in 1833 - aimed to boost countries confidence and help banks return to daily performance after the start of the Great Depression. (RFC had six points [not listed in notes]) - it continued to operate through the New Deal where it became more prominent, and through WWII. - disbanded in 1957 when the U.S. Govt. felt it no longer needed to stimulate spending. - amended by the Emergency Banking Act of 1933.
Banking Act of 1935
- made the FDIC a PERMANENT agency - Amended the Federal Reserve Act to create the Board of Governors and created the "Federal Open Market Committe (FOMC)": which is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including interest rates that are charged to banks.
Federal Deposit Insurance Corporation Improvement Act (FDICIA) - 1991
- strengthened the FDIC by: - requiring resolution of failed institutions at lowest cost to the FDIC. - requiring annual exam and independent audit of insured institutions. - Virtually eliminated "Too-Big-To-Fail Doctrine": which was the idea that a business has become so large and ingrained in the economy that the government will provide assistance to prevent it's failure. (this was the intent of the Act) - created "Truth in Savings Program": which requires clear and uniform disclosure of rates of interest (Annual Percentage Yield, APY) and the fees associated w/ the account so the consumer can make a meaningful comparison b/w potential accounts.
Garn - St. Germaine Act (1982)
- this act and the DIDMCA were "Deregulation" Acts. - it was an Act of Congress that deregulated S&L and allowed banks to provide adjustable-rate mortgage loans. - created reserve set aside at 0%. - created Money Market Deposit Accounts (MMDA's).. [also referred to as Depository Institution Act in notes] - allowed for more charter changes - allowed thrifts to make Commercial (C) and Industrial (I) loans.
FIRREA (1989)...
1. Abolished the Federal Loan Bank Board 2. Created the Office of Thrift Supervision 3. Abolished the Federal Savings and Loan Insurance Corporation (FSLIC)
The Gramm-Leach-Bliley Act (1999)...
1. Created the Financial Holding Company 2. Virtually repealed the Glass-Steagall Act 3. Amended the Community Reinvestment Act
The first Bank of the United States...
1. Was a joint private-public venture 2. Did not have its charter renewed 3. Had a 20-year charter
The Emergency Banking Act (1933)...
1. Was the statutory authority for the 1933 "bank holiday" 2. Amended the Reconstruction Finance Corporation Act 3. Allowed commercial banks to sell preferred stock
How many bank failures have there been i Tennessee in 2014?
3
According to the DIDMCA (1980), the Federal Reserve may establish reserve requirements for transaction accounts between...
8%-14%
The Banking Act of 1935...
Amended the Federal Reserve Act in order to change the structure of the Federal Reserve System
The president who vetoed the rechartering of the second Bank of the United States was...
Andrew Jackson
The terms APR and APY mean...
Annual percentage rate and annual percentage yield
DIDMCA made the changes in reserve requirements. Since 1980, requirements...
Are uniform and universal
What are the six CRA Districts?
Atlanta, Chicago, New York, Kansas City, San Francisco, and Dallas.
The first commercial bank in Putnam County was established in 1890. It was...
Bank of Cookeville
The FDIC insures...
Both commercial banks and savings institutions
Reserve deposits are included in...
Cash Assets
Today, the largest mortgage lenders, by volume, are...
Commercial Banks
The state of Tennessee...
Continues to partially own commercial banks
The first commercial bank in Tennessee was the Bank of Nashville (1807). It was...
Created by the act of the state legislature
FDICIA (1991)...
Created the Truth in Savings program
What act created a fee structure for Federal Reserve services?
DIDMCA
The two bank deregulation acts are...
DIDMCA and GARN-St. Germain
The largest liability of commercial banks is...
Deposits
The TARP program was created by...
EESA
What is an example of a regulation act?
FIRREA
Money Market Deposit Accounts (MMDA's) were created by...
Garn-St. Germain Act 1982
When the RFC act was passed, the President of the United States was...
H. Hoover
The largest assets are...
Loans
The largest earning asset of commercial banks is...
Loans
The term "Bank Credit" includes...
Loans and securities
Tennessee's constitutional cap of 10% on interest rates was removed as a result of...
Nothing, there is still a cap
Dodd-Frank abolished...
OTS
National banks are chartered, regulated, and examined by...
Office of Comptroller of the Currency (OCC)
One of the purposes of the Community Reinvestment Act was to...
Outlaw "redlining"
What are the CRA ratings?
Outstanding, Satisfactory, Needs Improvement, and Substantial Noncompliance
"Reverse redlining" is...
Predatory
The FDIC's most common response to bank failures is...
Purchase and assumption
The CDFI Fund was created by...
Riegle Community Development Act (1994)
Interstate banking is allowed by...
Riegle-Neal Interstate Banking and Branching Efficiency Act (1944)
The FDIC was created as a permanent agency by...
The Banking Act of 1935
Although several bank failures have occurred since 2008, a bigger wave of bank failures occurred in...
The early 1980's
The largest liabilities are...
Time and savings deposits
Depository Institutions Deregulation and Monetary Control Act (DIDMCA) - 1980 ...(very long, a lot of separate titles)
Title I: Monetary Control Act - made reserve requirements uniform and universal - Federal Reserve (Fed) can establish reserve requirements for transaction accounts b/w 8 and 14% (currently at 10% since 1992) - Allows a portion of net demand deposits to be set aside at 3% of the reserve requirement. - Established a fee structure for Federal Reserve services. Title II: Depository Institutions Deregulation Act - established the Depository Institutions Deregulation Committee (DIDC): a six member committee with the primary purpose of phasing out interest rate ceilings on deposit accounts by 1986. > the ceiling rates were successfully removed effective March 31, 1986. Title III: Consumer Checking Account Equity Act - extended nationwide authority to offer "Negotiable Order of Withdrawal (NOW)" Accounts: these are essentially checking accounts where you can earn interest on money you have deposited, and bank or credit unions can require up to 7 days written notice of withdrawal, but this rarely happens. - Increased the FDIC coverage from $40,000 to $100,000 per account. Title IV: Powers of Thrift Institutions and Misc. Provisions - makes banks more competitive - Federally Chartered S&L (FCS&L) authorized to invest up to 20% of assets in consumer loans, commercial paper, and corporate debt securities. - FCS&L authorized to offer credit card services. - State Stock S&L authorized to convert to Federal S&L. Title V: State Usury Laws - laws that govern the amount of interest that can be charged on a loan. - the TN General Usury limit is 24%, or 4 points above the average prime loan rate. Title VI: Truth in Lending Simplification and Reform Act - Truth in Lending began in 1969, to promote informed use of consumer credit, requiring disclosures about its' terms and cost to standardize the manner in which costs associated w/ borrowing are calculated and disclosed. - We now use the term APR, or Annual Percentage Rate. - Federal Reserve Regulation Z: requires debt lenders to disclose all specifics of a given loan Title VII: Made Amendments to the National Banking Laws Title VIII: Financial Regulation and Simplification Act - provides guidelines for simplification of regulations of the Federal financial regulatory agencies. Title IX: Foreign Control of U.S. Financial Institutions - declared that no application may be approved regarding takeover of any financial institution by a foreign person (certain exceptions exist such as that institution going bankrupt, etc.)
"Fringe Banking" or the alternative financial sector includes...
Title Pawn Companies
The Resolution Trust corporation (RTC)...
Was closed at the end of 1995
The Federal Home Loan Bank Board...
Was replaced by the Federal Housing Finance Board
The purpose of the FDIC's "too big to fail doctrine" in the 1980's...
Was to overcome the threat of systemic risk
Until the 1980's, thrift institutions...
Were the largest home equity lenders
Systemic Risk
a risk to the entire financial sector. - these risks led to "Reregulation" Acts (next three acts)
Response to Failure by the FDIC
a. Direct Payoff (PO): FDIC pays insurance to the depositors up to the limit ($250,000) b. Purchase and Assumption (P&A): (major method used by FDIC) where all liabilities are assumed by a healthy bank. - in a "clean-bank" transaction, healthy bank does not takeover the loan assets of the failed bank. - in a "whole-bank" transaction, healthy bank does takeover the loan assets of the failed bank. c. Insured Deposit Transfer (IDT): (rarely used) insured and secured deposits are transferred to a transferee or agent institution in the community, permitting a PO of failed institutions' depositors by the agent institution. - the depositor can either have their insurance payment OR have a new account opened in the agent institution. - when no assuming (healthy) bank is found, IDT is an alternative to a straight PO. d. Direct Assistance: refers back to 1980 w/ DIDMCA. - Too-Big-To-Fail: too much Systematic Risk with large embedded companies for the government not to do a direct assistance bailout of the company.
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
a. established the "Financial Stability Oversight Council (FSOC)": which identifies threats to financial stability of the U.S., promoting market discipline, and respond to emerging risks in the United States Financial System. b. provides for orderly liquidation of systematically important, failing financial companies. c. prohibits taxpayer bailouts d. FDIC may conduct a special examination of nonbank financial companies supervised by the Federal Reserve Board (FRB), or a Bank Holding Company (BHC) w/ at least $50 billion in assets. e. within 1-year of enactment, each Federal Agency, including the FDIC, must remove any regulatory reference to, or requirement/reliance on, credit ratings, and substitute their own credit-worthiness standards. f. the Consumer Financial Protection Bureau (CFPB) has rule-making, examination, and enforcement authority over nonbank "covered" persons that: - offer or provide payday loans to consumers or private education loans. - bureau is headed by Presidentially-appointed Director. - bureau is located in the Federal Reserve System g. Transfers OTS (office of Thrift Supervision) duties to the OCC (office of the Comptroller of Currency), the FDIC, and the FRB, 1-year after enactment. (Also disbanded the OTS) h. permanently increased FDIC insurance to $250,000, retroactive to January 2008. i. established "Office of Minority and Women Inclusion (OMWI)," which is responsible for ensuring that diversity and inclusion are leveraged throughout the agency, at each Federal Banking and Securities Agency and at each Federal Reserve Bank. j. also effective 1-year after enactment, the Act repeals various banking law provisions prohibiting the payment of interest on demand deposits.
Savings and Loan Associations (S&L)
accepts savings at interest and lends money to savers chiefly for home mortgage loans and may offer checking accounts and other services.
Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)
amended laws governing federally-chartered banks in order to restore laws' competitiveness w/ the recently relaxed laws governing state-chartered banks. - the goal was to return the balance b/w the benefits of a state bank charter versus a federal bank charter. - also stipulated a federally chartered bank wishing to expand must first undergo a review of its' Community Reinvestment Act compliance.
Riegle Community Development and Regulatory Improvement Act (1994)
an Act to reduce administrative requirements for insured depository institutions to the extent consistent w/ safe and sound banking practices, and to facilitate the establishment of community development financial institutions.
Federal Deposit Insurance Corporation (FDIC)
an independent agency of the United States (U.S.) federal government that preserves public confidence in the banking system by insuring deposits.
Mortgage Backed Securities (MBS)
debt obligations that represent claims to cash flows from pools of mortgage loans, most commonly on residential property.
Premium Rates of the FDIC
each bank and thrift pays an annual assessment/premium rate per every $100 of assessable deposits. - the current premium rate as of 2007 is between 0 and 27 cents per $100.
Community Reinvestment Act (1977)
encouraged financial institutions to help meet their communities needs through safe and sound lending practices and by providing retail banking and community development services; including low- and moderate-income areas. - CRA enacted in response to concerns about disinvestment and evidence of lenders systematically denying credit to certain communities, particularly lower income and minority neighborhoods. (practice known as "redlining") - The Federal Reserve, FDIC, OCC, and OTS must: a. regularly review the performance of banks and S&L b. take into account their CRA record when the institution applies to open a new branch, merge with, or acquire another institution. - Amendment to CRA in 1990 required CRA records be made public. a. Ratings based on Lending, Investment, and Service. b. Ratings are: Outstanding (O), Satisfactory (S), Needs Improvement (NI), or Substantial Noncompliance (SN). c. Ratings can be found on certificate in bank lobby.
Thrifts
financial institutions focused on taking deposits and originating home mortgages.
Government Sponsored Enterprise (GSE)
financial services corporation created by the U.S. Congress; with the function to enhance the flow of credit to targeted sectors of the economy and make those segments more efficient and transparent, and to reduce risk to investors and other suppliers of capital.
Purpose of the FDIC
insure savings accounts against future bank failures; currently insured up to $250,000 per account.
Credit Unions
nonprofit-making money cooperative whose members (consumers) can borrow from pooled deposits at low interest rates.
RTC Completion Act (1993)
passed to wind-up/close the operations of the RTC, and it was successfully closed at the end of 1995.
Commercial Banks
provide services to the general public including accepting deposits, giving business and auto loans, mortgage lending, and basic investment products, like savings accounts and certificates of deposit (CDs)
Savings Banks
receives savings accounts and pays interest to depositors.
Bank Holding Company (BHC) Act - 1956
required Federal Reserve approval for the establishment of a bank holding company . - Holding Company: a company created to buy and possess the shares of other companies, which it then controls.
"Free Banking" came to an end...
with passage of the National Bank Act (1864)