Financial Institution are regulated because they
provide products and services that the economy needs in order to function well
Regulatory dialectic
the process by which regulations are evaded, new regulations are enacted to close the loopholes, new evasion strategies and products are developed, new regulations are adopted to curb the innovations, etc
Individual bank fail for 2 reasons
1) liquidity
2) acquires assets that are too risky
Lender of last resort
the role of the Fed as a lender to banks experiencing difficulties to prevent the bank from failing due to a lack of liquidity
insolvent
liabilities are greater than its assets
Bank panics
the events that occur when depositors lose confidence in banks in general and "run" many banks to redeem their deposits quickly
Banking act of 1933 (Glass-Steagall Act)
Legislation that barred banks from paying interest on demand deposits, separated commercial banking from investment banking, and restricted the types of assets a bank could own.
Federal Deposit Insurance Corporation (FDIC)
a government agency that provides federal insurance for depositors of qualified banks and supervises both the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF)
Deposit Insurance
funds established with the purpose of protecting depositors in event of a bank failure
Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980
the first major 1980s banking act. It deregulated financial institution deposit and loan rate ceilings and allowed nonbank institutions to have checking accounts (NOWs) and offer other services in competition with banks. It also extended reserve requireme
Depository Institutions Act (DIA) of 1982 (Garn-St. Germain)
extended the 1980 revisions in banking regulation by authorizing MMDA accounts, accelerating the phaseout of deposit rate ceilings, granting thrift institutions broader powers, and providing for acquisitions of failing institutions by different types of i
Federal Savings and Loan Insurance Corporation (FSLIC)
an agency that insured savings association and federal savings bank deposits until 1989, when deposit insurance responsibilities passed to the Savings Association Insurance Fund supervised by the FDIC
Competitive Equality in Banking Act (CEBA) of 1987
a regulatory act that (1) redefined nonbank banks and (2) provided funding to bail out the failing FSLIC
Nonbank banks
banks used by holding companies to evade regulatory restrictions
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
this act made major changes in the structure of financial regulation. It abolished the FHLBB and FSLIC and established the OTS, FDIC-SAIF, and RTC as their replacements. It required that deposit insurance premiums be raised and that thrift institutions ad
Federal Deposit Insurance Corporation Improvement Act (FDICIA)
this act went beyond the FIRRE act in tightening bank and thrift institutions' capital requirements. It allowed "well-capitalized commercial banks" to enter investment banking in a limited way through subsidiaries
Prompt corrective actions
a policy of intervening in the management of a financial institution quickly when the institution begins showing signs of financial distress
Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley)
legislation that repealed many of the Glass-Steagall restrictions on commercial banking and investment banking
Emergency Economic Stabilization Act of 2008
one of the actions taken to alleviate the financial crisis that started in the U.S. in 2007. The legislation established the Troubled Asset Relief Program (TARP)
Troubled Asset Relief Program (TARP)
a program established in 2008 that allows the U.S. Treasury to purchase or guarantee mortgage-related assets of banks and other financial institutions
Dodd-Frank Wall Street Reform and Consumer Protection Act
a law in 2010 designed to reduce the likelihood of similar financial crisis in the future by addressing the structure of the regulatory agencies, enhanced regulation of systemic risk, consumer protection, and limits on bank's proprietary trading and use o
National Credit Union Share Insurance Fund (NCUSIF)
an organization providing federal insurance to members who own shares (deposits) in federally chartered credit unions and in qualifying state-chartered credit unions
Payoff and Liquidate policy
an approach for resolving a bank failure by paying off insured deposits and liquidating the bank's assets
Purchase and Assumption agreement
a policy of the deposit insurance fund covering bank failures. The insurance fund can sell the assets of the failed institution to another institution that "purchases" the assets and "assumes" the responsibility for repaying the liabilities of the failed
Moral Hazard
problems of hidden actions.
Too big to fail (TBTF)
policy adopted by federal regulators that the failure of certain financial institutions would have too much of an adverse effect on the economy and so those institutions will not be allowed to fail
Financial Stability Oversight Council (FSOC)
a U.S. federal government organization created under the Dodd-Frank Act to monitor systemic risk of the financial system
Tier 1 capital
a measure of bank capital that includes the sum of common stock, paid-in-surplus, retained earnings, noncumulative perpetual preferred stock, and minority interest in consolidated subsidiaries minus goodwill and other intangible assets. aka core capital
Tier 2 capital
a measure of bank capital that includes cumulative perpetual preferred stock, loan loss reserves, subordinated debt instruments, mandatory convertible debt instruments, and other debt instruments that combine both debt and equity features. aka supplementa
Risk-weighted assets
a measure of total assets that weights high-risk assets more heavily than low-risk assets
Office of the Comptroller of the Currency (OCC)
created in 1863 by the National Bank Act, the OCC is a subsidiary of the Treasury Department and is responsible for supervising national banks
Call reports
detailed statements of the operating and financial condition of a bank
On-site bank examinations
unannounced visits by bank examiners to a bank or its branches
Loans classified as "loss
are thought to be uncollectible, and the bank is required to write them off
Doubtful" loans
are expected to result in some loan losses
Loans classified as "substandard
some element of risk, if not watched closely, may result in losses to the bank
Satisfactory" loans
are those that meet standards of prudent banking practice and appear to be in no danger of defaulting
CAMELS
Capital adequacy, Asset quality, Management competence and control, Earnings, Liquidity, and Sensitivity to market risk rating system used by financial institution examiners
Interstate Banking and Branching Efficiency Act (IB&BEA)
legislation allowing U.S. banks to merge and branch across state lines unless a potential host state opted out of interstate branching
De novo branching
creating a new bank branch
Regulation Q
a historical Federal Reserve regulation that set a maximum interest rate that banks could pay on deposits. All interest rate ceilings on time and savings were phased out on April 1, 1986, by federal law
Money market mutual funds (MMMFs)
open-ended mutual funds that invest in short-term debt, collect an annual account fee, and offer checking account withdrawals
Money market deposit accounts (MMDAs)
Federally insured deposits that have a legal limit of six third-party transactions each month.Their interest rates and other features are determined by the issuing bank
universal banking
some countries allow commercial banks can also serve as investment banks and even appoint directors for businesses in which they own stock
Functional regulation
an approach to financial institution regulation in which the Federal Reserve acts as the umbrella regulator while the bank and nonbank subsidiaries fall under the supervision of other regulators
Consumer Credit Protection Act (Truth-in-Lending Act)
legislation passed with the intent of ensuring that every borrower obtained meaningful information about the cost of credit, especially (1) the annual percentage rate, and (2) the total finance charges on a loan
Regulation Z
regulation requiring disclosures about (1) annual percentage rate and (2) the total finance charges and other terms of a loan
Fair Credit Billing Act (FCBA)
requires that creditors provide detailed information to consumers on the method of assessing finance charges and also that billing complaints be processed promptly
Equal Credit Opportunity Act (ECOA)
a law that requires that credit be made available to individuals without regard to sex or martial status. Also women's income to be treated equally with men's in evaluating credit
Regulation B
regulation through which the Federal Reserve Board implements the Equal Credit Opportunity Act of 1974
Community Reinvestment Act (CRA)
legislation created to prevent redlining, where a lender draws a hypothetical red line on a map around one part of a community and refuses to make loans in that area. Requires that lenders keep records to show they lend in all areas of their community
Fair Credit Reporting Act (FCRA)
intends to promote the accuracy, fairness, and privacy of personal information assembled by credit-report agencies
Fair and Accurate Credit Transactions (FACT) Act
passed in 2003 as an amendment to the Fair Credit Reporting Act to help reduce identity theft
Bureau of Consumer Financial Protection (BCFP)
an independent bureau created by the Dodd-Frank Act within the Federal Reserve System to enforce consumer finance laws and to promote fairness and transparency for consumer financial products and services
commissioner or superintendent of banking
agency director