1) What are the five primary reasons identified for bank regulation (broad general reasons)?
1) Safety and Soundness of institutions and instruments (Depositor safety, system confidence, financial stability)
2) Efficient and competitive Financial system
3) Monetary Stability
4) Maintain integrity of payment system (Clear checks, transfer funds el
2) What is meant by a "dual banking system"?
banking system that includes both a federal and state regulatory system, and both a federal and state system for allowing the creation of new banks
What is a bank "charter"?
from either state banking agency or state or fed government, or Office of the Comptroller of the Currency (OCC); this is required to be a member of the federal reserve system. State bank may decide whether they wish to be members of the fed
What is the FDIC? What is deposit insurance? What benefit does it provide to depositors? to banks?
*insures deposits in banks and thrifts in institutions up to at least $250,000 (This is to promote the public's confidence in the US financial system)
*Benefits depositor by backing their funds
*benefits the banks by instilling trust into the people, and
What is the Federal Reserve? What are the Fed's primary roles/functions?
*is the central bank of the US
*Banking regulator and examiner
*manage the monetary policy
*Financial System Stability
What is meant by monetary policy?
*Controls interest rates through maintaining the money supply.
What is the Fed's legislative directive regarding monetary policy?
*Price stability (manage inflation)
*Full employment (Sustainable economic Growth)
What are the three tools used by the Fed to implement normal monetary policy?
*open market operations (fed uses this most often by buying and selling Government securities, this either increases or decreases the money supply)
*Adjusting the required reserve ratio
*Adjust the discount rate for borrowing by banks and other institutio
Fed Reserve Act 1913
Created the fed reserve to serve as central bank of the US, and to provide safety, flexibility, and more stable monetary and financial system.
Banking Act of 1933 (Glass-Steagall) and 1935
passed in response to the great depression; *separated commercial banking and investment banking
*established FCID and Deposit insurance
*Prohibited payment of interest on demand deposits
*established interest rate ceilings on savings and time deposits
Riegle-Neal Interstate Banking and Branching Efficiency act of 1994
*Eliminated most restrictions on interstate bank mergers and allowed commercial banks to open branches nation wide.
Gramm-leach-Bliley Act Financial Services Modernization act of 1999
*Repealed Glass-Steagall, allowing affiliations between commercial banks, investment banks, and insurance companies
*Allowed bank holding companies to engage in any financial activity through their ownership of subsidiaries
Dodd-Frank Wall Street Reform and Consumer Protection act of 2010
Most significant overhaul and re-regulation of US financial system since the 1930s. It is being implemented by regulators, and with more rules/ regulations to write
5 Key provisions to the Dodd-Frank Bill
* Seeks to End "Too Big to Fail"
*Consumer Financial Protection
*Council to monitor and address Systemic risk (Risk to the overall financial system)
*More transparency and accountability for derivatives
*Clarification of Bank regulatory system
*Hedge Fund
5 Key provisions to the Dodd-Frank Bill:
Seeks to End "Too Big to Fail
*Create orderly way to close down and liquidate failed financial firms w/o taxpayer bailout "Funeral Plans"
*Closer oversight and tougher capital requirements for the largest and most complex financial institutions (Annual stress tests for Banks)
*Volker
5 Key provisions to the Dodd-Frank Bill:
Consumer Financial Protection (Created CFPB Consumer Financial Protection Bureau)
*Provides consumers with info about mortgages and other financial products.
*CFPB created Office of Fair lending and Equal Opportunity, Office of Financial Education, Office of Service Members Affairs, and Office of Financial Protection for older American
5 Key provisions to the Dodd-Frank Bill:
Council to Monitor and Address Systemic Risk (Risk to the overall financial system)
*Creates Financial Stability Oversight Council (made up of key heads of Treasury, Fed, SEC, OCC, CFTC, etc.) Oversight Council-Seeks to improve quality, transparency, and accessibility of financial data and information by conducting and sposoring research
5 Key provisions to the Dodd-Frank Bill:
More Transparency and accountability for Derivatives
*more derivatives should be traded on exchanges and using clearinghouses (reduce counter-party risk)
*More disclosure/ transparency of firm exposure to derivatives
5 Key provisions to the Dodd-Frank Bill:
Clarification of Bank Regulatory System
*Streamlines bank supervision (Eliminates OTS)
*Lessens the ability for "regulator shopping" by financial institutions
5 Key provisions to the Dodd-Frank Bill:
Hedge Fund Registration and Reporting
*hedge funds must register with SEC
*Provides more information about trades and holdings
5 Key provisions to the Dodd-Frank Bill:
Credit Rating Agency Oversight
*Creates Office of Credit Ratings at the SEC
*More Disclosure of methodologies and track record related to ratings
*Can require credit rating agencies to submit their rating systems for review and can de-certify an agency that gives misleading ratings.
What are the basic conflicts between banks and regulators regarding Capital and Liquidity?
*The federal government, reserve, and other agencies are concerned that banks and institutions do not have enough capital. Banks argue that high requirements are tough because its expensive to gain additional capital, and that high capital makes them less