Federal Deposit Insurance Corporation (FDIC)
The government agency that insures customer deposits if a bank fails
-Preserve and promote public conf in US financial system by insuring deposits
-$250k per depositor per institution
-Examine banks for compliance with consumer protection laws
-Employ mor
Federal Reserve
The central bank of the United States.
-Responsible for two functions: macro econ stability (monetary policy) and financial stability (liquidity provisions)
-'Gatekeeper of economy' for US Gvnt yet independent from the Gvnt
-'Lender of last resort' in pro
Comptroller of the Currency
Charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold.
-OCC led presently by Tom J. Curry, HQ in DC
-Sub group of Treasury focused on regulating US Chartered Banks
-Oversite of charter pro
Department of Justice (DOJ)
Federal department responsible for enforcement of the law (prosecuting, punishment, etc.)
-'White collar' crime focus, such as insider-trading, embezzling, laundering, fraudulent behavior broadly
-Focus on criminal enterprise, often conducted by a person
Securities and Exchange Commission (SEC)
1934 - Created to supervise stock exchanges and to punish fraud in securities trading.
-Protect investors, maintain orderly markets, facilitate capital formation
-Banks themselves (through their brokerages) offer securities to clients; also invest for the
Commodities Futures Trading Commission (CFTC)
Regulates futures and option markets.
-Historically based in agricultural risk hedging
-1974 broadened to include all hedging/futures solutions (oil, gold, et al - CURRENCY CONTRACTS)
-2008 expanded from reg agency for options to now include SWAPS
-Overse
State Boards / Commissions
-Regulating state-chartered banks, ensuring a fair market place for all parties involved
-Approving banks that want to start a new charter
-Audit / rating system of banks in various categories
-Licensing bank employees who serve certain functions
-Advisin
National Bank Act
Legislation passed in 1863 to make banking safer for investors. Its provisions included a system of federally chartered banks, new requirements for loans, and a system for the inspection of banks.
The comptroller not only assesses the need for and charter
Glass-Steagall Act
Enacted in 1929-1933
Purpose: to enact stricter rules and regulations after more than 9,000 banks failed and many Americans lost confidence in the banking system between 1929 and 1933.
What is did: Prohibited national banks from investing in stock and fro
Securities and Exchange Act
With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents,
Banking Act
In 1935, President Franklin D. Roosevelt enacted significant reforms to the Federal Reserve and the financial system, including increasing the independence of the Fed from the executive branch and shifting some powers formerly held by the Reserve Banks to
Gramm-Leach-Bliley Act
Requires financial institutions to ensure the security and confidentiality of customer data. Requires financial institutions to explain how they share and protect their customers' private information.
This legislation, signed into law by President Bill Cl
USA Patriot Act
Act in response to the 9/11 attacks that gives federal officials greater authority to take measures to combat terrorism and strengthen national security.
Sarbanes-Oxley Act
Federal legislation passed in 2002 that sets higher ethical standards for public corporations and accounting firms. Key provisions limit conflict-of-interest issues and require financial officers and CEOs to certify the validity of their financial stateme
Dodd-Frank Regulatory Reform Act
Legislation signed into law by President Barack Obama in 2010 that places strict regulations on lenders and banks in an effort to protect consumers and prevent another all-out economic recession.
Put regulations on the financial industry and created progr
Demand Deposits
money in a checking account that can be paid out "on demand" or at any time
Non-interst bearing, checkable
Savings Deposits
deposits that earn interest but have no specific maturity date
Interest bearing, not checkable
Now Accounts
interest-bearing checking accounts
Interest bearing, checkable, unlimited checks
Money Market Deposits
Interest bearing, checkable with limitations
Time Deposits
Interest bearing, penalty for early withdrawal
Net Interest Income
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Net Noninterest Income
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Value of a Bank's Stock Rises When
-Expected dividends increase
-The required return falls
-Combination of the two
Return on Equity (ROE)
Net Income / Total Equity
Return on Assets (ROA)
Net Income / Total Assets
Net Interest Margin (NIM)
Net Interest Income / Total Assets
Net Noninterest Margin (NNIM)
Net Noninterest Income / Total Assets
Net Bank Operating Margin (NOM)
(Total Operating Revenues - Total Operating Expenses) / Total Assets
Earnings Per Share (EPS)
Net Income / Common Shares Outstanding
Three Characteristics of Banks
-Few Fixed Assets
-Short Duration Liabilities
-Very High Leverage
Deregulation Has
-Encouraged larger, riskier loan portfolios
-Changed the way banks view branch offices
-Forced banks to cut operating expense
Credit Risk
Assets will decline in value because of risk or default
Liquidity Risk
Insufficient cash for withdrawals and other needs
Market Risk
Asset values decline because of increasing interest rates
Interest Rate Risk
Changes in net income due to interest rate changes
Earnings Risk
Total risk to net income
Capital Risk
Risk to equity
IS Gap
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Relative IS Gap
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IS Ratio
Interest Sensitive Assets / Interest Sensitive Liabilities
Advantages and disadvantages of a bank holding company structure
Advantages: Allows for easier expansion and growth
Disadvantages: More administrative cost
One 'non-bank' competitor for deposits and loans that banks now face:
Manufacturer finance ('Ford Credit')
Dividends paid to common stockholders
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Assets = Liabilities + Equity
C + S + L + MA = D + NDB + EC
Provision for loan losses
Dollars that banks allocate in anticipation of non-performing loans
Charge-offs
Dollars banks report after concluding that specific loans are non-performing
In class a video clip from 'The Ascent of Money' described the history of lending. What is the name is the famous 'first lender' mentioned in the video clip?
Shylock, character in 'Merchant of Venice'
Two measurements of earnings risk
Standard Deviation of Net Income
Standard Deviation of ROE
Standard Deviation of ROA