Copyright © 2000 Addison Wesley Longman Slide #18-1 Chapter Eighteen BANKING REGULATION

Copyright © 2000 Addison Wesley Longman Slide #18-2 How Asymmetric Information Explains Banking Regulation 1.Govt. Safety Net 包括 Deposit Insurance 及 lender of last resort A. Prevents bank runs due to asymmetric info: depositors can‘t tell good from bad banks, 同時會有 contagion effect B. Creates moral hazard incentives for banks to take on too much risk C. Creates adverse selection problem of crooks and risk-takers wanting to control banks D. Too-Big-to-Fail increase moral hazard incentives for big banks and is unfair 2.Restrictions on Asset Holdings Reduces moral hazard of too much risk taking FDIC 對倒掉的銀行 (1)payoff method(2) purchase and assumption method 存款人會損失一些

Copyright © 2000 Addison Wesley Longman Slide #18-3 How Asymmetric Information Explains Banking Regulation 3.Bank Capital Requirements A. Reduces moral hazard: banks have more to lose when have higher capital B. Higher capital means more collateral for FDIC Leverage ratio Risk-based capital requirement:1988basel Accord, 1992 全面實施 1998 開始實施 VAR 5% 以上 (Well capitalized) 3% 以下：常被檢查限制 為了 trading risk 10 天內最大損失的 3 倍 tier3 capital  短期證券到期時若銀行為 under- capitalized, 則投資人拿不到錢。

Copyright © 2000 Addison Wesley Longman Slide #18-4 How Asymmetric Information Explains Banking Regulation 4.Bank Supervision: Chartering and Examination A. Reduces adverse selection problem of risk takers or crooks owning banks B. Reduces moral hazard by preventing risky activities C. New trend: assessment of risk management  要銀 行自已監管風險 5.Disclosure Requirements Better info reduces asymmetric info problem File “call report” CAMEL 紐西蘭經驗，讓市場監督 董事負無限責任 沒有存款保險 充分揭露各種資訊 問題：存款人有能力解讀 ? 有能力者不願當董事 ! 大部分為外商銀行

Copyright © 2000 Addison Wesley Longman Slide #18-5 How Asymmetric Information Explains Banking Regulation 6.Consumer Protection A. Standardized interest rates (APR) B. Prevent discrimination: e.g., CRA 7.Restrictions on Competition to Reduce Risk-Taking A. Branching restrictions B. Separation of banking and securities industries: Glass-Steagall International Banking Regulation 1. Bank regulation abroad similar to ours 2. Particular problem of regulating international banking E.g., BCCI scandal 資產被掏空 販毒、獨裁者洗錢 哪國來監督 ?

Copyright © 2000 Addison Wesley Longman Slide #18-6 Major Banking Legislation in U.S.

Copyright © 2000 Addison Wesley Longman Slide #18-7 The 1980s Banking Crisis Why? 1. Decreasing profitability: banks take risk to keep profits up 2. Financial innovation creates more opportunities for risk taking 3. Innovation of brokered deposits enables circumvention of $100,000 insurance limit Result: Failures  and risky loans  面臨：資金來源的競爭 :MMMF 資金去路的競爭 :CP 市場、證券化、 junk bond market Real estate loan, M&A loan 80 年代末期，每年倒 200 家

Copyright © 2000 Addison Wesley Longman Slide #18-8 Federal Deposit Insurance Corporation Improvement Act (FDICIA) of FDIC recapitalized with loans and higher premiums 2. Reduce scope of deposit insurance and too-big- to-fail 3. Prompt corrective action provisions 4. Risk-based premiums 5. Annual o n-site examinations and stricter reporting 6. Enhances Fed powers to regulate international banking 限制 brokered deposit 的投保範圍 Well capitalized Adequately capitalized Under capitalized Significantly undercapitalized Critically undercapitalized Carrot-and –stick ∵不會再 “ 姑息 ”

Copyright © 2000 Addison Wesley Longman Slide #18-9 Evaluating FDICIA and Other Reforms Limits on Scope of Deposit Insurance 1. Eliminate deposit insurance entirely 2. Lower limits on deposit insurance 3. Eliminate too-big-to-fail 4. Coinsurance ( 只有部分的存款才有被保險 ) Prompt Corrective Action 1. Critics believe too many loopholes 2. However: regulator accountability increased by mandatory review of bank failure resolutions 將 regulator 攤在陽光下檢驗

Copyright © 2000 Addison Wesley Longman Slide #18-10 Risk-based Insurance Premiums Hard to implement Other Proposed Changes 1. Regulatory consolidation 2. Market-value accounting Evaluating FDICIA and Other Reforms

Copyright © 2000 Addison Wesley Longman Slide #18-11 Banking Crises Worldwide

Copyright © 2000 Addison Wesley Longman Slide #18-12 Cost of Banking Crises in Other Countries

Copyright © 2000 Addison Wesley Longman Slide #18-13 Calculating Capital Requirements First National Bank Assets Liabilities Reserves $ 3 m Checkable deposits $ 20 m Treasury Nontransactions securities $10 m deposits $ 60 m Government agency Borrowings $ 11 m securities $ 7 mLoan loss reserves $ 2 m Municipal bonds $10 m Bank capital $ 7 m Residential mortgages $10 m Real estate loans $20 m C&I loans $35 m Fixed assets $ 5 m

Copyright © 2000 Addison Wesley Longman Slide #18-14 Leverage Ratio = Capital/Assets = $7m/$100m = 7% Bank is well capitalized Calculating Capital Requirements

Copyright © 2000 Addison Wesley Longman Slide #18-15 Calculating Risk-Adjusted Requirements Risk Adjusted Assets = 0 x $ 3 million(Reserves) + 0 x $10 million(Treasury securities) +.20 x $ 7 million(Agency securities) +.50 x $10 million(Municipal bonds) +.50 x $10 million(Residential mortgages) x $20 million(Real estate loans) x $35 million(Commercial loans) x $ 5 million(Fixed assets) 或 commercial paper x $20 million(Letters of credit) $91.4 million(Total risk-adjusted assets) 或 interbank deposit 或 fully backed mortgage bond  off-balance sheet activities

Copyright © 2000 Addison Wesley Longman Slide #18-16 Core Capital Requirement = 4% x risk-adjusted assets = 4% x $91.4m = $3.66m < $7m of core capital Total Capital Requirement = 8% x risk-adjusted assets = 8% x $91.4m = $7.31m < $9m of total capital = $7m of core + $2m of loan loss reserves Calculating Risk-Adjusted Requirements (tier1) (tier1+tier2) 4%  OK 6%  well capitalized 8%  OK 10%  well capitalized Tier2 capital 包括 loan loss reserve 及 subordinated debt