1. BANK REGULATION
CHAPTER 18
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Dr David P Echevarria

2. REGULATORY STRUCTURE OF THE BANKING SYSTEM
Comptroller of the Currency
Chartering and Auditing
Oversight for Intrastate branching, mergers, acquisitions, and consolidations
Federal Reserve System
Setting reserve requirements
Controls borrowing at the discount window
Oversight for state-chartered member banks
State Banking Commissions
Limitations on inter- and intra-state banking as well as branching
Non-Insured states have considerably less FED and US Government oversight
All Rights Reserved
Dr David P Echevarria

3. REGULATION OF BANK OWNERSHIP
Bank Holding Companies (BHC)
1970 Amendments to Bank Holding Company Act (1956)
Permits BHC to enter non-banking activities
Permits BHC to acquire banks in different states
Financial Services Modernization Act (1999)
Repeals Glass-Steagal Act (1933)
Permits affiliations with Insurance and Brokerage firms
Engage in any financial activity via subsidiaries of BHC
Most important – cleared way for consolidation of industry
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Dr David P Echevarria

4. BALANCE SHEET REGULATIONS
Regulation of Deposits; DIDMCA (1980)
All depository institutions can offer NOW accounts; dealing with disintermediation
De facto entry of banks into money market activities
Regulation of Loans
Attempting to limit portion of loan portfolio in high leverage transactions
Limiting amount of loans to any individual client
All Rights Reserved
Dr David P Echevarria

5. BALANCE SHEET REGULATIONS
Regulation of Capital
Capital = Total Assets minus Total Liabilities
The greater the capital of a bank, the greater the stability (5 - 8 % is typical)
Recent development in the EC have begun to result in uniform capital requirements
Basel Accords, 1988, 2004, : Greater risk level require greater capital (equity), capital adequacy and stress testing (decreasing bank leverage)
All Rights Reserved
Dr David P Echevarria

6. INTEREST RATE REGULATIONS
Deposit Rate Regulations
The Problem of disintermediation; rate caps result in deposit flight
After 1980, rates largely deregulated on most accounts (Regulation Q)
Loan Rate Regulations
Truth-in-Lending regulations
Reporting of transactions in mortgage markets
All Rights Reserved
Dr David P Echevarria

7. GEOGRAPHIC REGULATIONS
Intrastate Regulations
Few limits on intra-state banking and branching
Acquisitions by out-of-state BHC still a touchy issue, particularly in capital deficit areas
Interstate Regulations
McFadden Act; prevent concentration of banking power
Competition spurs lower rates and more services to borrowers and depositors
Some Mutual Funds now performing limited banking-type services via MM funds
Large national brokerage houses offer a variety of bank-like services; ML CMA
All Rights Reserved
Dr David P Echevarria

8. REGULATION OF NONBANKING ACTIVITIES
Bank Provision of Insurance Services
Potential for unfair competition for credit insurance
Many other ways to bundle services to clients
All Rights Reserved
Dr David P Echevarria

9. HOW REGULATORS MONITOR BANKS (CAMEL)
Capital Adequacy
The greater the capital ratio, the stronger the bank
Ability to absorb losses is a function of capital
Asset Quality and Average Maturity of the Loan Portfolio
How much credit risk exposure
5-Cs of Credit
Management
Regulatory conformance
Internal controls
All Rights Reserved
Dr David P Echevarria

10. HOW REGULATORS MONITOR BANKS (CAMEL)
Earnings strength and Trends
ROA measure
Liquidity
Vault resources
Borrowings (from Fed or Fed Funds) to cover reserve short-falls
All Rights Reserved
Dr David P Echevarria

11. REGULATORY ISSUES IN BANKING
THE "TOO BIG TO FAIL" ISSUE
Argument for Government Rescue
Argument against Government Rescue
Bear-Stearns? Was the Fed right to come to the "rescue" of BSC?
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Dr David P Echevarria

12. HOMEWORK QUESTIONS
What functions does the Comptroller of the Currency perform?
What are primary objectives of Federal Reserve System?
What oversight exists for state chartered banks?
Why are Bank Holding Companies (BHC) an important?
How did regulators deal with the disintermediation issue?
What metrics do auditors and regulators use to ensure bank performance?
What does it mean when banks engage in off-balance sheet activities?
All Rights Reserved
Dr David P Echevarria