1. Regulating the Banking Industry
ECO 473 – Money & Banking – Dr. D. Foster

2. Rationales for Government Regulation
Maintain liquidity.
Limit failures.
Promote an efficient financial system.
Protect consumers.
Evaluate these rationales in light of our earlier discussion about how the government benefits from controlling the money supply.
Can the market provide these outcome?

3. Federal Regulation: 1933–1970
The Banking Act of 1933 (Glass-Steagall Act):
Created the Federal Deposit Insurance Corporation (FDIC).
Placed interest rate ceilings on checking deposits of commercial banks.
Separated commercial and investment banking.
Branching restrictions.
Would bringing back Glass-Steagall help the banking industry? Consumers/Depositors?

4. Partial Deregulation: 1971–1999
Disintermediation in the 1970s.
Depository Institutions Deregulation and Monetary Control Act (DIDMCA):
Six-year phaseout of interest rate ceilings.
Permitted NOW accounts.
Increased FDIC coverage to $100,000.

5. Partial Deregulation: 1971–1999
The Garn–St. Germain Act of 1982:
Authorized money market deposit accounts.
Savings institutions can make commercial real estate loans.
Gave the FDIC power to permit troubled financial institutions to merge with healthier partners.
Financial Institutions Reform, Recovery & Enforcement Act (FIRREA):
Taxpayer funds used to liquidate failed thrifts.
Abolished current thrift regulatory structure.

6. Partial Deregulation: 1971–1999
The FDIC Improvement Act Of 1991
Allowed for earlier intervention by the FDIC.
Let FDIC set/change premiums to boost fund.
The Financial Services Modernization Act of (Gramm-Leach-Bliley Act):
Securities firms and insurance companies can own banks.
Banks can underwrite insurance and securities, including shares of stock.

7. Unsettled Issues The moral-hazard problem of deposit insurance:
The “too-big-to-fail” policy & Continental Illinois.
Off-balance-sheet banking
Asset valuation
Derivatives
New wave of regulation
SOX; Dodd-Frank

8. Regulating the Banking Industry
ECO 473 – Money & Banking – Dr. D. Foster