Historical Bank Regulation ? Definition of Commercial Bank ? Accept demand deposits and make commercial loans. ? Limitations on: ? Geographic Scope ? Products and Services 2 Goals and Functions of Bank Regulation ? Ensure the Safety and Soundness of Banks ? Provide an Efficient and Competitive Financial System ? Provide Monetary Stability ? Maintain the Integrity of the Payments System ? Protect Consumers from Abuses 3 Safe, Sound, Efficient & Competitive System ? Supervision and Examination ? CAMELS Capital ? Asset Quality ? Management Quality ? Earnings Quality ? Liquidity ? Sensitivity to Market Risk ? 4.
Safe, Sound, Efficient & Competitive System ? Supervision and Examination ? Memorandum ? of Understanding Formal regulatory document ? Cease ? and Desist Order Legal document ? Has legal standing 5 Safe, Sound, Efficient & Competitive System ? New Charters ? Dual Banking System ? Office of the Comptroller of the Currency ? Charters national banks ? Office ? of Thrift Supervision Charters federal savings banks and savings associations ? National ? Credit Union Administration 6 Charters federal credit unions Safe, Sound, Efficient & Competitive System ? New Charters ? State ? Banking Authorities Savings Authorities Credit Union Authorities.
Charter state banks Charter state savings banks Charter state credit unions ? State ? ? State ? 7 Safe, Sound, Efficient & Competitive System ? National versus State Charter ? All banks obtain FDIC deposit insurance as part of the chartering process ? National banks must join the Fed ? Primary regulator is the OCC 8 Safe, Sound, Efficient & Competitive System ? National versus State Charter ? State ? banks may join the Fed State banks are regulated by their state banking authority. ? State banks also have a primary federal regulator ? The primary federal regulator of state banks that are members of the Fed is the Federal Reserve ?
The primary federal regulator of Non-Fed member state banks is the FDIC 9 Safe, Sound, Efficient & Competitive System ? Commercial Banks, Savings Institutions, and Credit Unions ? Commercial ? Banks Specialize in short-term business credit ? Savings ? Institutions Specialize in real estate loans ? “Qualified Thrift Lender” ? Unitary Thrift Holding Company ? Credit ? Unions 10 “Common Bond” requirement Safe, Sound, Efficient & Competitive System ? Non-Depository Financial Companies ? Brokerage houses ? Mortgage companies ? Insurance companies ? Finance companies 11 Safe, Sound, Efficient & Competitive System ? Federal Deposit Insurance ?
Depositors are currently insured up to $100,000 per qualify account per insured bank ? Original limit in 1933 was $5,000 ? FDIC maintains the deposit insurance fund at 1. 25% of insured deposits. ? Currently, the fund is “well-funded” and over 90% of banks pay no insurance premium 12 Safe, Sound, Efficient & Competitive System ? Shortcomings of Restrictive Bank Regulation ? Does not prevent bank failure ? Cannot eliminate economic risk ? Does not guarantee that bank management will make good decisions 13 Monetary Stability & the Payments System ? The Federal Reserve System ? Fundamental ? Functions Conduct monetary policy ?
Provide and maintain the payments system ? Supervise and regulate banking operations ? Organization Board of Governors ? 12 Federal Reserve District Banks ? 14 Monetary Stability & the Payments System ? The Federal Reserve System ? Monetary Policy Tools ? Open Market Operations ? Open market purchases (sales) increase (decrease) reserves & the money supply ? Discount Rate ? Decreasing (Increasing) the discount rate makes bank borrowing less (more) expensive, which leads to an increase (decrease) in the money supply ? Reserve Requirements ? Decreasing (Increasing) reserve requirements increases (decreases) the money supply 15.
Monetary Stability & the Payments System ? Commercial Banks and the Economy ? Banks are the primary conduit for monetary policy ? Banks are the primary source of credit for most small businesses and many individuals 16 Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Unit banking versus Branch banking ? Branching and Interstate Expansion ? Riegle-Neal Act 17 Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Bank ? Holding Companies Parent ? Subsidiaries ? One-Bank Holding Companies ? Mutli-Bank Holding Companies 18 Exhibit 1.
10 Organizational structure of the BHC Single Bank Holding Company Board of Directors Parent Company Bank Subsidiary Bank Branches Each subsidiary has a president and line officers Nonbank Subsidiaries The bottom four levels have the same organizational form as the independent bank. Multibank Holding Company Board of Directors Parent Company Bank Subsidiary Nonbank Subsidiaries Bank Subsidiary 19 Bank Branches Bank Branches Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Financial ? Holding Companies Can engage in financial activities not permitted in a bank or bank holding company ?
Federal Reserve may not permit a bank holding company to convert to a financial holding company if the bank holding company is not well capitalized, well managed, or did not receive a satisfactory rating on its most recent CRA exam. 20 Exhibit 1. 11 Organizational structure of a financial holding company Financial Holding Company Bank Holding Company Securities Subsidiaries Insurance Subsidiary Thrift Holding Company Real Estate Subsidiary Banking Company Nonbank Subsidiaries Thrift Company Subsidiaries and Service Companies 21 Efficient and Competitive Financial System ? Organizational Form of the Banking.
Industry ? Holding ? Company Cash Flow Parent company’s net income is typically derived from dividends, interest, management fees from equity in subsidiaries, and interest paid on holding company debt. ? Parent company typically pays little in income tax since 80% of dividends from subsidiaries is exempt. 22 Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Non-bank Activities Permitted By Bank Holding Companies ? “Closely related to banking” 23 Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Mergers ? and Consolidations.
Mergers must be approved, dependent on the classification of the surviving bank ? OCC approves national bank mergers ? State member banks by the Federal Reserve ? State non-member banks by the FDIC 24 Efficient and Competitive Financial System ? Organizational Form of the Banking Industry ? Mergers ? and Consolidations Motivation for mergers and consolidation: ? Cut costs ? Improve profitability ? Increase competitive position ? Cross-sell financial products & services 25 Consumer Protection ? Reg. B ? Equal ? Credit Opportunity Cannot discriminate on the basis of sex, race, marital status, religion, age, or national origin. ? Reg.
Z ? Truth-in-Lending ? Requires disclosure of: ? Effective interest rates, total interest paid, total of all payments 26 ? Why credit was denied Trends in Federal Legislation & Regulation ? Key Federal Legislation: 1970 – 1993 ? Depository Institutions Deregulation and Monetary Control Act of 1980 ? DIDMCA ? Depository ? Institutions Act of 1982 Garn-St. Germain ? Competitive Equality Banking Act of 1987 27 Trends in Federal Legislation & Regulation ? Key Federal Legislation: 1970 – 1993 ? Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ? FIRREA ? Federal Deposit Insurance Corporation Improvement Act of 1991 ?
FASB 115 Held-to-maturity ? Trading account securities ? Available-for-sale ? 28 Trends in Federal Legislation & Regulation ? Key Federal Legislation: 1994 – 2000 ? Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ? Gramm-Leach-Bliley Act of 1999 ? Key Federal Legislation: 2001 – 2002 ? USA Patriot Act (2001) ? Sarbanes-Oxley Act (2002) 29 Trends in Federal Legislation & Regulation ? Current Unresolved Regulatory Issues ? Capital ? Adequacy Increased capital requirements make banks safer, from a regulator’s perspective ? However, increasing capital requirements also has disadvantages: ? Equity is more expensive than debt ?
Most banks do not have ready access to the equity markets ? This can lead to more consolidation 30 Trends in Federal Legislation & Regulation ? Current Unresolved Regulatory Issues ? Deposit Insurance Reform ? Too Big to Fail ? Should $100,000 insurance limit be increased? ? Non-bank Financial Services Companies ? Should banks that lend to hedge funds, like Long-Term Capital Management, be required to hold additional capital? 31 Trends in Federal Legislation & Regulation ? Current Unresolved Regulatory Issues ? New ? Powers Req. Q still prevents banks from paying explicit interest on commercial demand deposit accounts ?
Most banks would like to be able to pay interest on commercial demand deposit accounts ? What are the costs and benefits? 32 Banking Business Models ? Global Banks ? International presence ? Nationwide Banks ? Coast-to-coast presence ? Super-Regional Banks ? Extensive operations in a limited geographic area of the U. S. ? Regional Banks ? Specialty Banks 33 Exhibit 1. 17 DISTRIBUTION OF THE NUMBER OF BANKS AND TOTAL ASSETS BY TOTAL ASSETS: 1995 – 2004 1995 1997 1999 2001 2003 2004 Number of Banks 10,242 9,451 8,580 8,080 7,769 7,630 < $100 M 7,123 (69. 55%) 6,147 (65. 04%) 5,157 (60. 10%) 4,486 (55. 52%) 3,911 50.
34% 3,655 (47. 90%) Assets Size $100M – $1B $1B – $10B 2,741 331 (26. 76%) (3. 23%) 2,900 331 (30. 68%) (3. 50%) 3,029 318 (35. 30%) (3. 71%) 3,194 320 (39. 53%) (3. 96%) 3,434 341 44. 20% 4. 39% 3,530 360 (46. 26%) (4. 72%) Asset Size $100M – $1B $1B – $10B $668 $1,077 (16. 22%) (26. 17%) $711 $995 (15. 32%) (21. 45%) $755 $915 (13. 16%) (15. 96%) $819 $915 (12. 47%) (13. 93%) $910 $947 (11. 97%) (12. 46%) $953 $973 (11. 33%) (11. 57%) > $10B 63 (0. 62%) 73 (0. 77%) 76 (0. 89%) 80 (0. 99%) 83 1. 07% 85 (1. 11%) 1995 1997 1999 2001 2003 2004 Total Assets $4,116 $4,642 $5,735 $6,569 $7,603 $8,413 < $100 M $310 (7.54%) $277.
(5. 97%) $243 (4. 23%) $222 (3. 37%) $201 (2. 64%) $189 (2. 25%) > $10B $2,061 (50. 07%) $2,658 (57. 27%) $3,823 (66. 65%) $4,613 (70. 22%) $5,545 (72. 93%) $6,297 (74. 85%) 34 Banking Business Models ? Specialty Banks ? Also ? known as: Community Banks ? Independent Banks ? Typically have less than $1 billion in assets ? Organization 35 Exhibit 1. 18 Organizational structure of an independent bank 36 Banking Business Models ? Specialty Banks ? Personnel Senior Credit Officer ? Cashier/Chief Financial Officer ? Senior Operations Officer ? Senior Investment Officer ? Branch Area Executive ? 37.
Fundamental Forces of Change ? Deregulation/Reregulation ? Financial Innovation ? Securitization ? Globalization ? Advances in Technology 38 Fundamental Forces of Change Role of Regulation ? Regulatory Dialectic ? Process of regulation, market response, and reregulation ? Financial Innovation 39 Fundamental Forces of Change Increased Competition ? For Deposits ? Interest rate ceilings and inflation paper ? For Loans ? Commercial ? Junk bonds ? Credit scoring ? Credit derivatives 40 Fundamental Forces of Change: Off-Balance Sheet Activities ? Loan Commitments ? Loan guarantees ? Standby Letters of Credit.
? Interest Rate Swaps ? Futures, Forwards & Options ? Leases 41 Fundamental Forces of Change: Impact of Nonbank Competition ? Captive Finance Companies ? General Finance Companies ? Fund their loans by issuing commercial paper and long-term bonds. Their cost of funds is higher than a bank’s, but they charge higher rates. 42 Fundamental Forces of Change: Competition for Payments Services ? Credit Cards ? Debit Cards ? Prepaid Cards ? CHIPS ? ACH 43 Fundamental Forces of Change: Competition for Other Bank Services ? Trust Services ? Brokerage Services ? Data Processing ? Real Estate Appraisal ? Credit Life Insurance.
? Personal Financial Consulting 44 Fundamental Forces of: Change Investment Banking ? National Full-Line Firms ? Investment Banking Firms ? Underwriter ? Underwriter syndicate ? Broker versus Dealer 45 Fundamental Forces of Change: Deregulation and Re-regulation ? Deregulation ? Eliminating existing regulations ? Reregulation ? CHIPS ? ACH 43 Fundamental Forces of Change: Competition for Other Bank Services ? Trust Services ? Brokerage Services ? Data Processing ? Real Estate Appraisal ? Credit Life Insurance ? Personal Financial Consulting 44 Fundamental Forces of: Change Investment Banking ? National Full-Line Firms.
? Investment Banking Firms ? Underwriter ? Underwriter syndicate ? Broker versus Dealer 45 Fundamental Forces of Change: Deregulation and Re-regulation ? Deregulation ? Eliminating existing regulations ? Reregulation Bank Management, 6th edition. Timothy W. Koch and S. Scott MacDonald Copyright © 2006 by South-Western, a division of Thomson Learning FUNDAMENTAL FORCES OF CHANGE IN BANKING Chapter 1 51 William Chittenden edited and updated the PowerPoint slides for this edition. Ebook for reference ? Ebook of Bank Management and Financial Services (Peter Rose 7e, 133. 21 MB) from http://www. mediafire. com/? tedu75mh7 68tszx 52