Tài chính doanh nghiệp - Chapter 17: Regulation of the financial institutions’ sector

Chapter 17Regulation Of The Financial Institutions’ Sector Learning Objectives To explore why financial institutions are one of the most regulated industries in the modern world.To discover the many types of regulation, and to understand how the financial institutions have been affected.To understand how regulation has influenced and shaped the structure of financial-services industries.IntroductionFinancial institutions are one of the most heavily regulated businesses in the world.Many economists, financial analysts, and financial institutions have argued that regulation has done more harm than good.Other observers, however, argue that government regulations have achieved some positive results for the financial institutions as well as for the public.The Reasons Behind the Regulation of Financial InstitutionsConcern for the safety of the public’s funds.To promote public confidence in the system.To ensure equal opportunities and fairness in the public’s access to financial services.To prevent excessive money creation, and hence excessive inflation.To aid “disadvantaged” economic sectors.To ensure that important financial services are provided reliably and at a reasonable cost.Does Regulation Benefit or HarmFinancial Institutions?Regulations subsidize the growth of financial institutions and protect them from competition.Regulations tend to increase public confidence.Regulations spawn innovative escapes (regulatory dialectics) through loopholes in the regulations.Regulations can benefit financial institutions.Does Regulation Benefit or HarmFinancial Institutions?Regulatory dialectics are not the most productive form of innovation.The time and energy spent on regulatory compliance activities are costly.Regulations can harm financial institutions.The Regulation of Commercial BanksDue to their importance in the financial system, commercial banks are typically the most regulated of all financial institutions.Responsibility for regulating banks operating in the U.S. today is divided among three federal agencies – the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation – and the state banking commissions of the 50 states.The Federal Reserve SystemSupervises and regularly examines all member banks operating in the U.S.Imposes reserve requirements on deposits held by all depository institutions and grants temporary loans of reserves through its discount window.Must approve all applications of member banks to merge, establish branches, or exercise trust powers.The Federal Reserve SystemSupervises international banking corporations organized by U.S. banks and foreign banks operating in the U.S.Regulates and examines all bank and financial holding companies in the U.S.Conducts monetary policy to control the growth of money and credit in the financial system.Office of the Comptroller of the CurrencyIssues charters for new national banks.Regulates and regularly examines all national banks.Must approve all national banks’ applications for new branch offices, trust powers, mergers, and consolidations.Declares insolvent national banks closed.Federal Deposit Insurance CorporationInsures deposits of savings institutions (thrifts) and banks conforming to its regulations up to $100,000, and acts as receiver for all national banks declared insolvent and for state banks if requested by a state banking commission.Must approve applications by insured banks to set up branches, merge or exercise trust powersRequires all insured banks to submit reports on their financial condition..State Banking CommissionsIssue charters for new state banks.Supervise and regularly examine all state-chartered banks.Approve applications by state banks to form a holding company, acquire subsidiaries, or establish branches.Declare insolvent state-chartered banks closed and appoint a receiver to liquidate or otherwise dispose of the assets of failed state banks.Opening Competition Across Political BoundariesThe new geographic markets that banks can enter have been tightly controlled.It was believed, until quite recently, that “too much competition” could lead to excess volatility in bank profits and introduce instability into the nation’s banking system, thereby endangering the savings of depositors.Opening Competition Across Political BoundariesOpening Competition Across Political BoundariesOpening Competition Across Political BoundariesThe Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994Regulation of the Services Banks Can OfferRegulations controlling the services banks can offer have also been tight out of concern for bank safety and a desire to protect certain nonbank financial institutions from tough bank competition.Glass-Steagall Act (Banking Act) (1933)Financial Services Modernization (Gramm-Leach-Bliley) Act (1999)The Gramm-Leach-Bliley ActThe Financial Services Modernization (Gramm-Leach-Bliley) Act permitted banks to affiliate with security underwriting firms, insurance companies, and selected other types of businesses, through financial holding companies (FHCs) or a subsidiary structure.This law opened up the United States for the first time in more than half a century to universal or multidimensional banking.The Rise of Disclosure Laws in BankingOne rapidly expanding area of U.S. banking regulation today concerns disclosure rules.Truth in Lending Act (1968)Home Mortgage Disclosure Act (1975)Community Reinvestment Act (1977)Truth in Savings Act (1991)FDIC Improvement Act (1991)Financial Services Modernization (Gramm-Leach-Bliley) Act (1999)The Growing Importance ofCapital Regulation in BankingAnother major trend reshaping the regulation of banks and other financial institutions today centers upon their capital.Basel I Agreement (1988)FDIC Improvement Act (1991)Basel II Agreement (2007 or 2008)The Growing Importance ofCapital Regulation in BankingThe Basel I Agreement stipulated that:The Growing Importance ofCapital Regulation in BankingWhile Basel I was directed at measuring credit risk primarily, Basel II brings in refined estimates of market risk exposure and adds new capital requirements for operational risk. Banks that qualify for the Basel II approach will be allowed to develop their own internal models of risk assessment (the internal-ratings-based approach) and use those models to calculate their own risk exposure and capital requirements.The Unfinished Agenda for Banking RegulationSlowly, banking is experiencing an era of deregulation, as legal constraints are lifted on a variety of banking activities.Supervision of financial institutions in the future will rest primarily upon:government examinations (of market data and the firms’ risk management systems)capital requirements, andmarket discipline.The Regulation of Thrift InstitutionsCredit UnionsChartering: National Credit Union Administration (NCUA) / stateNew branches: No approval requiredMergers & acquisitions: NCUA / stateDeposit insurance: NCUA Share Insurance Fund / stateSupervision: NCUA / stateDepository Institutions Deregulation and Monetary Control Act (1980)The Regulation of Thrift InstitutionsSavings and Loan AssociationsChartering: Office of Thrift Supervision (OTS) / stateNew branches: OTS / FDIC / stateMergers & acquisitions: OTS / FDIC / stateDeposit insurance: FDIC / stateSupervision: OTS / stateFinancial Institutions Reform, Recovery and Enforcement Act (1989)FDIC Improvement Act (1991)The Regulation of Thrift InstitutionsThe Regulation of Thrift InstitutionsSavings BanksChartering: Office of Thrift Supervision (OTS) / stateNew branches: OTS / stateMergers & acquisitions: OTS / FDIC / stateDeposit insurance: FDIC / stateSupervision: FDIC / stateThe Regulation of Thrift InstitutionsMoney Market FundsChartering: Securities and Exchange Commission (SEC)New branches: No approval requiredMergers & acquisitions: No approval requiredDeposit insurance: no government insuranceSupervision: SEC (selected activities)The Regulation of Insurance CompaniesWhile not quite as heavily regulated as commercial banks, insurance intermediaries face tough regulatory rules that are imposed primarily by state insurance commissions.The Regulation of Pension FundsBecause pension funds have risen rapidly to hold the bulk of the retirement savings of workers, they are heavily regulated by the courts and government agencies today.Employee Retirement Income Security Act (1974)Pension Benefit Guaranty Corporation, or “Penny Benny” (a federal agency)The Regulation of Finance CompaniesThe bulk of regulation of finance companies is at the state level and focuses principally upon the making of consumer loans.The Regulation of Investment CompaniesInvestment companies or mutual funds are regulated predominantly by the federal government in the U.S.Securities and Exchange CommissionInvestment Company and Investment Advisers Acts (1940)Trends inThe Regulation of Financial InstitutionsRegulation seeks to promote the safety and stability of financial institutions in order to preserve the confidence of the public and avoid institutional failures.However, regulation can become a costly burden that significantly increases the operating costs of financial institutions and limits the cleansing effects of failure and competition.Trends inThe Regulation of Financial InstitutionsIncreasingly,market discipline is playing a bigger role,regulators are cooperating more (because the distinctions between the financial institutions are blurring),the focus of regulation is moving away from control over the services offered and geographic expansion to controlling risk taking, andthere is increasing attention to public disclosure.Markets on the NetBank for International Settlements at www.bis.orgCanadian Department of Finance at www.fin.gc.caConference of State Bank Supervisors at www.csbs.orgEuropean Union at www.europa.eu.int/institutions/index_en.htmFederal Deposit Insurance Corporation at www.fdic.govMarkets on the NetFederal Financial Institutions Examination Council at www.ffiec.govFederal Reserve System at www.federalreserve.govFederal Trade Commission at www.ftc.govNational Credit Union Administration at www.ncua.govMarkets on the NetOffice of the Comptroller of the Currency at www.occ.treas.govOffice of Thrift Supervision at www.treas.govSecurities and Exchange Commission at www.sec.govChapter ReviewIntroduction to Financial Institutions’ RegulationThe Reasons Behind the Regulation of Financial InstitutionsDoes Regulation Benefit or Harm Financial Institutions?Chapter ReviewThe Regulation of Commercial BanksThe Federal Reserve SystemOffice of the Comptroller of the CurrencyFederal Deposit Insurance CorporationState Banking CommissionsOpening Competition Across Political BoundariesRegulation of the Services Banks Can OfferThe Gramm-Leach-Bliley ActChapter ReviewThe Regulation of Commercial Banks continuedThe Rise of Disclosure Laws in BankingThe Growing Importance of Capital Regulation in BankingThe Unfinished Agenda for Banking RegulationChapter ReviewThe Regulation of Thrift InstitutionsCredit UnionsSavings and LoansSavings BanksMoney Market FundsThe Regulation of Insurance CompaniesThe Regulation of Pension FundsChapter ReviewThe Regulation of Finance CompaniesThe Regulation of Investment CompaniesAn Overview of Trends in the Regulation of Financial Institutions