CHAPTER 18 1

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 2

Bank Holding Companies (BHC) 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 3

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 4

C. 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 Accord, 1988: Greater risk level require greater capital (equity) 5

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 6

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 7

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  -Character -Capacity -Capital -Collateral -Conditions 8

Management  Regulatory conformance  Internal controls Earnings strength and Trends  ROA measure Liquidity  Vault resources  Borrowings (from Fed or Fed Funds) to cover reserve short-falls 9

FDIC INSURANCE PRICING ISSUE  Proposals to Reform Deposit Insurance THE INTERSTATE BANKING ISSUE  Arguments for Interstate Banking  Arguments against Interstate 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? 10

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 do regulators affect intra-state and inter-state banking? 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? Q&A: 2, 5, 12, Interp: c 11