1. The Impact of Government Policy and Regulation on the Financial-Services Industry

2. Reasons for the Regulation of Banks
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Reasons for the Regulation of Banks
Protection of the Safety of the Public’s Savings
Control of the Supply of Money and Credit
Ensure Equal Opportunity and Fairness in Access to Credit
Promote Public Confidence in the Financial System
Avoid Concentration of Power
Support of Government Activities
Help for Special Segments of the Economy

3. Principal Regulatory Agencies Under the Dual Banking System
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Principal Regulatory Agencies Under the Dual Banking System
Federal Reserve System
Comptroller of the Currency
Federal Deposit Insurance Corporation
Department of Justice
Securities and Exchange Commission
State Banking Boards or Commissions

4. What is Regulated? Initial creation of depository institutions
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Initial creation of depository institutions
Initial licensing and chartering
Location and number of physical branches, offices
Initial board of directors and officers
Minimum cash and capital requirements to open
On-going operations
Mergers and acquisitions
Opening or closing of offices, branches
Many operations procedures
What financial services/products may be offered
Assets
Diversification of assets
Quality of assets
Liquidity of assets
Level of cash reserves

5. What is Regulated? –Cont.
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Liabilities & equity
Types of liabilities created
Distribution of financing of assets
Quality of liability and equity accounts
Minimum capital requirements
Others
Community involvement
Degree of market share in each market area
Non-discriminatory operating policies
Regulatory Process
Examinations
Reports
CAMELS Rating: C apital adequacy; A sset Quality; M anagement Quality; E arnings – amount & stability; L iquidity; S ensitivity to market risk 5

6. National Banking Act (1863,1864)
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National Banking Act (1863,1864)
Passed During the Civil War to Help Fund the War
Created A New Division of the Treasury, the Comptroller of the Currency
Created National Banks with a Federal Charter

7. 2-7
Federal Reserve Act of 1913
Passed After a Series of Financial Panics at the Beginning of the Century
Created the Federal Reserve System
Gave the Fed the Authority to Act as the Lender of Last Resort
Created to Provide a Number of Services to Member Banks
Today the Fed Controls the Money Supply

8. Glass-Steagall Act 1933 Passed During the Great Depression
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Glass-Steagall Act 1933
Passed During the Great Depression
Separated Investment and Commercial Banking
Created the FDIC
Fed Given the Power to Set Margin Requirements
Prohibited Interest to be Paid on Checking Accounts

9. FDIC Act 1935 Addressed the Issues Left Out of the Glass- Steagall Act
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FDIC Act 1935
Addressed the Issues Left Out of the Glass- Steagall Act
Gave the FDIC the Power to Examine Banks and Take Necessary Action

10. Social Responsibility Acts
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Social Responsibility Acts
1968 – Full Information on Terms of Loans Must be Given
1974 – Cannot Be Denied a Loan Based on Age, Sex, Race, National Origin or Religion
1977 – Cannot Discriminate Based on the Neighborhood in Which Borrower Resides
1987 and 1991 – Banks Must Disclose Full Terms on Deposit and Savings Accounts

11. 2-11
Depository Institution Deregulation and Monetary Control Act (DIDMCA) 1980
First of Deregulation Acts
Phased Out Interest Rate Ceilings
Allowed Interest to be Paid on Checking Accounts (NOW Accounts)
Term Transaction Account Created – All Institutions with These Accounts Subject to Reserve Requirements

12. Garn-St. Germain Act 1982 Continued the Deregulation of DIDMCA
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Garn-St. Germain Act 1982
Continued the Deregulation of DIDMCA
Created Money Market Deposit Account
FDIC Could Arrange Mergers Across State Lines if Needed
Loan Limits were Liberalized
Banks in Need of Capital Could Get It From the FDIC

13. Competitive Equality in Banking Act (CEBA) 1987
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Competitive Equality in Banking Act (CEBA) 1987
Allowed Creation of Special Bridge Banks for Failed Institutions
Bridge Banks Are Special National Banks Operated by the FDIC
Bridge Banks Created When Bank is Essential to the Community

14. 2-14
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) 1989
Created in Response to Large Number of Bank and S&L Failures
Combined FDIC and FSLIC into the FDIC and Dismantled S&L Regulatory Body
Created the RTC to Take on the Assets of Failed S&Ls
$50 Billion Authorized to Handle Failed Institutions (Later Increased)
Allowed Bank Holding Companies to Purchase Savings Banks

15. FDIC Improvement Act 1991 Move Towards Re-regulating the Industry
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FDIC Improvement Act 1991
Move Towards Re-regulating the Industry
Requires Regulators to Take Prompt Corrective Action (PCA) When a Bank has Problems
Prompt Corrective Action Based on the Capital Position of the Bank
Requires Regulators to Develop New Standards for the Banks They Regulate

16. 2-16
Riegle-Neal Act 1994
Riegle-Neal Interstate Banking and Branching Efficiency Act repealed provisions of the McFadden Act of 1927
Bank Holding Company Can Acquire Banks Nationwide
Consolidation of Interstate BHCs into Branches

17. Gramm-Leach-Bliley Act 1999
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Gramm-Leach-Bliley Act 1999
Permits Banking-Insurance-Securities Affiliations (with regulator’s approval and are well capitalized)
Consumer Protections for Consumers Purchasing Insurance Through a Bank
Must Disclose Policies Regarding the Sharing of Customers’ Private Information
Customers are Allowed to ‘Opt Out’ of Private Information Sharing
Fees for ATM Use Must be Clearly Disclosed
Identity Theft is Made a Federal Crime

18. 2-18
The USA Patriot Act 2001
Requires Banks and Financial Service Providers to Establish the Identity of their Customers
Requires Banks and Financial Service Providers to Check the Customer’s ID Against Government- Supplied Lists of Possible Terrorists and Terrorist Organizations
Report Suspicious Activity (SARs) in Customer’s Account to the US Treasury

19. Fair and Accurate Credit Transactions (FACT) Act 2003
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Fair and Accurate Credit Transactions (FACT) Act 2003
Passed in Response to Increased Problem of Identity Theft
Federal Trade Commission Must Make it Easier for Consumers Victimized to File Theft Report
Individuals and Families are Entitled to One Free Credit Report Each Year

20. Check 21 2004 Reduces the Need for Banks to Transport Paper Checks
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Check
Reduces the Need for Banks to Transport Paper Checks
Can Provide a Customer with ‘Substitute’ Check Which Contains Image of Front and Back of Original Check
Allows for Electronic Transmission of ‘Substitute’ Checks for Clearing of Checks

21. Federal Deposit Insurance Reform Act 2005
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Federal Deposit Insurance Reform Act 2005
First Significant Increase FDIC Coverage in 25 years
Raises FDIC Insurance Limits from $100,000 to $250,000 for Retirement Accounts
Federal Regulators are Empowered to Periodically Adjust Deposit Insurance Limits for Inflation
Merges Bank Insurance Fund (BIF) and Savings Association Insurance Funds (SIF) into Single Deposit Insurance Fund (DIF)

22. Emergency Economic Stabilization Act of 2008
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Emergency Economic Stabilization Act of 2008
Passed in Response to Home Mortgage and Financial System Problems
Temporarily Increases FDIC Deposit Insurance Coverage from $100,000 to $250,000 for All Deposits until Year-end 2009
Allows the US Treasury to Add Capital to Banks to Enhance Lending

23. Unresolved Regulatory Issues
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Unresolved Regulatory Issues
Does the regulatory safety net set up to protect small depositors encourage financial firms to take on added risk?
Does deregulation exacerbate the too-big-to- fail problem?
As firms become larger and more complex, can the government regulators effectively oversee what these firms are doing? Can we simplify the current regulatory structure?
What is functional regulation and will it really work under the current structure?

24. Regulating Nonbank Financial-Service
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Regulating Nonbank Financial-Service
Credit Unions
National Credit Union Administration
Savings Associations
Office of Thrift Supervision
Money Market Funds
Securities and Exchange Commission
Insurance Companies
State Insurance Commissions
Finance Companies
State Governments
Mutual Funds
Securities and Exchange Commission
Securities Brokers and Dealers
Financial Conglomerates
Functional Regulation

25. Obama’s Financial Reform Plan
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Obama’s Financial Reform Plan
For the regulation of financial firms, the proposal:
Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests.
the Treasury will re-examine capital standards for banks and bank-holding companies.
Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes.
Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks.
Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms.
Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs. 25

26. Obama’s Financial Reform Plan
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Obama’s Financial Reform Plan
For the regulation of financial markets, the proposal:
Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges
Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products.
Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets
Urges the SEC to strengthen its regulation of credit-rating firms.
Tells regulators to reduce their reliance on credit-rating firms. 26

27. Obama’s Financial Reform Plan
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Obama’s Financial Reform Plan
For regulations protecting consumers and investors, the proposal:
Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
Requires non-binding shareholder votes on executive compensation packages.
To give the government more tools to manage crises, the proposal:
Creates a mechanism that allows the government to take over and unwind large, failing financial institutions.
In the international sphere, the proposal:
Improve the quality, quantity, and international consistency of capital.
Improve cooperation on supervision of globally interconnected financial firms. 27