1. Irwin/McGraw-Hill 1 Why Are Financial Institutions Special? Chapter 6 Financial Institutions Management, 3/e By Anthony Saunders

2. Irwin/McGraw-Hill 2 Services of FIs n Key services: Reduce monitoring costs (Diamond, 1984) Increase liquidity Reduce price risk Reduce transaction costs Maturity intermediation

3. Irwin/McGraw-Hill 3 Specialness Transmission of monetary policy Credit allocation (Areas of special need such as home mortgages) Intergenerational transfers or time intermediation Payment services (FedWire and CHIPS) Denomination intermediation

4. Irwin/McGraw-Hill 4 Specialness and Regulation n FIs receive special regulatory attention. Reasons: »Special services provided by FIs in general. »Institution-specific functions such as money supply transmission (banks), credit allocation (thrifts, farm banks), payment services (banks,thrifts), etc. Negative externalities arise if these services are not provided.

5. Irwin/McGraw-Hill 5 Regulation of FIs n Important features of regulatory policy: Protect ultimate sources and users of savings. »Including prevention of unfair practices such as redlining and other discriminatory actions. Ensure soundness of the system as a whole. n Regulation is not costless Net regulatory burden.

6. Irwin/McGraw-Hill 6 Regulation n Safety and soundness regulation: Regulations to increase diversification Minimum capital requirements Guaranty funds: »FDIC: Bank Insurance Fund (BIF), Savings Association Insurance Fund (SAIF) »Securities Investors Protection Fund (SIPC) Monitoring and surveillance

7. Irwin/McGraw-Hill 7 Regulation n Monetary policy regulation Federal Reserve directly controls outside money. Bulk of the money supply is inside money (deposits). Reserve requirements facilitate transmission of monetary policy.

8. Irwin/McGraw-Hill 8 Regulation n Credit allocation regulation Supports socially important sectors such as housing and farming. »Requirements for minimum amounts of assets in a particular sector or maximum interest rates or fees. »Qualified Thrift Lender Test (QTL). »Regulation Q.

9. Irwin/McGraw-Hill 9 Regulation n Consumer protection regulation Community Reinvestment Act (CRA). Home Mortgage Disclosure Act (HMDA). n Effect on net regulatory burden. n Potential extensions to other FIs such as insurance companies.

10. Irwin/McGraw-Hill 10 Regulation n Investor protection regulation Protections against abuses such as insider trading, lack of disclosure, malfeasance, breach of fiduciary responsibility. n Key legislation Securities Acts of 1933, 1934. Investment Company Act of 1940.

11. Irwin/McGraw-Hill 11 Regulation n Entry regulation Level of entry impediments affects profitability and value of charter. Regulations define scope of permitted activities. Effects size of net regulatory burden.

12. Irwin/McGraw-Hill 12 Trends n Trends in the United States Decline in share of depository institutions. Increases in pension funds and investment companies. May be attributable to net regulatory burden imposed on depository FIs. Recent regulatory changes partially alleviate net regulatory burden on FIs.