1. Topic 7: Prudential Control in Banking (Part 2)

2. Recap: Previous Regulation Lecture Last Week: An examination of the need for prudential control and regulation. Arguments to the contrary: that banking sectors should be un- regulated An examination of UK policies and regulations that have helped shape the development of the industry.

3. This Week’s Lecture Outline To contrast UK regulation with… Prudential control and regulations in the USA

4. USA Banking Regulation Overview Evolved through time – tends to have been more involved than regulation in other countries. Different to UK banking regulation:  Regularly turn to legislation to iron out perceived inefficiency  Protection of small depositors more important.  Concern about potential collusion – ‘anti-trust’.

5. Regulatory Responsibility – The ‘FRS’ Federal Reserve - State ‘Member’ Banks Comptroller of the Currency - National ‘Member’ Banks FDIC examines the ‘Non-Member’ insured Banks. Banks performance is monitored and assessed on a scale ranging from 1 to 5.

6. National Banking Act (1863,1864) Passed during the civil war to help raise funding. Created the treasury and the comptroller of the currency. Created national banks with a Federal Charter.

7. Federal Reserve Act (1913) Created the FRS Created to provide a number of services to member banks.  E.g. the authority to act as the lender of last resort. Today the FED controls the money supply and base interest rates.

8. You may remember… McFadden-Pepper Act (1927)  Prevented banks from expanding across state lines.  Made national banks subject to the branching laws of their state.  International Banking Act (1978) tidied this up with respect to international banks 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. US Banking Act (1933) Created the FDIC  membership compulsory for FRS members  Non-members can join if they meet admission criteria Members pay an annual insurance premium to the FDIC FDIC purchases securities to provide a stream of funds (to cover deposits of up to $100,000).

10. Major USA Banking Regulation FDIC Act 1935  Gave the FDIC the power to examine banks and take necessary action. Bank Merger Acts  All mergers must be approved by the appropriate regulating body.  Mergers must be evaluated in three areas: Effect on competition. Effect on the convenience and needs of the community. Effect on the financial condition of the banks.

11. Bank Holding Company Act (1956) Federal Reserve given the power to regulate bank holding companies 1966 Amendment reduced the tax burden of bank holding companies 1970 - Amended the definition of bank holding companies to include one- bank holding companies

12. 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 – banks must disclose full terms on deposit and savings accounts.

13. Riegle-Neal Act (1994) Bank holding company can acquire banks nationwide.  Consolidation of inter-state BHCs into branches. Smaller well managed banks only need to be examined every 18 months. Community development fund created to promote development of depressed local communities.

14. Gramm-Leach-Bliley Act (1999) Permits banking-insurance-securities affiliations 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.

15. Conclusions There is a degree of contrast in terms of attitudes to regulation in the UK and USA This is evidenced by the number of important regulations in each country What about Germany?  Follows EU regulation on Banking (See Page 245-250 in Modern Banking in Theory and Practice)  Attitudes towards Universal Banking have helped shape EU policy