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The following will be discussed in this chapter: General types of bank regulations, privacy regulations, anti-money laundering and anti-terrorism regulation, community re-investment regulation, deposit account regulation, deposit insurance regulation, consumer protection, withdrawal limit and reserve requirement,…
Session: SIX MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Summary of Previous Session • Sub Prime mortgage: the main cause of banking crisis 2008 – • Story telling General Principles of Bank Regulations Agenda of this session • General Types of Bank Regulations • Privacy Regulations • Anti-money laundering and anti-terrorism regulation • Community re-investment regulation • Deposit account regulation • Deposit insurance regulation • Consumer protection Agenda of this session (Contd.) • Interest on demand deposits • Lending Regulations – Consumer protection – Debt collection – Credit cards – Lending limits • Central bank regulations • Regulation of bank affiliates and4 holding Types of Regulations • Banks in one form or another have been subject to the following non exhaustive list of regulatory provisions: 1) restrictions on branching and new entry; 2) restrictions on pricing (interest rate controls and other controls on prices or fees); 3) line-of-business restrictions and regulations on ownership linkages among financial institutions; Types of Regulations (Contd.) 4) restrictions on the portfolio of assets that banks can hold (such as requirements to hold certain types of securities or requirements and/or not to hold other securities, including requirements not to hold the control of non financial companies); 5) compulsory deposit insurance (or informal deposit insurance, in the form of an expectation that government will bail out depositors in the event of insolvency); 6) capital-adequacy requirements; Types of Regulations (Contd.) 7) reserve requirements (requirements to hold a certain quantity of the liabilities of the central bank); 8) requirements to direct credit to favored sectors or enterprises (in the form of either formal rules, or informal government pressure); 9 expectations that, in the event of difficulty, banks will receive assistance in the form of “lender of last resort”; 11 special rules concerning mergers (not always subject to a competition standard) or failing banks (e.g., liquidation, winding up, insolvency, composition or analogous proceedings in the banking sector); 10 Consumer protection (Contd.) • The Truth in Lending Act (TILA) of 1968, implemented by Regulation Z, promotes the informed use of consumer credit by standardizing the disclosure of interest rates and other costs associated with borrowing TILA also gives consumers the right to cancel certain credit transactions involving a lien on the consumer's principal dwelling, regulates certain creditcard practices, and provides a means of 27 Debt collection • • The Fair Credit Reporting Act (FCRA) of 1970 regulates the collection, sharing, and use of customer-credit information The act allows consumers to obtain a copy of their credit report from credit bureaus that hold information on them, provides for consumers to dispute negative information held and sets time limits, after which negative information is suppressed 28 Debt collection (Contd.) • It requires that consumers be informed when negative information is added to their credit records, and when adverse action is taken based on a credit report 29 Credit cards • • Provisions addressing credit-card practices aim to enhance protections for consumers who use credit cards and improve credit-card disclosure under the Truth in Lending Act: Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance30over a Credit cards (Contd.) • • Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer 31 is Credit cards (Contd.) • • Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle Banks would be required to provide consumers a reasonable amount of time to make payments 32 Lending limits • • Lending-limit regulations restrict the total amount of loans and credits that a bank may extend to a single borrower This restriction is usually stated as a percentage of the bank's capital or assets – For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus 33 Lending limits (Contd.) • Loans to Insiders (Regulation O) establishes various quantitative and qualitative limits and reporting requirements on extensions of credit made by a bank to its "insiders" or the insiders of the bank's affiliates The term "insiders" includes executive officers, directors, principal shareholders and the related interests of such parties 34 Central banking regulation • Extensions of Credit by Federal Reserve Banks (Regulation A) establishes rules regarding discount window lending, the extension of credit by the Federal Reserve Bank to banks and other institutions 35 Central banking regulation (Contd.) • The Federal Reserve Board made significant amendments to Regulation A in 2003, including amendments to price certain discount-window lending at abovemarket rates and to restrict borrowing to banks in generally sound condition 36 Regulation of bank affiliates and holding companies • Transactions Between Member Banks and Their Affiliates (Regulation W) regulates transactions, such as loans and asset purchases between banks and their affiliates 37 Regulation of bank affiliates and holding companies (Contd.) • • The term "affiliate" is broadly defined and includes parent companies, companies that share a parent company with the bank, companies that are under other types of common control with the bank (e.g by a trust), companies with interlocking directors (a majority of directors, trustees, etc are the same as a majority of the bank's), subsidiaries, and certain other types of 38 Summary of this session • General Types of Bank Regulations • Privacy Regulations • Anti-money laundering and anti-terrorism regulation • Community re-investment regulation • Deposit account regulation • Deposit insurance regulation • Consumer protection 39 Summary of this session (Contd.) • Interest on demand deposits • Lending Regulations – Consumer protection – Debt collection – Credit cards – Lending limits • Central bank regulations • Regulation of bank affiliates and40holding THANK YOU 41 ... demand deposits • Lending Regulations – Consumer protection – Debt collection – Credit cards – Lending limits • Central bank regulations • Regulation of bank affiliates and4 holding Types of. ..Summary of Previous Session • Sub Prime mortgage: the main cause of banking crisis 2008 – • Story telling General Principles of Bank Regulations Agenda of this session • General Types of Bank... 26 of public Consumer protection (Contd.) • The Truth in Lending Act (TILA) of 1 968 , implemented by Regulation Z, promotes the informed use of consumer credit by standardizing the disclosure of