1 Chapter 18 Bank Regulation Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline Background Regulatory structure Deregulation Act of 1980 Garn-St Germain Act Regulation of deposit insurance Regulation of capital Regulation of operations Regulation of interstate expansion How regulators monitor banks The “too-big-to-fail” issue Global bank regulations 3 Background The banking industry has become more competitive due to deregulation Banks have more flexibility on the services they offer, the locations where they operate, and the rates they pay depositors Banks have recognized the potential benefits from economies of scale and scope Bank regulation is needed to protect customers who supply funds to the banking system Regulators are shifting more of the burden of risk assessment to the individual banks themselves 4 Regulatory Structure The U.S. has a dual banking system consisting of federal and state regulation Three federal and fifty state agencies supervise the banking system A federal or state charter is required to open a commercial bank National versus state banks Federal charters are issued by the Comptroller of the Currency State banks may decide to become members of the Fed 35 percent of all banks are members of the Fed, comprising 70 percent of deposits 5 Regulatory Structure (cont’d) Regulatory overlap National banks are regulated by the Comptroller of the Currency, the Fed, and the FDIC State banks are regulated by the state agency, the Fed, and the FDIC Perhaps a single regulatory agency should be assigned the role of regulating all commercial banks and savings institutions 6 Regulatory Structure (cont’d) Regulation of bank ownership Commercial banks can be either independently owned or owned by a bank holding company Most banks are owned by BHCs BHCs have more potential for product diversification because of amendments to the Bank Holding Company Act of 1956 7 Deregulation Act of 1980 The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was enacted in 1980 DIDMCA has two categories of provisions: Those intended to deregulate the banking industry Those intended to improve monetary control The main deregulatory provisions are: Phaseout of deposit rate ceilings Allowance of NOW accounts for all depository institutions New lending flexibility for depository institutions Explicit pricing of Fed services 8 Deregulation Act of 1980 (cont’d) DIDMCA also called for an increase in the maximum deposit insurance level from $40,000 to $100,000 per depositor Impact of DIDMCA There has been a shift from conventional demand deposits to NOW accounts Consumers have shifted funds from conventional passbook savings accounts to various types of CDs DIDMCA has increased competition between depository institutions 9 Garn-St Germain Act of 1982 The Act: Permitted depository institutions to offer money market deposit accounts (MMDAs), which have no interest ceiling MMDAs are similar to money market mutual funds MMDAs allow depository institutions to compete against money market funds in attracting savers’ funds Permitted depository institutions to acquire failing institutions across geographic boundaries Intended to reduce the number of failures that require liquidation 10 Regulation of Deposit Insurance Federal deposit insurance has existed since the creation of the FDIC in 1933 as a response to bank runs About 5,100 banks failed during the Great Depression Deposit insurance has increased from $2,500 in 1933 to $100,000 today Insured deposits make up 80 percent of all commercial bank balances The FDIC is managed by a board of five directors, who are appointed by the President [...]... risk when applying the VAR model VAR is the estimated potential loss from trading businesses that could result from adverse movements in market prices Banks typically use a 99 percent confidence level 18 Regulation of Capital (cont’d) Use of the value-at-risk method to determine capital requirements (cont’d) Testing The validity is assessed with backtests in which the actual daily trading gains . 1 Chapter 18 Bank Regulation Financial Markets and Institutions, 7e, Jeff Madura Copyright. ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline Background Regulatory structure Deregulation Act of 1980