EOC solutions Chapter 13

EOC solutions Chapter 13 - Answers to Chapter 13 Questions...

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Answers to Chapter 13 Questions: 1. Regulators have issued several guidelines to insure the safety and soundness of CBs: i. CBs are required to diversify their assets and not concentrate their holdings of assets. For example, banks cannot lend more than 10% of their equity to a single borrower.
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ii. CBs are required to maintain minimum amounts of capital to cushion any unexpected losses. In the case of banks, the Basle standards require a minimum core and supplementary capital of 8% of their risk-adjusted assets. iii. Regulators have set up guaranty funds such as D+IF for commercial banks, SIPC for securities firms, and state guaranty funds for insurance firms to protect individual investors. iv. Regulators also engage in periodic monitoring and surveillance, such as on-site examinations, and request periodic information from the firms. 2. The United States has experienced several phases of regulating the links between the commercial and investment banking industries. After the 1929 stock market crash, the United States entered a major recession and approximately 10,000 banks failed between 1930 and 1933. A commission of inquiry (the Pecora Commission) established in 1932 began investigating the causes of the crash. Its findings resulted in new legislation, the 1933 Banking Act, or the Glass-Steagall Act. The Glass-Steagall Act sought to impose a rigid separation between commercial banking C taking deposits and making commercial loans C and investment banking C underwriting, issuing, and distributing stocks, bonds, and other securities. The act defined three major securities underwriting exemptions. First, banks were to continue to underwrite new issues of Treasury bills, notes, and bonds. Second, banks were allowed to continue underwriting municipal general obligation (GO) bonds. Third, banks were allowed to continue engaging in private placements of all types of bonds and equities, corporate and noncorporate. For most of the 1933-1963 period, commercial banks and investment banks generally appeared to be willing to abide by the letter and spirit of the Glass-Steagall Act. Between 1963 and 1987, however, banks challenged restrictions on municipal revenue bond underwriting, commercial paper underwriting, discount brokerage, managing and advising open- and closed-end mutual funds, underwriting mortgage-backed securities, and selling annuities. In most cases, the courts eventually permitted these activities for commercial banks. With this onslaught and the de facto erosion of the Glass-Steagall Act by legal interpretation, the Federal Reserve Board in April 1987 allowed commercial bank holding companies to establish separate Section 20 securities affiliates. Through these Section 20 affiliates, banks can conduct all their "ineligible" or gray area securities activities, such as commercial paper underwriting, mortgage-backed securities underwriting, and municipal revenue bond underwriting.
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