PNotesforChapter3

PNotesforChapter3 - Chapter 3 The Financial Environment...

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Unformatted text preview: Chapter 3 The Financial Environment Bendeck/Waller, UHCL; waller@uhcl.edu The Cash Flow Timeline Order Placed Payment Sent Cash Received Accounts Collection < Inventory > < Receivable > < Float > Time ==> Accounts < Payable > Invoice Received Disbursement < Float > Payment Sent Cash Disbursed Bendeck/Waller, UHCL; waller@uhcl.edu Order Received Sale Learning Objectives Understand y the principal functions of various financial institutions y the functions and structures of various regulatory agencies y the banking system's evolution in connection to legislative developments y Federal Reserve Regulations and their impact on cash management y Parts of the Uniform Commercial Code which affect cash management Bendeck/Waller, UHCL; waller@uhcl.edu U.S. Payment System y Banking System Product Differences Geographical Restrictions Safety Considerations y Payment System Next Chapter Bendeck/Waller, UHCL; waller@uhcl.edu Commercial Bank Services y y y y y y y y y y Intermediation Services Payment and Collections Trade Services Guarantor Services Agent or Fiduciary Services Consulting Services Risk Management Services Broker/Dealer Services Insurance Services Foreign Exchange Services Bendeck/Waller, UHCL; waller@uhcl.edu Intermediation Services y y Deposit Products Demand Deposit Accounts (DDA) Time Deposit Accounts Other Interest Bearing Accounts Credit Services Short-term Loans Long-term Loans Leasing Mortgages Bendeck/Waller, UHCL; waller@uhcl.edu Investment Banking Services y y y y Commercial Paper (CP) Loan Sales Private Placement Corporate Bonds and Equity Bendeck/Waller, UHCL; waller@uhcl.edu Trade Services y y y y Commercial Letters of Credit (L/Cs) Letters of Credit Confirmations Documentary Collections Banker's Acceptances Bendeck/Waller, UHCL; waller@uhcl.edu Agent or Fiduciary Services y y y y y y y y Trust Services Investment Management Corporate Pension Plans Qualified Employees Benefit Plans Corporate Trustee Transfer and Paying Agent Registrar Custody Services Bendeck/Waller, UHCL; waller@uhcl.edu Investment Banking and Brokerage Firms y y y y y y Bond and Stock Underwriting CP Dealers and Underwriters Institutional and Retail Brokerage Investment Research Investment Advisory and Portfolio Management Risk Management Bendeck/Waller, UHCL; waller@uhcl.edu Underwriting y y y Origination and Distribution Components Firm Commitment Underwriting Arrangement Best Effort Underwriting Arrangements Bendeck/Waller, UHCL; waller@uhcl.edu Savings and Loan Associations y y y y Principal asset: residential mortgages. DIDMCA of 1980 expanded asset powers. Mutual or stockholder owned. Deposits insured by Savings Association Insurance Fund (SAIF). Bendeck/Waller, UHCL; waller@uhcl.edu Savings Banks y y y Garn St. Germain Act of 1982 allowed conversions to stock association and federal charters. Principal asset: residential mortgages. Deposits insured by the Bank Association Insurance Fund (BAIF) Bendeck/Waller, UHCL; waller@uhcl.edu Credit Unions y y y y Principal asset: consumer loans. Mutual associations. Common bond requirements. Deposits insured by NCUSIF. Bendeck/Waller, UHCL; waller@uhcl.edu Regulatory Environment y y Federal Level State Level Bendeck/Waller, UHCL; waller@uhcl.edu Federal Regulatory Agencies y y y y y y y y y Federal Reserve Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC) Securities and Exchange Commission (SEC) Department of Justice Federal Financial Institution Examination Council (FFIEC) Office of Foreign Asset Control (OFAC) Financial Crimes Enforcement Network (FinCEN) State Banking Boards and Commissions Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Organization y y y y y Board of Governors FOMC Federal Advisory Council District banks Member banks Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Roles y y y y y Bank supervision Monetary policy Banking services Fiscal Agent Consumer Protection Agency Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Supervision y y y y y Member commercial banks Bank holding companies Edge Act banks U.S. banking activities of foreign banks Foreign activities of U.S. member banks Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Monetary Policy y y y Reserve Requirements Discount Window Rate Open Market Operations Bendeck/Waller, UHCL; waller@uhcl.edu Fed's involvement with banking services y y y y y y Circulate new money Check processing Check settlement ACH FedWire Regulate availability schedules Bendeck/Waller, UHCL; waller@uhcl.edu Fed's involvement with banking services y In 2003, the Federal Reserve processed 35 billion currency units with a value of $585 billion; processed 16.3 billion checks with a value of $15.8 trillion; processed 6.5 billion ACH transactions with a value of $16.8 trillion. y In 2006, the Federal Reserve processed 38 billion currency units with a value of $665 billion; processed 11.4 billion checks with a value of $13.9 trillion; processed 9.2 billion ACH transactions with a value of $16.6 trillion. y Worldwide 35 billion checks and 5 billion electronic payments were processed in 1979 40 billion checks and 40 billion electronic payments were processed in 2002 33 billion checks and 55 billion electronic payments were processed in 2006 y Note the Federal Reserve processed approximately 1/3 of the check units processed in U.S. Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Fiscal Agent y y y Banker for the federal government. Accepts payment for federal taxes on behalf of the IRS. Fiscal agent for the Treasury when issuing, redeeming, and transferring ownership of government securities. Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Act y y y Provided for the formation of FRS and the foundation for the current banking system. Gave the Fed supervisory powers over member banks Allowed the Fed to create a payment and collection system through member banks Bendeck/Waller, UHCL; waller@uhcl.edu Edge Act y y y y Permits domestic banks to invest in corporations that engage in international banking and finance. Edge Act corporations can operate anywhere in the U.S. Edge Act corporations are not subject to state banking laws. Edge Act corporations can't accept domestic deposits and make domestic loans. Bendeck/Waller, UHCL; waller@uhcl.edu McFadden Act y y y y Governed geographical expansion for banks. Prohibited branching across state lines unless otherwise allowed by state laws. Gave states jurisdiction over bank expansion within and across state lines. Restrictions applied to state and national banks. Bendeck/Waller, UHCL; waller@uhcl.edu Douglas Amendment (1956) y y Allowed interstate expansion for independent banks with state permission. Prohibited interstate expansion by bank holding companies. Bendeck/Waller, UHCL; waller@uhcl.edu Recent Changes in Branching Laws y y y 1980s and changes in branching laws at the state level. The Interstate Banking and Branch Efficiency Act of 1994 (also known as the Riegle Neal Interstate Banking and Branching Act) phased out state barriers against branching established by McFadden Act. Bendeck/Waller, UHCL; waller@uhcl.edu Glass Steagall Act y y y y Established the separation of banking and commerce, including investment banking. Prohibited commercial banks from underwriting securities other than government securities. Established deposit rate ceilings on deposit account, including a prohibition against payment of interest on DDA Established the FDIC to insure bank deposits up to a stipulated maximum amount. Bendeck/Waller, UHCL; waller@uhcl.edu Community Reinvestment Act Passed in 1977, Amended in 1995 y y y Intended to encourage depository institutions to help meet the credit needs of the communities in which they operate. Depositories are subject to periodic CRA reviews. Compliance required in order to be able to expand deposit facilities. Bendeck/Waller, UHCL; waller@uhcl.edu Electronic Funds Transfer Act (EFTA, 1978) y y Defined the rights and responsibilities of individuals using EFT services except for wire transfers. Limited customer liability for unauthorized electronic banking transactions with proper notification. Bendeck/Waller, UHCL; waller@uhcl.edu Depository Institutions Deregulation and Monetary Control Act (DIDMCA) y y y Imposed RR on all depository institutions regardless of FRS membership status. Extended Fed services to all deposit-taking institutions. Mandated the Fed to reduce or price payment system float. Bendeck/Waller, UHCL; waller@uhcl.edu DIDMCA (continued) y y y Mandated the pricing of previously free Fed services according to standards of a tax-paying vendor. Phased-out of Reg Q by 1986. Introduced NOW accounts. Bendeck/Waller, UHCL; waller@uhcl.edu Garn-St. Germain Act y y y Authorized banks to offer Money Market Deposit Accounts (MMDA) to compete with money market mutual funds. Granted the FDIC/FSLIC emergency powers to deal with failed institutions. Increased lending limits on individual loans. Bendeck/Waller, UHCL; waller@uhcl.edu Bank Secrecy Act (1970) & Money Laundering Control Act (1986) y Required financial institutions to monitor & report activity inconsistent with a customer's business attempts by customers to avoid reporting or recordkeeping requirements unusual or multiple funds-transfer activities customers who provide insufficient or suspicious information y Also required financial institutions to report any suspicious deviations from normal transaction patters for employees responsible for large-value transfers Bendeck/Waller, UHCL; waller@uhcl.edu Expedited Funds Availability Act (EFAA, 1988) y y Defined funds withdrawal time periods for deposited checks and payable-through-draft (PTD) Established PTD and check return procedures. Bendeck/Waller, UHCL; waller@uhcl.edu Financial Institutions, Reform, Recovery, and Enforcement Act (FIRREA) y y y Dismantled the FHLBB as thrift regulatory. Created the OTS as thrift regulator. Dismantled the FSLIC, making the FDIC the sole administrator of the thrift and bank insurance funds. Bendeck/Waller, UHCL; waller@uhcl.edu FIRREA (continued) y y Created the RTC to help dispose of failed S&L assets. Gave the FDIC greater flexibility to raise deposit insurance premiums. Bendeck/Waller, UHCL; waller@uhcl.edu Federal Deposit Insurance Corporation Improvement Act (FDICA) y y y Established higher standards for safety and soundness for financial institutions. Required early closure of banks and thrifts when net worth falls below 2%. Required the establishment of risk-based deposit insurance premiums. Bendeck/Waller, UHCL; waller@uhcl.edu Interstate Banking and Branching and Efficiency Act y y y Permitted BHCs to acquire banks located in any state after September 1995. Allowed banks to merge operations with banks in another state so long as states have not opted-out of bill. Allowed banks to establish new branches provided state laws expressly permit it. Bendeck/Waller, UHCL; waller@uhcl.edu Debt Collection Improvement Act (1996) y Required that most federal payments, except for tax refunds, be conducted electronically; this requirement has now been eliminated Bendeck/Waller, UHCL; waller@uhcl.edu Gramm-Leach-Bliley Act (1999) y y y y Eliminated barriers among the banking, insurance, and securities business. Permitted the creation of FHCs. Allowed for easier entry by foreign banks into U.S. financial services companies. Established the Fed as the regulator of FHCs. Bendeck/Waller, UHCL; waller@uhcl.edu Gramm et al (continued) y y Barred a BHC from merging with insurance or securities firms or embarking in any new powers is CRA rating was less than "satisfactory". Required financial institutions to establish privacy policies and disclose them at the start of a customer relationship and once a year thereafter. Bendeck/Waller, UHCL; waller@uhcl.edu Patriot Act (2001) y Extended BSA to non-bank financial institutions including broker dealers, credit card companies and check cashing services y y Made all foreign banks with accounts in the U.S. subject to U.S. jurisdiction, including the power to obtain records and information regarding customers Prohibited U.S. banks from maintaining, either directly or indirectly, correspondent account for any foreign shell banks. Shell banks are foreign banks without a physical presence in any country. y Prevented operators of U.S. credit card systems from authorizing foreign banks to i8ssue or accept U.S. credit cards without taking steps to prevent usage by terrorists. Bendeck/Waller, UHCL; waller@uhcl.edu SOX (2002) y y The primary purpose of SOX was to improve disclosure and financial reporting. Briefly, firms must Disclose the code of ethics applicable to senior financial officers Disclose whether the audit committee has a financial expert Require audit committees to pre-approve all audit and non-audit services provided by the auditor and to be briefed by auditors on the company's accounting, including alternative approaches that might be preferable to the company's current methods. y Moreover, the SEC requires that firms must reconcile pro-forma financial information to financial statements. Bendeck/Waller, UHCL; waller@uhcl.edu Check 21 (2003) y Purpose encourage chuck truncation encourage innovation in the check-payment system with requiring receipt of checks in electronic form improve the payments system y Substitute Check a MICR-encoded paper reproduction of an original check that x Contains an image of the front & back of the check x Has a MICR line that contains all of the information appearing on the MICR line of the original check x Adheres to industry standards so that the substitute can be processed in the same manner as standard checks Bendeck/Waller, UHCL; waller@uhcl.edu Check 21 (2003), continued y y IMPORTANT: This act creates legal equivalence for substitute checks. This means that parties cannot refuse to accept a substitute check that meets the Act's requirements. What do we mean by parties? Other banks, paying customers, depositing customers, consumers, corporations, Federal Reserve, 3rd-party processors, etc. It does not create legal equivalence for images. Arrangements involving image presentment require agreement of the parties who accept the electronic form of the instrument for value. Bendeck/Waller, UHCL; waller@uhcl.edu Federal Reserve Regulation y y y y y Reg D - RR Reg E - EFTA Reg J - Check collection and settlement through the FRS Reg Q - No interest payment on corporate demand deposits. Reg CC - EFAA Bendeck/Waller, UHCL; waller@uhcl.edu Regulation CC y y y Established policies on withdrawal of deposited funds and requires banks to disclose their withdrawal policies to customers. Establishes rules to speed up the collection and return of checks and PTDs. Establishes check endorsement standards for banks and corporations Bendeck/Waller, UHCL; waller@uhcl.edu Uniform Commercial Code (UCC) y y y Uniform set of laws governing commercial transactions. Enacted separately by each state. Establishes duties and responsibilities of parties involved in commercial transactions. Bendeck/Waller, UHCL; waller@uhcl.edu UCC Article 3 y y Definition of negotiable instruments. Permits avoidance of inadvertent accord and satisfaction if payee discovers the inadvertence and returns the check to the payor within 90 days. Bendeck/Waller, UHCL; waller@uhcl.edu UCC Article 3 and Unauthorized Signatures y y y Failure to examine forged signatures does not automatically create a liability for banks. Banks can't legally charge a customer's account for checks with unauthorized signatures. Customer may be held liable Bendeck/Waller, UHCL; waller@uhcl.edu UCC Article 4-Bank Deposits and Collections y y y y y When a bank may charge a customer's account. A bank's liability for failing to honor a good check. A customer's right to stop payment. Bank's option not to pay an item beyond stale date. Customer's duty to report unauthorized signatures or alternatives. Bendeck/Waller, UHCL; waller@uhcl.edu UCC Article 4A Electronic Transfers y y y Outlines risks, rights, and obligations of parties using the Fedwire, CHIPS, and SWIFT. Requires reasonable security procedures to be used to verify payment orders. Establishes that banks are not liable for consequential damages unless otherwise agreed in writing. Bendeck/Waller, UHCL; waller@uhcl.edu UCC Article 5-Letters of Credit y y y y Covers commercial letters of credit. Defines the roles of different parties involved in the issuance and settlement of the L/C. Specifies the obligations of the issuer to the applicant. Requires that the issuer must honor a demand for payment which compiles with the terms of the credit. Bendeck/Waller, UHCL; waller@uhcl.edu ...
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This note was uploaded on 04/27/2008 for the course FINC 4631 taught by Professor Waller during the Spring '08 term at UH Clear Lake.

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