ECN 481 (7), Bank Regulation

ECN 481 (7), Bank Regulation - Bank Regulation (US) Major...

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Bank Regulation (US) Major Duties: Chartering and Examination Chartering -- Granting the bank permission to begin business. -- National Banks -- State Banks Examination – Supervision of bank activity, including periodic auditing of bank records.
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Regulators: Commercial Banks Comptroller of the Currency -- charterer and primary examiner of national banks State Banking Authorities -- charterer and primary examiner of state banks Federal Reserve -- secondary examiner of member banks
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Federal Deposit Insurance Corporation (FDIC) Secondary examiner to some banks Insures bank deposits guaranteed up to $100,000 per depositor
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Deposit Insurance: Pros and Cons Pros -- protects customers -- greatly reduces bank runs Cons -- gives banks implicit incentive to engage in bad business practices
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Moral Hazard and Adverse Selection Moral Hazard -- Those who have insurance may use it as a “safety net,” a justification to take on greater risk. Adverse Selection -- Insurance tends to attract people most likely to take advantage of it.
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FDIC -- Resolving Situations With Problem Banks Options: handling problem banks Close bank , pay off depositors (e.g. Freedom National Bank of RI) Merge bank with a healthy bank (e.g. Syracuse Savings Bank) Decisions unique to individual cases (e.g. Bank of New England) - the “too big to fail” policy
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Regulators -- Savings Banks and Savings and Loans Deposit Insurance: FDIC Primary Examiner: Office of Thrift Supervision (OTS) Most Savings and Loans: members of Federal Home Loan Bank System (FHLBS) Regulatory system -- overhauled in past decade
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Credit Unions Most are members of the National Credit Union Administration (NCUA). Deposit Insurance: National Credit Union Share Insurance Fund (NCUSIF). No major overhauls to regulatory system.
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The Savings and Loan Crisis (US): A Case Study Affected all of banking system, Savings and Loans the most dramatic.
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US Banking in the 1950s and 1960s – Fat City Regulation Q – mandated ceilings on bank deposits (no more than 3% max), kept cost of funds down for banks Low inflation, low interest rate environment (e.g. 6% fixed rate mortgages) The “3-6-3” Rule of Banking
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The 1970s -- Banking in a Weakened State Disintermediation -- due to rising market interest rates with Regulation Q, along with the emergence of Money Market Mutual Funds. Interest Rate Risk -- inability to pass on rising interest rates to existing loans
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Losing Member Banks Traditional Advantage to Membership -- Use of the Discount Window. Traditional Disadvantage to
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ECN 481 (7), Bank Regulation - Bank Regulation (US) Major...

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