The Banking Industry-Regulation & Structure

The Banking Industry-Regulation & Structure - The...

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The Banking Industry: Regulation and Structure ECON 3381 A. Hales
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Types of Regulation Entry and Chartering Regulation: limits the number of banks in any given financial services sector Safety and soundness regulation: designed to protect depositors and borrowers against the risk of failure Monetary Policy Regulation: regulators control and implement monetary policy by requiring minimum levels of cash reserves to be held against deposits Credit allocation regulation: supports lending to socially important sectors such as housing and farming Consumer Protection Regulation: prevents unfair discrimination in lending Investor Protection Regulation: protects investors who directly purchase securities or indirectly through mutual or pension funds managed by the bank
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Entry and Chartering Regulation: Product Expansion Commercial and Investment Banking After the 1929 crash, about 10,000 banks failed between 1930-1933. The Pecora Commission investigated the causes of the crash and concluded that there were concerns with the riskiness and conflicts of interest that arise when commercial and investment activities are linked in one organization. Banking Act (1933)/Glass-Steagall Act : Separated commercial banking from investment banking, establishing them as separate lines of commerce
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Entry and Chartering Regulation: Product Expansion Commercial and Investment Banking cont. 1963-1987: Banks challenged restrictions (including those on underwriting municipal revenue bonds and commercial paper) 1987: Federal Reserve Board allows bank holding companies to establish separate Section 20 affiliates as investment banks. These Section 20 affiliates conducted investment activities. This did not violate Section 20 of the Glass-Steagall Act since revenue generated from securities underwriting was less than 5% (later 10% and later 25%) of the total revenues generated. 1997: The Fed and the OCC expanded bank holding companies’ permitted activities. Specifically, commercial banks were allowed to acquire existent investment banks rather than establish completely new Section 20 subsidiaries. This resulted in a large number of mergers & acquisitions between commercial and investment banks.
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Product Expansion Commercial and Investment Banking cont. Financial Services Modernization Act (1999)/Gramm-Leach- Bliley Act: repealed Glass-Steagall Act and allowed for the creation a financial services holding company that could engage in banking activities and securities underwriting. Furthermore, commercial banks that belong to a financial services holding company could take a controlling interest in a nonfinancial enterprise as long as two conditions are met. The investment cannot be made indefinitely.
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The Banking Industry-Regulation & Structure - The...

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