Chapter 13 - Answers to Chapter 13 Questions 1. Regulators...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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. 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 BIF 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. Since 1863, the United States has experienced several phases of regulating the links between the commercial and investment banking industries. Early legislation, such as the 1863 National Bank Act, prohibited nationally chartered commercial banks from engaging in corporate securities activities such as underwriting and distributing of corporate bonds and equities. As the United States industrialized and the demand for corporate finance increased, however, the largest banks found ways around this restriction by establishing state-chartered affiliates to do the underwriting. 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 1931 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

Chapter 13 - Answers to Chapter 13 Questions 1. Regulators...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online