Chapter11 - Economic Analysis of Banking Regulation Chapter...

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Economic Analysis of Banking Regulation Chapter 11
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Stuff Review Sheet Test chapters: 6, 8, 9, 10, 11, 12 Wed, Ricketts 203, 7:00 No homework due Commercial Paper
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7 ways banks are regulated FDIC Regulators restrict assets Minimum bank capital requirements Chartered and Auditied Disclosure Req’t Consumer Protection Restrictions on Competition
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1) FDIC Regulation Bank panic ‘cycles’ every 20 years 1920’s: 600 insolvencies/year 1930-33: 2000 insolvencies/year 1934-81: 15 insolvencies/year FDIC closes insolvent banks (G-S, 1933) Payoff method Purchase and Assumption of bad debt method Used to be the most popular
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FDIC and Moral Hazard Depositors: no incentive to monitor bank mgmt. loan decisions Bankers: no worries about bad loan decisions causing savers to lose saving “Too big to fail” policy Taxpayers pay Glass-Steagall implications
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2) Regulators Restrict Assets E.g. no common stock allowed Limits on risky loans
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3) Minimum Bank Capital Req’t Traditional measure: Leverage Ratio Bank Capital/Assets (inverse of equity multiplier!!) Greater than 5%: well capitalized Less than 3%: Trouble! Basel Accord (1988) - International Hold 8% of ‘risk-adjusted’ assets Zero-weight: gov. securities 20% weight: claims on banks 50% weight: residential mortgages and municipal bonds 100% weight: loans to consumers and corporations Regulatory Arbitrage Fed in ‘96: 3 times max capital that could be lost in 10 days
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4) Banks chartered, audited Criteria Mgmt. adequacy Likely earnings Adequacy of capital Effect on competition (pre-1980)
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This note was uploaded on 04/07/2008 for the course ECON 4130 taught by Professor Springer during the Spring '08 term at Rensselaer Polytechnic Institute.

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Chapter11 - Economic Analysis of Banking Regulation Chapter...

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