Safety and soundness regulation wwwfdicgov to protect

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Unformatted text preview: ., all FIs providing a similar function whether banks, thrifts, or insurance companies should be similarly regulated in the provision of that service). Safety and Soundness Regulation To protect depositors and borrowers against the risk of FI failure due, for example, to a lack of diversification in asset portfolios, regulators have developed layers of protective mechanisms. These mechanisms are intended to ensure the safety and soundness of the FI and thus to maintain the credibility of the FI in the eyes of its borrowers and lenders. In the first layer of protection are requirements encouraging FIs to diversify their assets. Thus, banks are required not to make loans exceeding more than 15 percent of their own equity capital funds to any one company or borrower. A bank that has 6 percent of its assets funded by its own capital funds (and therefore 94 percent by deposits) can lend no more than 0.9 percent of its assets to any one party. The second layer of protection concerns the minimum level of capital or equity funds that the owners of an FI need to contribute to...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.

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