ChapterTwoTheImpactofGovernmentPolicyandRegulationontheFinancial-ServicesIndustryCopyright

?2010byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/IrwinKeyTopicsThePrincipalReasonsforBankandNonbankFinancial-ServicesRegulationMajorBankandNonbankRegulatorsandLaws

EmergencyEconomicStabilizationActandtheGlobalCreditCrisisTheCentralBankingSystemOrganizationandStructureoftheFederalReserveSystemandLeadingCentralBanksofEuropeandAsiaFinancial-ServicesIndustryImpactofCentralBankPolicyTools2-2ReasonsfortheRegulationofBanksProtectionoftheSafetyofthePublic’sSavingsControloftheSupplyofMoneyandCreditEnsureEqualOpportunityandFairnessinAccesstoCreditPromotePublicConfidenceintheFinancialSystemAvoidConcentrationofPowerSupportofGovernmentActivitiesHelpforSpecialSegmentsoftheEconomy2-3PrincipalRegulatoryAgenciesUndertheDualBankingSystemFederalReserveSystemComptrolleroftheCurrencyFederalDepositInsuranceCorporationDepartmentofJusticeSecuritiesandExchangeCommissionStateBankingBoardsorCommissions2-4GoalsandFunctionsofBankRegulationsLawsLimitingBankLendingandRiskLawsRestrictingandExpandingServicesBanksandOtherDepositoryInstitutionsCanOfferLawsProhibitingDiscriminationinOfferingServicesLawsMandatingIncreasedInformationTransparencyandMoreAccurateFinancialReportingLawsRegulatingBranchBankingLawsAssistingFederalAgenciesinDealingwithFailingDepositoryInstitutions2-5NationalBankingAct(1863,1864)PassedDuringtheCivilWartoHelpFundtheWarCreatedANewDivisionoftheTreasury,theComptrolleroftheCurrencyCreatedNationalBankswithaFederalCharter2-6FederalReserveActof1913PassedAfteraSeriesofFinancialPanicsattheBeginningoftheCenturyCreatedtheFederalReserveSystemGavetheFedtheAuthoritytoActastheLenderofLastResortCreatedtoProvideaNumberofServicestoMemberBanksTodaytheFedControlstheMoneySupply2-7Glass-SteagallAct1933PassedDuringtheGreatDepressionSeparatedInvestmentandCommercialBankingCreatedtheFDICFedGiventhePowertoSetMarginRequirementsProhibitedInteresttobePaidonCheckingAccounts2-8FDICAct1935AddressedtheIssuesLeftOutoftheGlass-SteagallActGavetheFDICthePowertoExamineBanksandTakeNecessaryAction2-9SocialResponsibilityActs1968–FullInformationonTermsofLoansMustbeGiven1974–CannotBeDeniedaLoanBasedonAge,Sex,Race,NationalOriginorReligion1977–CannotDiscriminateBasedontheNeighborhoodinWhichBorrowerResides1987and1991–BanksMustDiscloseFullTermsonDepositandSavingsAccounts2-10DepositoryInstitutionDeregulationandMonetaryControlAct(DIDMCA)1980FirstofDeregulationActsPhasedOutInterestRateCeilingsAllowedInteresttobePaidonCheckingAccounts(NOWAccounts)TermTransactionAccountCreated–AllInstitutionswithTheseAccountsSubjecttoReserveRequirements2-11Garn-St.GermainAct1982ContinuedtheDeregulationofDIDMCACreatedMoneyMarketDepositAccountFDICCouldArrangeMergersAcrossStateLinesifNeededLoanLimitswereLiberalizedBanksinNeedofCapitalCouldGetItFromtheFDIC2-12CompetitiveEqualityinBankingAct(CEBA)1987AllowedCreationofSpecialBridgeBanksforFailedInstitutionsBridgeBanksAreSpecialNationalBanksOperatedbytheFDICBridgeBanksCreatedWhenBankisEssentialtotheCommunity2-13FinancialInstitutionsReform,RecoveryandEnforcementAct(FIRREA)1989CreatedinResponsetoLargeNumberofBankandS&LFailuresCombinedFDICandFSLICintotheFDICandDismantledS&LRegulatoryBodyCreatedtheRTCtoTakeontheAssetsofFailedS&Ls$50BillionAuthorizedtoHandleFailedInstitutions(LaterIncreased)AllowedBankHoldingCompaniestoPurchaseSavingsBanks2-14FDICImprovementAct1991MoveTowardsRe-regulatingtheIndustryRequiresRegulatorstoTakePromptCorrectiveAction(PCA)WhenaBankhasProblemsPromptCorrectiveActionBasedontheCapitalPositionoftheBankRequiresRegulatorstoDevelopNewStandardsfortheBanksTheyRegulate2-15Riegle-NealAct1994Riegle-NealInterstateBankingandBranchingEfficiencyActrepealedprovisionsoftheMcFaddenActof1927BankHoldingCompanyCanAcquireBanksNationwideConsolidationofInterstateBHCsintoBranches2-16Gramm-Leach-BlileyAct1999PermitsBanking-Insurance-SecuritiesAffiliations(withregulator’sapprovalandarewellcapitalized)ConsumerProtectionsforConsumersPurchasingInsuranceThroughaBankMustDisclosePoliciesRegardingtheSharingofCustomers’PrivateInformationCustomersareAllowedto‘OptOut’ofPrivateInformationSharingFeesforATMUseMustbeClearlyDisclosedIdentityTheftisMadeaFederalCrime2-17TheUSAPatriotAct2001RequiresBanksandFinancialServiceProviderstoEstablishtheIdentityoftheirCustomersRequiresBanksandFinancialServiceProviderstoChecktheCustomer’sIDAgainstGovernment-SuppliedListsofPossibleTerroristsandTerroristOrganizationsReportSuspiciousActivity(SARs)inCustomer’sAccounttotheUSTreasury2-18TheSarbanes–OxleyAccountingStandardsAct2002CreatesPaneltoPromoteAccurateandObjectiveAuditsofPublicCompaniesTopCorporateOfficersMustVouchfortheAccuracyoftheirCompanies’FinancialStatements2-19FairandAccurateCreditTransactions(FACT)Act2003PassedinResponsetoIncreasedProblemofIdentityTheftFederalTradeCommissionMustMakeitEasierforConsumersVictimizedtoFileTheftReportIndividualsandFamiliesareEntitledtoOneFreeCreditReportEachYear/cra.index.jsp2-20Check212004ReducestheNeedforBankstoTransportPaperChecksCanProvideaCustomerwith‘Substitute’CheckWhichContainsImageofFrontandBackofOriginalCheckAllowsforElectronicTransmissionof‘Substitute’ChecksforClearingofChecks2-21FederalDepositInsuranceReformAct2005FirstSignificantIncreaseFDICCoveragein25yearsRaisesFDICInsuranceLimitsfrom$100,000to$250,000forRetirementAccountsFederalRegulatorsareEmpoweredtoPeriodicallyAdjustDepositInsuranceLimitsforInflationMergesBankInsuranceFund(BIF)andSavingsAssociationInsuranceFunds(SIF)intoSingleDepositInsuranceFund(DIF)2-22EmergencyEconomicStabilizationActof2008PassedinResponsetoHomeMortgageandFinancialSystemProblemsTemporarilyIncreasesFDICDepositInsuranceCoveragefrom$100,000to$250,000forAllDepositsuntilYear-end2009AllowstheUSTreasurytoAddCapitaltoBankstoEnhanceLending/press/releases/hp871.htm2-23UnresolvedRegulatoryIssuesDoestheregulatorysafetynetsetuptoprotectsmalldepositorsencouragefinancialfirmstotakeonaddedrisk?Doesderegulationexacerbatethetoo-big-to-failproblem?Asfirmsbecomelargerandmorecomplex,canthegovernmentregulatorseffectivelyoverseewhatthesefirmsaredoing?Canwesimplifythecurrentregulatorystructure?Whatisfunctionalregulationandwillitreallyworkunderthecurrentstructure?2-24QuickQuizBrieflydescribevarioustypesofbankingregulationsandtrytomatcheachmajorlawwiththemaingoals/functionsofregulations(useslide5).Howhavebankfailuresinfluencedrecentlegislation?WhatchangesinregulationdidtheGLBAbringabout?Whatregulatoryissuesremaintoberesolved?2-25RegulatingNonbankFinancial-ServiceCreditUnionsNationalCreditUnionAdministrationSavingsAssociations

OfficeofThriftSupervisionMoneyMarketFunds

SecuritiesandExchangeCommissionInsuranceCompaniesStateInsuranceCommissionsFinanceCompanies

StateGovernmentsMutualFundsSecuritiesandExchangeCommissionSecuritiesBrokersandDealersSecuritiesandExchangeCommissionFinancialCongl