Outline 2299

1
Outline 2/2/99

• Finish notes from
• Stock project
• Bank project
• Financial Intermediaries - depository
• Bank regulation
• Current events

2
Learning Objectives

• Review trends - depository institutions
• Regulation of institutions
• Why
• Who
• Historical evolution

3
Financial IntermediariesDepository Institutions

• Commercial banks
• Thrifts
• savings and loans
• savings banks
• credit unions

4
Comparisons of Depository Institutions
Percent of Assets
5
Commercial Banks

• Federal funds market
• Classifications of banks
• money center bank
• regional banks
• super-regional
• other
• smaller community banks

6
Number of U.S.
7
Loan Portfolios of All U.S. Banks
8
Trends in the industryIncrease in multi-state
organizations
9
Multi-state organizations
10
Concentration of Largest Banks
11
Top 10 Banking Companies Market Capitalization
12
Major Players
13
Largest Mergers
14
Savings and Loans

• Distinctive characteristics
• concentrate on home mortgages
• higher reliance on savings deposits
• Savings banks (SB) vs. SLs
• SB less reliance on mortgage loans
• SB higher proportion of investments in corporate
  stocks and bonds
• SB more reliant on deposits
• SB higher net worth to assets (book value)

15
Financial Intermediary RegulationRegulations
16
Why regulate banks?

• Protection of depositors (small)
• Monetary stability
• Maintain an efficient and competitive financial
  system
• Consumer protection

17
What Regulation is not intended to accomplish

• keep banks from failing
• substitute government decisions for bankers
  decisions
• give preferential treatment to specific groups or
  institutions.

18
(No Transcript)
19
History of Bank Regulation

• Dual banking system (late 1800s)
• Development of the Federal Reserve System (early
  1900s)
• McFadden Act (1927)
• branching of national banks subject to the same
  as state banks
• liberalized national banks securities
  underwriting activities
• Banking Acts of 1933Glass Steagall
• prohibited banks from underwriting securities
  (four exceptions)
• municipal bonds, US. government bond, private
  placements
• real estate loans
• FDIC established

20
More history

• 1956 Bank Holding Company Act
• restricted the banking and nonbanking activities
  of multi-bank holding companies
• Empowered the Fed to regulate MBHC by
• determine permissible activities
• exercising supervisory authority
• exercising chartering authority
• conduct examinations
• 1970 Amendments
• extended to one-bank holding companies
• restricted activities to closely related to
  banking
• 1978 International Banking Act
• regulated foreign banks in US
• subjected to McFadden and Glass-Steagall
• access to discount window, insurance and fedwire

21
SL Chronology

• 1960-80 - Volatile and high interest
  rates and inflation rates
• 1980-82 - DIDMCA - Tax
  motivated increased in - RE
  construction - Reduced net worth
  requirements
• 1982-85 - Reduced net worth requirements
  again - Garn St. Germain Act
  of 1982 - State chartered
  changes - Increase net worth
  requirements - Limits on
  brokered deposits
• 1986-89 - Substantial losses incurred
  - Increase net worth requirements
  with links to interest rate risk
  - FIRREA

22
Deposit Institutions and Monetary Control Act of
1980 ( DIDMCA)

• Objective to increase competition by putting
  banks on a more equal footing with nonbank
  depository institutions
• Provisions
• phase out of interest rate ceilings
• Authorized NOW accounts
• uniform reserve requirements for state and
  national banks
• increased FDIC coverage to 100,000
• expanded loan authorities for federal thrifts
• consumer
• commercial

23
Garn St. Germain (DIA)

• Garn St. Germain Depository Institution Act (DIA)
• introduced MMDA and super NOWS
• allowed fed thrifts expanded powers
• business deposits
• expanded govt securities commercial loans
• allowed commercial banks to acquire failed
  savings banks

24
Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA)

• Objective to halt the crisis of the thrift
  industry and to prevent from happening again
• Created the Resolution Trust Company (RTC)
• Equalized rules thrifts and banks
• Insurance fund administered by FDIC (SAIF)
• Increase emphasis on mortgage lending (less on
  junk bonds)
• easier to convert thrifts to commercial banks
• Office of Thrift Supervision is chartering agency
  for thrifts

25
1991 Federal Deposit Insurance Corporation
Improvement Act of 1991

• introduced prompt corrective action by regulators
• introduced risk based insurance premiums
• limited the use of too big to fail bailouts

26
1994 Riegle Neal Interstate Banking and Branching
Efficiency Act

• permits wider access of BHCs to acquire banks in
  other states
• invalidates state laws on reciprocating
  agreements
• June 1997, BHCs will be permitted to convert out
  of state banks into branches
• newly chartered banks will be permitted to branch
  interstate

27
Nonbank Activities

• Concerns ?
• Activities
• Consumer financing
• Securities brokerage
• Mortgage banking
• Consumer financing
• Leasing
• Data processing
• Insurance underwriting
• Small business investment
• Empirical Evidence
• nonbank subs. are more profitable
• nonbank subs. are better capitalized
• nonbank subsidiaries may be riskier

28
Bank Holding Companies

• Permitted
• make loans
• perform trust services
• service loans
• leasing personal property
• appraising real estate
• provide book keeping and data processing services
• provide insurance services related to extension
  of credit
• issue money orders
• Forbidden
• underwriting life insurance not related to credit
• real estate brokerage
• land development/property management

29
Regulations for Depositor Protection and
Monetary Stability

• General lending and investment restrictions
• real estate loans
• supervisory caps on loan to value
• requirements on securities loans
• loans to a single borrower (15 capital)
• loans to insiders (bank board approval)
• Capital standards
• details later (capital risk management)
• Commercial banks relationships to investment
  banks

30
Regulations for Depositor Protection and
Monetary Stability (cont.)

• Reserve requirements
• details (liquidity risk management)
• Brokered deposits
• Off balance sheet activities
• letters of credit
• loan commitments
• interest rate swaps
• Examinations

31
Regulations for an Efficient and Competitive
Financial System

• Chartering
• national
• state
• Anyone desiring FDIC insurance must be
  investigated in 7 areas
• 1. financial history
• 2. adequacy of capital
• 3. future earnings potential
• 4. character and fitness of managers
• 5. risk of the institution
• 6. convenience to community
• 7. consistency mission of Fed. Deposit Insurance
  Act.
• Expansion and merger activities
• Concentration Issues

32
Regulations for an Efficient and Competitive
Financial System (cont.)

• Expansion and merger activities
• Concentration Issues

33
Regulations for Consumer Protection

• Three main categories
• disclosure
• civil rights
• safeguards against abuse in the extension,
  collection, and reporting of consumer credit
• Disclosure laws
• truth in lending
• truth in savings
• other disclosure acts

34
Regulations for Consumer Protection (cont.)

• Civil Rights
• Equal credit opportunity acts
• Community Reinvestment Acts
• ascertaining community credit needs
• marketing and types of credit offered
• geographic distributions
• discrimination
• community development efforts
• Others

35
Specific Issues

• Glass-Steagall
• Insurance regulation
• Geographical bank expansion