Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 18 pdf

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Chapter 18
Bank Regulation
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Background

Regulatory structure

Deregulation Act of 1980

Garn-St Germain Act

Regulation of deposit insurance

Regulation of capital

Regulation of operations

Regulation of interstate expansion

How regulators monitor banks

The “too-big-to-fail” issue

Global bank regulations
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Background

The banking industry has become more
competitive due to deregulation

Banks have more flexibility on the services they offer,
the locations where they operate, and the rates they
pay depositors

Banks have recognized the potential benefits from
economies of scale and scope

Bank regulation is needed to protect customers
who supply funds to the banking system

Regulators are shifting more of the burden of risk
assessment to the individual banks themselves
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Regulatory Structure

The U.S. has a dual banking system consisting
of federal and state regulation

Three federal and fifty state agencies supervise the
banking system

A federal or state charter is required to open a
commercial bank

National versus state banks


Federal charters are issued by the Comptroller of the
Currency

State banks may decide to become members of the Fed

35 percent of all banks are members of the Fed, comprising
70 percent of deposits
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Regulatory Structure (cont’d)

Regulatory overlap

National banks are regulated by the
Comptroller of the Currency, the Fed, and the
FDIC

State banks are regulated by the state
agency, the Fed, and the FDIC

Perhaps a single regulatory agency should be
assigned the role of regulating all commercial
banks and savings institutions
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Regulatory Structure (cont’d)

Regulation of bank ownership

Commercial banks can be either
independently owned or owned by a bank

holding company

Most banks are owned by BHCs

BHCs have more potential for product diversification
because of amendments to the Bank Holding
Company Act of 1956
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Deregulation Act of 1980

The Depository Institutions Deregulation and Monetary
Control Act (DIDMCA) was enacted in 1980

DIDMCA has two categories of provisions:

Those intended to deregulate the banking industry

Those intended to improve monetary control

The main deregulatory provisions are:

Phaseout of deposit rate ceilings

Allowance of NOW accounts for all depository institutions

New lending flexibility for depository institutions

Explicit pricing of Fed services
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Deregulation Act of 1980 (cont’d)


DIDMCA also called for an increase in the
maximum deposit insurance level from $40,000
to $100,000 per depositor

Impact of DIDMCA

There has been a shift from conventional demand
deposits to NOW accounts

Consumers have shifted funds from conventional
passbook savings accounts to various types of CDs

DIDMCA has increased competition between
depository institutions
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Garn-St Germain Act of 1982

The Act:

Permitted depository institutions to offer money market
deposit accounts (MMDAs), which have no interest
ceiling

MMDAs are similar to money market mutual funds

MMDAs allow depository institutions to compete against
money market funds in attracting savers’ funds

Permitted depository institutions to acquire failing

institutions across geographic boundaries

Intended to reduce the number of failures that require
liquidation
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Regulation of Deposit Insurance

Federal deposit insurance has existed since the
creation of the FDIC in 1933 as a response to
bank runs

About 5,100 banks failed during the Great Depression

Deposit insurance has increased from $2,500 in 1933
to $100,000 today

Insured deposits make up 80 percent of all commercial
bank balances

The FDIC is managed by a board of five directors, who
are appointed by the President
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Regulation of Deposit Insurance
(cont’d)

The FDIC’s Bank Insurance Fund is the pool of funds
used to cover insured deposits

The fund is supported with annual insurance premiums paid by
commercial banks, ranging from 23 cents to 31 cents per $100 of

deposit

In 2003, three BIF-insured banks failed with total assets of $1.1
billion

As of 2004, the BIF balance was about $34 billion

In 1991, the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) was passed

Phased in risk-based deposit insurance premiums to counteract
the moral hazard problem
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Regulation of Capital

Capital requirements force banks to
maintain a minimum amount of capital as a
percentage of total assets

Banks would prefer low capital to boost their
ROE

Regulators have argued that banks need
sufficient capital to absorb potential operating
losses
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Regulation of Capital (cont’d)

Basel Accord of 1988


Central banks of 12 major countries agreed to uniform capital
requirements

The Accord was facilitated by the Bank for International
Settlements (BIS)

The key contribution of the Accord is that the requirements were
based on the bank’s risk level, forcing riskier banks to maintain a
higher level of capital

In 1996, the Accord was amended so that bank’s capital level also
account for its sensitivity to market conditions

Very safe assets are assigned a zero weight, while very risky
assets are assigned a 100 percent weight
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Regulation of Capital (cont’d)

Basel II Accord

The Basel Committee has worked on an
accord that would refine the risk measures
and increase the transparency of a bank’s risk
to its customers

The three parts of the Accord are:

Revise the measurement of credit risk

Explicitly account for operational risk


Require more disclosure for market participants
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Regulation of Capital (cont’d)

Basel II Accord (cont’d)

Revised measures of credit risk

The risk categories are being refined to account for some
possible differences in risk levels of loans within a category

A bank’s loans that are past due will have a weight of 150%
applied to their assets

Banks can use the internal ratings-based (IRB) approach to
calculate credit risk, in which banks provide summary statistics
about their loans to the Basel Committee

The Committee then applied pre-existing formulas to the
statistics in order to determine the required capital level
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Regulation of Capital (cont’d)

Basel II Accord (cont’d)

Accounting for operational risk

Operational risk is the risk of losses from inadequate or failed
internal processes or systems


Intended to encourage banks to improve their techniques for
controlling operational risk to reduce bank failures

Initially, banks can use their own methods for assessing their
exposure to operational risk

The Basel Committee suggests the average annual income
generated over the last three years
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Regulation of Capital (cont’d)

Basel II Accord (cont’d)

Public disclosure of risk indicators

The Basel Committee plans to require banks to
provide more information to existing and
prospective shareholders about their risk exposure
to different types of risk

This would provide existing and prospective
investors with additional information about a bank’s
risk
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Regulation of Capital (cont’d)

Use of the value-at-risk method to determine
capital requirements


Under the 1996 amendment to the Basel Accord,
capital requirements on large banks were adjusted to
incorporate their own internal measurements of
general market risk

Market risk is the exposure to movements in market forces
such as interest rates, stock prices, and exchange rates

Capital requirements imposed are based on the bank’s own
assessment of risk when applying the VAR model

VAR is the estimated potential loss from trading businesses
that could result from adverse movements in market prices

Banks typically use a 99 percent confidence level