(Chapter D2 The Inpac of Coversueat Poicy and Repletion onthe Facial Services Indusny 2-11. How have bau flazes influenced seceat legislation? Recent baal floes have ennsad hiage loses to federal inurancs cesarves and damaged public confidence m the banking systemn Recent legislation has tried to address these sss by ‘providing cegulates with new tools o deal With the faifwes, suchas the bridge bank device. and by granting banks. through regulation, somewhat broader service powers and more aventes for ‘geographic enpaasion rough branch offices aud holding companies in order to help reduce thei Fac exposuie In edition, the increase in baak failaes has focweed atteution oa the iarurence ‘premio baake pay aad theevgia the FDIC Inuprovensent Act allowed the FDIC to mors towards fae baced insurance premivine 2-12. What changes i regulation did the Gramm-Leach-Biiley (Financial Services Modernization) Act bring about? Why? “The most impoctant aspect ofthe law ist allow US. bank, insuraace companies aud secusities companice to affate vith each other either throvgh » Leldiag company stricture or throvel 9 ‘baal: subsidiary: The puupose ofthis avr i to allow these companies to diversity their service offerings and recace their overall isk Ta addition it ie thought tha thie name to offer customers the convenience of one stop shopping 2-13, What new regulatory isues emai to be esolved now shat iaerstate banking is possible ani secuciy and insucence services ate allowed to commingle with banking? ‘There are several Key ieues that remain to be reeoived. Oue inate ie concerned with what re claovld do about she govemaneataleafety aet Ws need to balaace rice taking by finaucial firme ‘with safety Zor depositors Another axpact of tis iste is hon to protect taxpayers i Financial firms are allowed to take on more risk Another issue that needs to be resolved is what to de about nancial conglomerates. We need 10 ‘be sure thet the fizaucial conglomerate does nol use the resources ofthe bau to prop another aspect of their busixess. In addition, regulators aced.to be better tained to adequately regulate the more complex ceganizatious and function regulation aeeds to be seviewed periedically to sicke owe it workiag. ‘A third area tat needs tobe sesolvec is whether benksing and commerce should be mixed ‘Should a bank sell cars slong with credit cards ard other financial services 214 Why ast we be conceraed about privacy inthe shaciag and woe of fasncial-service ‘cantomer's information? Cen the Siaencial system opersteefficieatly ifthe shaving of nonpublic snformation is forbidden? How far, sn your opinion, shenld we go sn regulating Who gets access to private mformation? Recommended for you \ Document continues below CH 15 Testing for Differenceseee eee eee Ged eee eee ww _ (Chapter 02 ~The Impact of Goverment Policy and Regulation on the Fimacial-Services Industry eis important fo be coucemed about how private information is shared because itis possible to misuse the information. For example, if an individual's medical condition is knowa to the bank. through its msurance division, the bank may deny a loan based on this confidential information, ‘Thay can also share this information with outside parties unless the customer states in writing that this information canaot be shared. (On the other hand, there could be much duplication of effort if no shaving information is allowed, This would lead to inefficiencies and higher costs to consumers. In addition, sharing of, information would allow targeting of services to particular customer needs. At this point, no one is quite sure what information and how it will be shared. Tt appears that there will evennually be a compromise betercea customers’ aceds for privacy and the financial-services company’s need for to share that information, 2-15. Why were the Sarbanes-Onley, Bank Secrecy and USA Patnot Acts enacted in the United States? What impact are these laws and their supporting regulations likely to hove on the financial-services sector? ‘The Bank Secrecy Act sequires any cash transaction of $10,000 or more be reported to the government and was passed 10 prevent money laundering by criminal organizations ‘The USA Patriot Act was enacted after the attacks of September 11 and i devigned to find and prosecute terrorists. It was a series of amendments to the Bank Secrecy Act. It requires banks and financial service providers to establish the identity of any customer opening or changing sccounts in the United States Many tanks are however concemed about the cost of complinnce ‘The Sarbanes-Osley Accounting Standards Act came as a sesponse to the disclosure of manipulation of cosporate financial reports and questionable dealiags among leading commercial firms, banks and accounting firms. It prohibits false or misleading information about the financial performance of banks and other financial service providers aad generally tries to enforce higher standards in the accounting profession, 2-16 Explain how the FACT. Check 21, 2005 Bankruptcy, Financial Services Regulatory Relief, and Federal Deposit Insurance Reform Acts are likely to affect the revenues and costs of financial firms and their service to customers FACT requires the FIC to make st easier for individuals victimized by identity theft to file a theft report and requires credir bureaus to help victims resolve the problems. This should make it casier for customers to handle identity thef problems and may reduce costs to the financial sastitutions that serve thece customers. Financial institations should be able to spend less on reimbursing customers for theft problems and periaps the instances of identity theft will also be seduced at the same tue. (Chapter 02 - The lapast of Govenumaat Po -y and Regulation on the Financial Services IndustryChapter 02 - The Impact of Government Policy and Regulation oa the Financial Services Industry Check 21 allows financial institutions to send substitute checks to other banks to clear checks rather than the checks themselves. The substitute checks can be electronic images that can be transferred in an instant at a much lower cost to other institutions. This should reduce costs to institutions as they do not have to have an employee physically transfer checks anymore. In addition, financial institutions should know more quickly whether a check is good and this, should reduce fraud and other costs associated with bad checks 2005 Bankruptcy Law requires that all higher income borrowers to pay back at least a portion of the money they have borrowed to the bank. Higher income borrowers will be required to make payment plans rather than have all of their debts forgiven. This should lower bad debt costs to financial institutions and may lower borrowing costs for all borrowers, The Financial Services Regulatory Relief Act of 2006 loosens regulations on depository institutions, adds selected new service powers to these institutions, and grants the Federal Reserve authority to pay interest on depository institutions’ legal reserves if deemed necessary. Federal Deposit Insurance Reform raises the deposit insurance limits for certain retirement accounts and allows regulators to periodically adjust deposit insurance limits for inflation. This should allow investors to put more money into insured deposit accounts and may allow banks to have a more stable and reliable source of funds for loans and other investments. This will probably have the effect of increasing bank revenues and/or reducing expenses for the bank. For all of these new laws, the effect should be to make the bank more profitable because of higher revenues or lower expenses, At the same time these new laws allow financial institutions to better serve their customers 2.17, In what ways is the regulation of nonbank financial institutions different fiom the regulation of banks in the United States? How are they similar? Most nonbank financial institutions are considered “vested with the public interest” and therefore, face as close supervision from federal and state supervisors as banks do. However, some institations are solely regulated at the federal level while others are only regulated at the state level.Chap-O2 - key for proble... © N (Chapter 02 - The Innpct of Govesnment Policy and Regultin on the Finacial Services Industry 2-18. Which financial-service firms are regulated primarily atthe federal level and which at the state level? Can you see problems in this type of regulatory structure? Regulted othe state level ‘Regulated at he decal level ‘Mnal Fads Savings and Loans and Savings Banks Sectrty Brokers and Dealer and lavesumeat | Money marke funds Banks Life aad propeny/eaalsriamrance Credit Unions companies Finance companics ‘Murual funds Security brokers and dale Security brokers and dealers Hedge Fade Fannciol conglomerates Some regulators and experts are concerned because they feel that state regulators might not have the expertise to deal with the new mote complex financial fin that exists today They are also. concerned because the new ‘functional’ regulation is not necessarily coordinated berwveen diffezent segulatory agencies. Oaly time will tell if this functional regulatory strucruce is effective. 219. Can you make a case for having only one regulatory agency for financial service firms? Yes a case ean easily be made for financial service firms. Problems im one arca such as secuity brokerage services o insurance may eventually lead to problems in the traditional banking area of viee Versa, One regulatory agency might be more likely ro find these overlapping problems and prevent them before they cause the collapse of the entire organization Ta addition, one regulatory agency may be able to bereer identify and prevent the inherent condlicts of intesest that ‘esist when a large Ginancéal conglomerate is formed 2-20. What is monetary policy? Monetary policy consists of regulation and control over the growth of money and credit m an attempt to pursue bread economic goals such as full employment, avoidance of inflation, and sustainable economic growth Its principal tools are open market operations, changes im the discount (lending) rate, and changes in reserve requirements behind deposits, (Chapter O2 The Innpct of Goresment Policy an Regulation op the Financial Services Industry What services does the Federal Reserve provide to depository institutions?— Seti arcs env Pana — Chap-O2 - key for proble... 6 Q CChapie: 02 The impact of Goverment Policy and Reguston oo the Fimasea-Services doy 2-21. What services does the Federal Reserve provide to depository institutions? Many services needed by banks are provided by the Federal Reserve Banks Among the most tumportant services provided by the Fed are checking clearing, the wiring of fds, shipments of currency and coin. lorns from the Reserve banks to qualified depository institutions. and the supplying of information concesning economic and financial trends and issues. The Fed began charging for its vexviees in order to help secoves the added costs of detegulation which made mote mtitutions eligible for Federal Reserve services and also to eucoage the private marketplace to develop and offer similar services (such as check clearing and wire transfers) How does the Fed affect the banking and financial system through open market operations (OMO)? Way is OMO the preferred too! for many central banks around the globe? (Open market operations consist of the buying and selling of securities by the central bank in an effort to influence and shape the conse of interest rates and the growth of money and credit Open-market operations, therefore, affect bank deposits - their Yotume and growth ~ as well as the volume of lending and the interest rates attached to bank borrowings aud loans as well as the value of bank stock OMO isthe preferred tool, because itis also the Cental Bank's most flexible Cool. Ic can be used every day and any anstakes eam be quickly reversed 23. Whats a primary dealer and why are they important? A primary dealer is 2 dealer in U.S. Treasury Bills and other securities that meets the Federal Reserve System requirements for trading divecly with dhe Fed’s tading desk inside the New ‘York Federal Reserve It is through these trades with primary dealers that the Federal Reserve carries out its monetary policy objectives and influences the economy including the supply of money and eredit and interest rates. Primary dealers have an integral sole to play inthe economy ofthe US. 24, How can changes i the central bank loan (discount) rate and reserve requirements affect the operations of depository stitutions? What happens to the legal reserves of the banking system whea the Fed grants loans through the discount window? How about when these loans ate repaid? What are the effects of aa increase in reserve requirements? ‘The Discount Window isthe department in each Federal Reserve Bank that seceives requests co borrow seserves from banks aud other depository institutions which aze eligible to obtain exedit from the Fed for short periods of tise. The rate charged om such loans 1s called the discomst rate Reserve requirements are the amount of vault cash and deposits atthe Federal Reserve banks that depository institutions raising fuads from sources of reservable liabilities (such as checking accounts, business CDs, and borrowings of Eurodollas fiom abroad) must hold. (Chapter 02 The lnspact of Gaerne Poliy and Regulation on the Fiaasca)- Services sty If the Fed grants loans $200 millon in seserves froma the diccowt window, total reserves will ise by the amount of the discount window loan, but then will fall when te loaa ie repaid.= \ Stucocu YA Chap-O2 - key for proble... 6 Q (Caper 02 ~The Impact of Goverenen Pelicy ad Region ote Financia Serves Inds 18th bye Fed grants loans $200 million in reserves from the discouat window, total reserves will rise smouat ofthe disconat window loaa, but then wll fall when the losa i repaid Inereasing reserve requirement means that depositary institutions mmst keap more walt cash aad eserves with the Federal Reserve for each deposit econ they bold. This woud have the offset fof making less money available for loans. Sitce this has a multiplicative effect om the economy i cau have a severe effect on the total amount of loaus made aud on the growth of the money supply that results How did the Federal Rescive change the policy aud practice ofthe discount window secently? Why was this change made? ‘The Fed created two nev loan types, primary and secondary credit, which replaced the existing adjustment and extended credit. Primary credit is extended to sound borrowing instirutions ata rate slightly higher than the federal fands tate Secondary credits extended to msitutions that do not qualify for primary eredit fox temporary funding needs at a rae slightly above the prime rate ‘These changes were implemented to encourage greater use of the discount windew and to bring reater stability the Zederal funds sate and o the money market asa whole 2-26. How do the structures of the European Central Bank (ECB). the Bank of Japan . and the People’s Bank of China appeat to be similar to the stretuse of dhe Federal Resesve System? How are these powerful and influential central banks different from one another? Like the Fed the ECB consists of a governing board and a policy making council and just like the Fed's board of governors works with the 12 regional Federal Reserve banks the ECB asa ‘cooperative asrangement with each EU member nation’s central bank. The policy mean of the ECB however isa lot simpler than its counterpart atthe Fed. The central goal is price stability. ‘which is largely achieved through open market operations and reserve sequirements ‘The PBC’s pursuit of monerary policy is supported by an advisory group, the Monetary Policy Committee (MPC), which meets atleast quarterly and includes the PBC Governor. the Chas of the China Bank Regulatory Commission, the Finance Minister, and other members ofthe Chinese government. au (Chapter 02 ~The Impact of Goreramet Pliy ané Reglaion os te Fasacial Services Eada= \S ) Stuaocu QA Chap-O2 - key for proble. © Q (Chapter 02. The Impart of Goveramet Pliy ané Raglaion os te Faaacisl Services Indu ‘The BOT regulates the volume of money and interest rates through open market operations (nsing securities issued by the Japanese government and commercial bills), by providing emergency loans to institutions in trouble and through the use of moral suasion to convince financial mangers to adhere to the BOM’s policies. However, the Bank of Japan (BOD) the People’s Bank of China (PBC). and central banks ia ‘other pasts of Asia appecr to be under close control of tueir governments, and several of these countries have experienced higher inflaion rates, volatile cwreucy prices. and ores significant ‘economic prablems in recent years aobems 2-1. For each of tte actions described, explain which government agency or agencies a ‘nancial manager must deal with and what banking laws are iavalved Chartering a new bank Establishing new bank braach offices, Forming a bauk holding company (BHC) or financial holding company (FHC). Completing a baak merger. ‘Malang holding company acquisitions of nonbank businesses. moo A. Forchartering a new bank in the United States either the state banking comission of the state where the bank 3s to be headquartered must be consulted ex the Comptroller of the ‘Currency must be sent an application for a national charter. The National Banking Act govems national charters while state charters are governed by niles laid down in state ‘banking statutes. B. Requests for establishing new branch offices must also be made of the bank's chartering agency ~ esther che state banking commission for state-chestered bans or the ‘Comptroller of the Currency for national banks in the United States © Requests for holding company formation svust be submitted tothe Federal Reserve Board ‘or, for certain routine transactions, to the Federal Reserve Bank ia the district. Some states requice their banking commissions to he notified if a holding company’ acquires 3 ‘bank within the state's borders, 12 out of 16 @ ShareChap-O2 - key for proble. - Ox (Chapter 02 - Tae lapse of Goveranea! Policy ané Regulation oa te Finacial Services Iadusy D, ‘The Bank Merger Act requires the approval of a bank's principal federal supervisory agency for a proposed merger even ifthe bank is state chartered. Mergers involving national banks must be approved by the Comptroller of the Currency and by the state ‘banking commiccion iff bank has a state charter of incosporation. The merger must alco be reviewed by other federal agencies that have supervisory sespeasibility for a bak. such 26 the FDIC or the Federal Reserve, and by the U.S. Department of Tustice Request for acquisitions of nonbank businesses must be approved by the Federal Reserve Board. For some more routine transactions, the Federal Reserve Bank in the distract can make the decision. See if you can develop 2 good case for and against the regulation of financial institutions in the following areas A ‘A. Restrictions on the number of nevr financial-service institutions allowed to enter the industry each yeu B. Restrictions on which depository institutions are eligible for government sponsored deposit surance. Restrictions on the ability of fanicial firms to underwrite debt and equity securities isstied by their business customers. D. Restrictions on the geographic expansion of banks and other finaneial firms, such a limits on branching 2nd holding company acquisitions across county, state, and tatemational borders, E Regulations on the fashure process, defining when banks and other financial firms ate to be allowed to fal and how their asseis sre to be liquidated. Restricting entry into the banking industry limits competition and, to some extent. protects some banks fom failure, reducing the risk of depositor loss (On the other hand, limiting new firms props up some financial-service firms that should be allowed to fail ifthe system is to be as efficent as st can be. Restrictions on which banks can get deposit insurance also limite competition but tenconrages some banks to take on more risk because most depositors are protected by the insurance, Restricting which institutions are chigible for deposit msurance may limit the losses to the federal agency providing that insurance bur may also limit thar federal agency's ability to monitor and control the money supply and the ecomomy ag a recult. Limits on underwriting securities reduce a bank's revenue potential and will probably result an losing some of the largest corporate customers to foreign banks who face more lenient regulations (On the hond, underwriting secusities is inherently sisky and Limiting this may limit the sak of the bank. [t may also prevent tae conflicts of iatezest that arise when a bank makes loans and underwrites securities atthe I Xero) @ Share= “= stuuueu MA Chap-O2 - key for proble... © A] (Chnpter 02 - The ingeet of Government Policy ag@ Regultion ou the Fisagce! Series Iadutey D. Limiting a bank’s ability o expand geomraphically exposes so greater risk of economic vetwations within ss local market azea sad makes stmoze prone to Zaluse the othes band. allowing 2 bank to expand geographically may coucentiate power sa the baad of a fw lauge institutions that make st more likely that service costs will tise {or all customers, E. Protecting banks fiom failure inevitably involves sheltering some inefficient and poorly managed institutions that waste zesowces aud ful to serve customers eflectively Tt also teuds tomake the average customer lees vigilant stout the quality sad risk of a particular banks services and aperations beemise depasite are insured and bank failure seems to siost customers to be a relatively remote possibility On the other hand. st makes customers mare confident in the system 2s 2 whole and makes a bank rua less likely 2-3. Consider the issue of whether or not the government should provide a system of deposit insurance Should it be whally or partly subsidized by the taxpayers? What portion of the cast shoul be borne by depositary institutions? by depositars? Should riskier depository institations pay higher deposit insurance promivms? Explain how you would determine esactly how big an ‘nsuraace premim each depository institutions should pay each year. sf taxpayers subsidize the cast of deposit insurance, depository institutions will be encouraged 10 take on added risk Ideally more risky banks should be compelled to pay more for deposit fnsrance: some ofthis cost would probably’ be passed on to depositors who would begin to shift their finds to lee ricky banks, Eventually banics willie to take on gzeater tisk will find theic cost of fund-sising to unacceptably high levels and will begin to reduce tir rick exposure, ‘not clear how high deposit insurance fees should be set to curtail excessive bank tisk taking, ‘though ir seems clear that moze ssky banks should pay higher iasurauce fees if we are to move toward a more efficient deposit insuranee system. Since there ae several dimensions to bank risk. ‘exposise it probably would not be feasible to tie the size of insurance fees to just one indicator. Pechaps an index of measines of loan portfolio risk, interest-rate risk, liquidity sisk. ete. would be preferable with the appropeiate measuses based upon research evidence fiom studies of bank: faluses. 2-4 ‘The Trading Desk at the Federal Reserve Bank of New York elects to sell $100 million in US. government securities to its list of prismary dealers. I other factors ate held constant what is Likely to happen to the supply of legal reserves available? To deposits and loaas? To interest, (0D outofie Gaara (Chapter 2 Ths inset of Governstat Policy a6 Regulation ou the Fizancia! Services LaceyChap-O2 - key for proble. QO: Chapter 02 - The Inpoct of Goverment Policy nd Regulation on the Finacial Services dst Ifthe wading desk sold $100 millon in U.S. Goverament securities, the supply of total legal reserves will decrease by $100 million, some of which will probably be taken from required reserves bebind any new deposits that are created. Deposits and loans will decrease by a multiple of the uewr reserves and, initially at least, market interest sates should sise 25. Suppose the Federal Reserve's discount rate is 4 percent. This afternoon, the Federal Reserve Board announces that its approving the request of several ofits Reserve Banks to raise their discount sates to 4.5 perceat. What is likely o happen to other interest rates tomonow ‘morning? Carefully explain the seasoning behind your answer ‘Would the smpser of the discouat sate change described above be somewhat different ifthe Fed simnltancously sold $100 million in securities through its Trading Desk at the New York Fed? Other interest rates will also rise following a discount rate increase. Of course if loan demand ‘were decreasing, market rates could fall despite the upward shift in the discount rate. Ifthe discov! rate were mcreased when loan demand was rising, market rates would almost surely rise. ceteris pasibus. Ifthe Fed sold $100 million in secusities this would seiaforce the discount sate increase. Other interest rates would almost certainly rise, other Zactors held constant. However, a Fed purchase ‘would encoucage lower interest rates, offsetting the diseoust rate effect. 2-6. Suppose the Fed purchases $500 million in government securities from a primary dealer ‘What will happen to the level of legal reserves ia the banking system and by how much will they change? Open market operations consist ofthe buying and selling of securities by the central bank in an effort to influence and chape the course of interest sates and the ayowth of money aud credit, Open-inatket operations, therefore, affect bank deposits ~ their volume and growth — as well as the volume of lending and the interest sates attached to bank borrowings and loans as well as the value of bauk stock. I the Fed purchases $500 muillion ia goverument secutities otal baak reserves will increase by $500 million Ife $500 million represents excess reserves, deposits snd loans will expand by a mulplicative Zactos related 1o the reserve tequitements ofthe vatious deposits 2-7. Ifthe Fed loans depository institutions $200 million in reserves from the discount \windows of the Federal Reserve banks, by how much will legal reserves of the banking system change? What happens when these loans are repaid by the borrowing institutions? The Discount Window isthe department in each Federal Reserve Bank that receives requests to borrow reserves from banks and other depository institutions which are eligible to obtain credit from the Fed for short periods of time. The rate charged om such lonns is called the discount rate. (D 5outofie Giese Chapter 02 - The Inpoct of Govemanent Policy aud Rees= @studocu Q Chap-02 - key for proble... 6 in} (Cape 0 The Inga of Goverment Ply and Regulation cathe intel Sevier Ite ‘Reserve requirements ste the atouat of alt cash and depossis at the Federal Reserve banks that Sepository institutions raising funds from sources of reservable liabilities (such 35 checking acconnrs, business CDs, and borrowings of Eurodollars from abroad) must hold sf the Fed loase $200 millon in reserves from the discomnt winder ves will ise by the ‘mou of the diveount wiadow loan, but then will fal when the loaa is repaid. Conrespondinaly loans and deposits should rise by a multiple of the increase in reserves depa requirements for deposits and whether the $200 milion is excess reserves or 201 lng on reserve incertae)= Qstudocu Q - Oa VL The Cental Banking System i's Impact en the Decisions and Policies of | Financial Instintious A Ospanizatonal Structure of the Federal Reserve System B The Central Ban's Principal Task: Making snd Implementing Monetary Policy 1 The Open Market Policy Taol of Central Banking 2. Other Central Bank Policy Tools 4. A Final Note on Central Bauking’s Impact on Finacial Firms Chap-02 - key for proble VU Swunanary ofthe Chapter Concsot Checks 2-1. What key areas or fictions ofa bank or other financial firm are regulated today? Among the most important areas of banking subject ro regulation are the adequacy ofa bank's capital. tae quality of its loans and secasity investments, its liquidity position, fund-raising ‘options, services offered, and its abity to expand through branching and the formation of holding companies. 2-2, What are the seasons for emulating each of these key aseas or fuctions? “These areas are zegulated, frst ofall (aud primarily) to protect te safety ofthe depositors’ fimds so that the public has seme assurance that is savings aud trensactions balances are secue. Thus, Donk failure is viewed as someting to be minimized. There is also a coneem for maintaining ‘competition and for insuring that the public ns ceasonnble and fair nccess to banking services, ‘especially credit and deposit services ot all of the areas listed above probably should be regulated. Minimizing the risk of banks failure eves to shelter some poorly maaged banks. The public would probably be better served saa the long rum by allowing uteficieat banks to fail rather than propping them up. Moreover regulation may cerve to distort the allocation of resources im bankang. such as by resiscung price competition trough legal interest-rate ceslings and ansi- branching laws which leads to over- ‘building of physical facilities. The result asa waste of scaice resources 2-3. What is the principal role of the Comptroller of Currency? ‘The Compuoller of the Curency cluters and supersases the activities of national banks dzough its policy-reting and examinations (Chapt 02 The lpact of GoveraatPoicy aus Regulation on the Finacial Services Iadusy 2-4 What is the principal job performed by the FDIC? ‘The Federal Deposit Insurance Corporation (FDIC) insures the deposits of bank: customers, up to «a total of $100,000 per account owner, in banks that qualify for a certificate of federal insurance coverage. The FDIC is a paamary federsl segulator (exam) of state-chariered, non-member banks. Iris also responsible for liquidating the assets of banks declared insolvent by their federal cr state chartering agency= Qstudocu Q - QO. ‘The Federal Deposit Insurance Comporation (FDIC) insures the deposits of bank customers. up to a total of $100,000 per account ewer, in banks that qualify for a certificate of federal insurance coverage. The FDIC 1s a pray federal regulator (examines of state-chestered, non sneuiber banks. Iris also cesponsible for liquidating the assets of banks declared insolvent by thei federal or state chartering ageney Chap-O2 - key for proble. 4. What s the principal ob performed by the FDIC? What hey roles does the Federal Reser system? system perfocm in the banking and financial ‘The Fedesal Reserve Systema supervises and examines the activities of state-chartered banks that choove to become menbers of system end qualify for Federal Reserve membershap aud segulates the acquisitions and activites af bank holdine companies, However, the Fed's principal responsibility monetary policy ~ the contol of money and credht growl in exder to achieve broad economic goals 26 Whatis the Glass-Steagall Act. and why was itimportat in banking history? ‘The Glass-Steagoll Act, passed by the US. Congress in 1933, was one of tae most comprehensive pieces of banking legislation in American history. It created te Federal Deposit Insurance Comporation to instre smaller-size ban deposits. imposed interese-rate cesings on, bank deposits. broadened the branching powers of national banks to mclude statewide brenching if state banks possessed similar powers. and separated commercial banking from investment banking thersby removing commercial banks om iaderwriting the issue and sale of coqporate stocks and bonds in che public macket ‘There are many’ people wo feel shat banks should have some Kimitations on thei investment anking activates. These analysts focus on two maim areas. Fust, they suggest that this service may cause problems for customers usiug odher tank services. For example, a bank may requite & customer getting a loan to puuchase secunties of a company iti vaderwnting, This potential conflict of interest concems some analysts. The second concem deals with wiaether the bank can (Bain effective control over ai industrial organization. Thie cond make the bane subject t9 additional risks or may give unaffiliated industial organizations 9 competitive disadvantage. ‘Today. banks can undersite securities as part of the Gramm Lesch Bhley Act Fimancial Services Modernization Act) However, congress builtin several protections to make sure that the bank does not iake advantage of customers, in addsion, banks are prevented fiom adiihatng svat industrial firms wader this law 7. Why did the federal insurance system nin into serious problems in the 1980s and 199037 ‘Com the current federal sasurance system be improved? In what ways? oO 4 out of 16 @ Share Chaps 02= Qstudocu Q ‘The FDIC, which insures US. bank deposits up 0 $100,000, was not designed to des! with systemwide flores or massive nnmbers of faling banks, Yet, dhe 1980s ushered im more baal closings than in any period since the Great Depression of the 1930s, bringing the FDIC to tie ‘unk of bankruptcy. Also, the FDIC's policy of charging te sauie insurance fees to all banks regardless of ther risk exposure encouraged more banks to gamble and accept substantial failure take The recent FDIC Improvenient Act legislation has targeted this last area, wth movement toward a sisk-based insurance schedule and greater insistence on maintaining adequate long-term ‘bank capital 2-8 How did the Equal Credit Opportunity Act and the Community Reinvestment Act adéeess discumination? ‘The Equal Credit Opportunity Act stated that individuals could not be denied a loan because of their age, sex. ace, national origin or religious aflibation or because they were reespieuts of public welfare. The Community Reinvestient Act prolubited banks ffom discriminating against ‘customers based on the neighborhood in which they lived. 2-9. How does the FDIC deal wath most falwes? ‘Most bank flues are handled by getting another ban: to take over the deposits and clean assets of the failed instiition a process Imown as purchase and assumption. Those that are small or in ouch bd shape that no suitable bids are ceceived from other banks are closed and the insazed. depositors are paid off deposit payoff approach Larger failures may sometimes be dealt with by opeacbanle assistance where the FDIC loans money tothe troubled bank and may order a change in mauagetent a: well. Large failing anoucy-ceuter banks may also be taken over aud ‘operated as "bridge lank" by the FDIC nati disposed of 2-10. What changes have oecusred in the US. banks’ authority to cross state lines? In 1994 the Riegle-Neal Interstate Bariking and Efficiency Act was passed. This law is ‘complicated but allows bank holdiag companics with adequate capital to acquire banks or bank holding companies anywhere in US. tenitory. No bank holdiag company can contol more than 10% of the deposits atthe national level and more than 30% of the deposits atthe stat level, ‘Bank boldwg companies ae also uot allowed to cross state lines solely for the purpose of collecting deposits Banks must adequately suppor fuer local communities by providing Toans there, Bank liolding companies are also allowed to offer a number of interstate services without ecessatily having branches inthe cate by allowing affiliated banks to act ac agents for the bank lholdug in other states, This law also allows foreign banks to brauch ia the U.S. under the same ules as domestic banks ecko oa) @ Share