Chapter 02 Asia PPT 2019

Chapter 2
Government
Policies and
Regulation
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part.
Historical Bank Regulation
 Glass-Steagall Act (1933-1999)
 Created three distinct industries
 Commercial Banking
 Investment Banking
 Insurance
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Historical Bank Regulation
 Definition of a Commercial Bank
 Limitations on:
 Geographic Scope
 Products and Services
 Results:
 Large number of small banks
 Limited products and services banks
could offer
 Limited geographic area to operate
3
Goals and Functions of Bank Regulation
 Ensure the Safety and Soundness of

Banks
 Provide an Efficient and Competitive
Financial System
 Provide Monetary Stability
 Maintain the Integrity of the Payments
System
 Protect Consumers from Abuses
4
Ensure Safety & Soundness and Provide an Efficient & Competitive
System
 Supervision and Examination

 FDIC
 OCC
5
System

 CAMELS
 Capital
 Asset Quality
 Management Quality
 Earnings Quality
 Liquidity
 Sensitivity to Market Risk
6
System

 Memorandum of Understanding
 Formal regulatory document
 Cease and Desist Order

 Legal document
 Has legal standing
7
System
 New Charters
 Dual Banking System
 Office of the Comptroller of the
Currency
 Charters national banks
 Office of Thrift Supervision

 Charters federal savings banks and
savings associations
 National Credit Union Administration
 Charters federal credit unions
8
System
 New Charters
 State Banking Authorities
 Charter state banks
 State Savings Authorities

 Charter state savings banks
 State Credit Union Authorities

 Charter state credit unions
9
System
 National versus State Charter

 All banks obtain FDIC deposit
insurance as part of the chartering
process
 National banks must join the Fed
 Primary regulator is the OCC
10
System
 National versus State Charter

 State banks may join the Fed
 State banks are regulated by their state
banking authority
 State banks also have a primary federal
regulator
 Federal Reserve for member banks
 FDIC for non-member banks
11
System
12
System
13
System
 Commercial Banks, Savings

Institutions, and Credit Unions
 Commercial Banks
 Specialize in short-term business credit
 Savings Institutions
 Specialize in real estate loans
 Stockholder versus Mutual Ownership
 “Qualified Thrift Lender”
 Unitary Thrift Holding Company
14
System
 Commercial Banks, Savings

Institutions, and Credit Unions
 Credit Unions
 “Common Bond” requirement
 Exempt from Federal Taxation
15
16
System
 Federal Deposit Insurance

 Currently full coverage for demand
deposit accounts until 12/31/2013
 Currently coverage of at least $250,000
per depositor on interest-bearing
accounts
 Coverage will revert to $100,000
($250,000 for retirement accounts) per

depositor on 1/1/2014
 Original limit in 1933 was $5,000
17
System

 Goal is for fund to be 1.25% of deposits
 Banks pay risk-based deposit
insurance premium to the Deposit

Insurance Fund
18
System

 Federal Deposit Insurance Corporation
 Receiver of failed institutions
 Liquidate
 Sell
 Too Big to Fail Policy
19
System
 Activities Permissible for a National Bank

 General Banking Activities
 Branching
 Consulting and financial advice
 Corporate governance
 Correspondent service
 Finder activities
 Leasing
 Lending
 Payment services
20
System
 Activities Permissible for a National

Bank
 Fiduciary, Insurance and Annuities
Activities
 General trust activities, employee
benefit accounts, and real estate
brokerage
 Insurance and annuities activities
 Securities activities
21
System
 Activities Permissible for a National

Bank
 Technology and Electronic Activities
 Digital certification
 Electronic bill payments
 Electronic correspondent services
 Electronic storage and safekeeping
 Internet access service
 Internet and PC banking
 Software development and production
22
System
 Activities Permissible for a National Bank

 Investments
 Asset-backed securities
 Bank stock
 Bankers acceptances
 Corporate bonds
 Collateralized mortgage-related investments
 Commercial paper
 Money market preferred stock,
 Trust preferred securities
 State and local bonds
23
System
 Shortcomings of Restrictive Bank

Regulation
 Doesnot prevent bank failure
 Cannot eliminate economic risk
 Assumed markets for bank products
could be protected
 Discriminated against U.S. based firms
 Does not guarantee that bank

management will make good decisions
24
Maintaining Monetary Stability and the Integrity of the
Payments System
 The Role of the Central Bank in the

Economy: The Federal Reserve
System
 Fundamental Functions
 Conduct monetary policy
 Provide and maintain the payments
system
 Supervise and regulate banking
operations
25
Payments System

System
 Monetary Policy
 Open Market Operations
 Open market purchases (sales) increase
(decrease) reserves & the money supply
26
Payments System

System
 Monetary Policy
 Discount Rate
 Decreasing (Increasing) the discount rate
makes bank borrowing less (more)
expensive, which leads to an increase
(decrease) in the money supply
27
Payments System

System
 Monetary Policy
 Reserve Requirements
 Decreasing (Increasing) reserve
requirements increases (decreases) the
money supply
 Last changed April 1992
28
Payments System
 The Federal Reserve’s Crisis

Management Tools
 Term Auction Facility
 Term Securities Lending Facility
 Primary Dealer Credit Facility
29
Payments System
 The Role of Depository Institutions

and the Economy
 Banks are the primary conduit for
monetary policy
 Banks are the primary source of credit
for most small businesses and many
individuals
30
Efficient and Competitive
Financial System
 Product restrictions, barriers to entry,
and restrictions on mergers and the
degree of branching can clearly
enhance safety and soundness, but
they also hinder competition
 Effective financial regulation requires
a delicate balance between the
system’s competitiveness and general
safety and soundness concerns
31
Financial System
 Organizational Form of the Banking
Industry
 Bank Holding Companies
 Parent
 Subsidiaries
 One-Bank Holding Companies

 Mutli-Bank Holding Companies
32
Financial System
 Consumer Protection
 Reg. B
 Equal Credit Opportunity
 Cannot discriminate on the basis of sex, race,

marital status, religion, age, or national origin
 Reg. Z
 Truth-in-Lending
 Requires disclosure of:
 Effective interest rates, total interest paid,
total of all payments
 Why credit was denied
33
Financial System
 Current Unresolved Regulatory Issues
 Capital Adequacy
 From a regulator’s perspective,
increased capital requirements make

banks safer
 Increasing capital requirements also
has disadvantages
 Equity is more expensive than debt
 Most banks do not have ready access to
the equity markets
 This can lead to more consolidation
34
Financial System
 Regulatory Reform
 Regulation of depository institutions is
highly fragmented
 Federal Reserve
 OCC
 OTS
 FDIC
 NCUA
35
Financial System
 Non-depository institutions are not
subject to the same regulatory burdens

as depository institutions
 Large investment banks
 Insurance companies
 Finance companies
 Hedge funds
 Credit card companies
36
and Competitive Financial
System
 Since the Fed is willing and able to
assist financial players they do not

directly supervise, the system appears
to be at greater risk than it was before
the most recent financial innovations
37
Bank Regulation in
East Asia and Southeast Asia
 China, HK SAR, Singapore and
Malaysia chosen as benchmarks
 Global recession impacted upon these regions
differently from the US
 Government policies an bank regulation differed
between countries according to whether they
were more centrally planned or market driven
 All economies chosen are mixed economies,
China is more planned, Hong Kong, Singapore
and Malaysia are more market driven but
Malaysia is Islamic banking driven
38
Bank Regulation in China
 Four Main Bank Entities report directly
to State Council:
 CBRC, PBOC, MOF and SAFE
 Main Financial Institution Groupings

 Three Policy Banks
 Five large Commercial Banks (Equitized Banks)
 Twelve Joint Stock Company Banks (JSCBs)
 144 City Commercial Banks, also JSCBs but on a
lower tier
39
China: Goals and Functions of
Depository Institution Regulation
 Goals and functions similar to those in US.
Safety, Efficiency, Competition, Monetary
Stability, Integrity of Payments System and
Consumer Protection.
 Real difference is that liberalization and
privatization is still planned by central
planners and not from private initiative
 Even in privatized banks in China, equity
holders may only be approved to qualified
private shareholders
40
China: Bank Control by State
Council and the CPC
 Policy Banks controlled by and Report
back to State Council
 The Five Equitized Banks are the most
dynamic and dominant. Tradable
shares only make up small proportion
of total shares and government control
is bolstered by non-tradable shares
allocated to shareholdings of other
government departments.
41
China: Bank Control by State
Council and the CPC continued
 The 12 advanced JSCBs are more independent but
less successful than the equitized banks as there is
less government involvement.
 CBRC Regulated City Commercial Banks serve
urban small businesses and micro-enterprizes
 Rural Credit Cooperatives provide 77.4% of rural
loans and distribute all rural subsidies of the
central government. Only financial institution
providing 76% of rural towns and villages with
financial services
42
China: Shadow Banks.
 Shadow bank involved in all credit intermediation
activities not caught in conventional banking
system.
 They indicate there is a misallocation of funds
 They exist because:
 Depositors offered higher interest rates than a
regulated bank
 Some entities want to conceal their wealth from
government authorities
 SMEs cannot obtain funds from legal banks and are
prepared to pay the usurious rates of shadow banks
or drastic penalties fro default.
43
Hong Kong SAR: Bank Regulation
 The HKMA is the Bank Regulator
 Functions of Bank Regulation in HK
 Maintain Monetary Stability
 Maintain Banking Stability
 To Meet Currency Exchange Objectives
 To Promote HK SAR as an international financial
center and ensure it is internationally competitive
 To maintain and develop its financial
infrastructure
44
Singapore: Macro-Prudential
Policy for Systemic Safety
 In January 2013, MAS published a
monograph on regulation of FMIs.
 Two key objectives:
 Safety
 Efficiency
 Achieved by monitoring and assessing
FMIs that they have:
 Proper structures, processes and rules
 Particularly with cooperative oversight of
cross-border or multicurrency FMIs that
may affect Singapore’s financial stability
45
Malaysia: Bank Regulation
 Central Bank is Bank Negara Malaysia
 Has Islamic Banking Infrastructure
 Backed by Shariah advisory councils
 Special Labuan Economic Zone where
regulator is Labuan Financial Services
Authority
 Has established reputable international
Islamic banking and finance center
strategically located between China and
India/Middle East.
46
Chapter 2
Government
Policies and
Regulation
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part.

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Chapter 2

 Ensure the Safety and Soundness of

 Supervision and Examination

 Supervision and Examination

 Sensitivity to Market Risk

 Supervision and Examination

 Cease and Desist Order

 Has legal standing

 Office of Thrift Supervision

 State Savings Authorities

 State Credit Union Authorities

 National versus State Charter

 National versus State Charter

 Commercial Banks, Savings

 “Qualified Thrift Lender”

 Unitary Thrift Holding Company

 Commercial Banks, Savings

 Federal Deposit Insurance

($250,000 for retirement accounts) per

 Federal Deposit Insurance

insurance premium to the Deposit

 Federal Deposit Insurance

 Activities Permissible for a National Bank

 Consulting and financial advice

 Activities Permissible for a National

 Activities Permissible for a National

 Electronic correspondent services

 Electronic storage and safekeeping

 Internet access service

 Internet and PC banking

 Software development and production

 Activities Permissible for a National Bank

 Collateralized mortgage-related investments

 Money market preferred stock,

 Trust preferred securities

 State and local bonds

 Shortcomings of Restrictive Bank

 Does not guarantee that bank

 The Role of the Central Bank in the

 The Role of the Central Bank in the

 The Role of the Central Bank in the

 The Role of the Central Bank in the

 The Federal Reserve’s Crisis

 The Role of Depository Institutions

 One-Bank Holding Companies

 Cannot discriminate on the basis of sex, race,

increased capital requirements make

subject to the same regulatory burdens

assist financial players they do not

 Main Financial Institution Groupings

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