1、Chapter TwoThe Impact of Government Policy and Regulation on the Financial-Services IndustryKey Topics The Principal Reasons for Banking and Financial-Services Regulation Major Financial-Services Regulators and Laws The Riegle-Neal and Gramm-Leach-Bliley(GLB)Acts The Check 21,FACT,Patriot,Sarbanes-O
2、xley,Bankruptcy Abuse,Federal Deposit Insurance Reform,and Financial-Services Regulatory Relief Acts Emergency Economic Stabilization Act and the Global Credit CrisisKey Topics(continued)FINREG is passed into law to avoid severe disruption in the financial system and deal with systemic rick Some Key
3、 Regulatory Issues Left Unresolved The Central Banking System Organization and Structure of the Federal Reserve System and Leading Central Banks of Europe and Asia Financial-Services Industry Impact of Central Bank Policy ToolsIntroduction This chapter is devoted to a study of the complex regulatory
4、 environment that governments around the world have created for financial-service firms in an effort to:Safeguard the publics savings Bring stability to the financial system Prevent abuse of financial-service customers Financial institutions must contend with some of the heaviest and most comprehens
5、ive rules applied to any industry Regulation is an ugly word to many people Burdensome Costly Damaging to innovation and efficiencyBanking Regulation Why are banks closely regulated?Banks are among the leading repositories of the publics savings Banks are closely watched because of their power to cr
6、eate money in the form of readily spendable deposits by making loans and investments Banks have a long history of involvement with federal,state,and local governments In the United States,banks are regulated through a dual banking system Both federal and state authorities have significant regulatory
7、 powersTABLE 21 Bankings Principal Regulatory Agencies and Their ResponsibilitiesBanking Regulation(continued)One of the earliest theories about regulation contends that firms in regulated industries actually seek out regulation It brings benefits in the form of monopolistic rents because regulation
8、s often block entry into the regulated industry A more recent theory argues that regulations can increase customer confidence,which may create greater customer loyalty toward regulated firms There is an ongoing struggle between regulated firms and the regulators Regulatory dialectic Financial-servic
9、e managers will search to find ways around new rules in order to reduce costs and allow innovation to occurMajor Banking Laws Where and When the Rules Originated National Currency and Bank Acts(186364)The first major federal government laws in U.S.banking were the National Currency and Bank Acts,pas
10、sed during the Civil War These laws set up a system for chartering new national banks through a newly created bureau inside the U.S.Treasury Department,the Office of the Comptroller of the Currency(OCC)The Comptroller not only assesses the need for and charters new national banks but also regularly
11、examines those institutionsMajor Banking Laws Where and When the Rules Originated(continued)The Federal Reserve Act(1913)A series of financial panics in the late 19th and early 20th centuries led to the creation of the Federal Reserve System(the Fed)The Feds principal roles are to serve as a lender
12、of last resort and to help stabilize the financial markets and the economy Their most important job today is to control money and credit conditions to promote economic stabilityMajor Banking Laws Where and When the Rules Originated(continued)The Banking Act of 1933(Glass-Steagall)The Glass-Steagall
13、Act defined the boundaries of commercial banking by providing constraints that were effective for more than 60 years This legislation separated commercial banking from investment banking and insurance The Federal Deposit Insurance Corporation(FDIC)was created to guarantee the publics deposits up to
14、a stipulated maximum amount in order to enhance public confidence in the banking system Initially$2,500 and today it is up to$250,000Major Banking Laws Where and When the Rules Originated(continued)The FDIC Improvement Act(1991)The FDIC was the object of criticism during the 1980s and 1990s This leg
15、islation permitted the FDIC to borrow from the Treasury to remain solvent,called for risk-based insurance premiums,and defined the actions to be taken when depository institutions did not meet capital requirements Prior to 1993,the FDIC imposed fixed insurance premiums on all deposits eligible for i
16、nsurance coverage,regardless of the riskiness of an individual depository institutions balance sheet This fixed-fee system led to a moral hazard problemMajor Banking Laws Where and When the Rules Originated(continued)Social Responsibility Laws Consumer Credit Protection Act(known as Truth in Lending
17、)Required that lenders spell out the customers rights and responsibilities under a loan agreement Dodd-Frank Regulatory Reform bill Emphasized providing consumers with more complete and understandable language to convey service prices and avoid misleading information Equal Credit Opportunity Act Ind
18、ividuals and families could not be denied a loan merely because of their age,sex,race,national origin,or religious affiliation,or because they were recipients of public welfareMajor Banking Laws Where and When the Rules Originated(continued)Social Responsibility Laws Community Reinvestment Act Prohi
19、bits U.S.banks from discriminating against customers residing within their trade territories merely on the basis of the neighborhood in which they lived Competitive Equality in Banking Act and the Truth in Savings Act Require banks to more fully disclose their service policies and the true rates of
20、return offered on the publics savings and the fees associated with credit servicesTABLE 22 Regulators of U.S.Insured Banks Major Banking Laws Where and When the Rules Originated(continued)The Riegle-Neal Interstate Banking Law(1994)Repealed previous provisions that prevented full-service interstate
21、banking nationwide Major provisions of the Riegle-Neal Act included:Adequately capitalized and managed holding companies can acquire banks anywhere in the United States Interstate holding companies may consolidate their affiliated banks acquired across state lines into full-service branch offices No
22、 single banking company can control more than 10 percent of nationwide deposits or more than 30 percent of deposits in a single state(unless a state waives this latter restriction)For the first time in U.S.history,American banks could accept deposits and follow their customers across state lines Maj
23、or Banking Laws Where and When the Rules Originated(continued)The Financial Services Modernization Act(The Gramm-Leach-Bliley Act(1999)One of the most important U.S.banking statutes signed into law Overturned long-standing provisions of the Glass-Steagall Act and the Bank Holding Company Act Permitt
24、ed banking companies to affiliate with insurance and securities firms under common ownership Securities and insurance companies could form financial holding companies that control one or more banks Banks were permitted to sell insurance and security services,provided they conform to state and federa
25、l rules This laws purpose was to allow qualified U.S.financial-service companies to diversify their service offerings and reduce their overall business risk exposureMajor Banking Laws Where and When the Rules Originated(continued)The USA Patriot Act Made a series of amendments to the Bank Secrecy Ac
26、t Passed originally in 1970 to combat money laundering Requires that financial-service providers establish the identity of customers opening new accounts or holding accounts whose terms are changed Usually accomplished by asking for a drivers license or other acceptable picture ID and obtaining the
27、social security number of the customer Service providers are required to check the customers ID against a government-supplied list of terrorist organizations and report any suspicious activity in a customers accountThe 21st Century Ushers in an Array of New Laws and Regulations FINREG,The Basel Agre
28、ement,and Other Rules Around the Globe The FACT Act of 2003 The Check Clearing for the 21st Century Act(Check 21 Act)The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 The Federal Deposit Insurance Reform Act of 2005 The Emergency Economic Stabilization Act of 2008 The Credit Card A
29、ccountability,Responsibility,and Disclosure Act of 2009 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009(FINREG)Basel I and II,and Basel IIIThe 21st Century Ushers in an Array of New Laws and Regulations FINREG,The Basel Agreement,and Other Rules Around the Globe(continued)Unres
30、olved Regulatory Issues What should we do about the regulatory safety net set up to protect small depositors from loss,usually through government-sponsored deposit insurance?Can we train regulators to be as good as they need to be in a more complex financial marketplace?With the financial-services i
31、ndustry consolidating and converging into fewer,but bigger,firms,can we get by with fewer regulators?Can we simplify the current regulatory structure and bring greater efficiency to the task?As financial firms reach their arms around the globe,what nation or nations should regulate their activities?
32、The Regulation of Nonbank Financial-Service Firms Competing with Banks Credit Unions National Credit Union Administration(NCUA)Savings and Loans and Savings Banks(“Thrifts”)State-chartered associations are supervised and examined by state boards or commissions Federally chartered savings association
33、s fall under the jurisdiction of the Office of Thrift Supervision The Dodd-Frank Act merged the Office of Thrift Supervision with the Office of the Comptroller of the Currency so that thrift institutions and national banks would have the same regulatory agency at the federal level Money Market Funds
34、 Securities and Exchange Commission(SEC)The Regulation of Nonbank Financial-Service Firms Competing with Banks(continued)Life and Property/Casualty Insurance Companies State insurance commissions Recently the federal government has become somewhat more involved in insurance When insurers form holdin
35、g companies to acquire commercial and investment banks or other federally regulated financial businesses,they may come under the Federal Reserves review Under the Dodd-Frank Act,a new federal insurance office was set up to help reduce the systemic risk caused by innovative,but sometimes highly risky
36、,activities of the largest insurers(such as AIG)and prevent disruptive insurance failuresThe Regulation of Nonbank Financial-Service Firms Competing with Banks(continued)Finance Companies Regulated at the state government level for many decades The depth of state regulation varies across the United
37、States Most states focus upon the types and contents of loan agreements they offer the public,the interest rates they charge(with some states setting maximum loan rates),and the methods they use to repossess property or to recover funds from delinquent borrowers Relatively light state regulation has
38、 led to a recent explosion in the number of small-loan companies The passage of the Dodd-Frank Act in 2010 caused many to close as the maximum interest rates that these entities could charge was drastically reducedThe Regulation of Nonbank Financial-Service Firms Competing with Banks(continued)Mutua
39、l Funds The U.S.Securities and Exchange Commission(SEC)requires these businesses to register with that agency,submit periodic financial reports,and provide investors with a prospectus that reveals the financial condition,recent performance,and objectives of each fund Security Brokers and Dealers and
40、 Investment Banks A combination of federal and state supervision applies to these traders in financial instruments who buy and sell securities,underwrite new security issues,and give financial advice The chief federal regulator is the SEC Requires these firms to submit periodic reports,limits the vo
41、lume of debt they take on,and investigates insider trading practicesThe Regulation of Nonbank Financial-Service Firms Competing with Banks(continued)Hedge Funds,Private Equity Funds,and Venture Capital Companies Some of the most lightly regulated of all financial institutions The SEC in the United S
42、tates has broad oversight of the information these firms provide to the public when they choose to sell securities in the open market that are accessible to small investors Regulation in this sector is virtually invisible,in part because it is relatively new and because it normally does not seek out
43、 many funds from small investors The Dodd-Frank Act of 2010 calls for greater separation between commercial banks and these riskier private investorsThe Central Banking System:Its Impact on the Decisions and Policies of Financial Institutions The central bank of the United States is the Federal Rese
44、rve System(the Fed)A central banks primary job is monetary policy Involves making sure the supply and cost of money and credit from the financial system contribute to the nations economic goals By controlling the growth of money and credit,the Fed and other central banks around the globe try to ensu
45、re that the economy grows at an adequate rate,unemployment is kept low,and inflation is held down The Fed is free to pursue these goals because it does not depend on the government for its funding Passes along most of its earnings to the U.S.TreasuryThe Central Banking System:Its Impact on the Decis
46、ions and Policies of Financial Institutions(continued)The European Union also have a central bank the European Central Bank(ECB)It is relatively free and independent of governmental control as it pursues its main goal of avoiding inflation In contrast,the Bank of Japan(BOJ),the Peoples Bank of China
47、(PBC),and central banks in other parts of Asia appear to be under close control of their governments Several of these countries have experienced higher inflation rates,volatile currency prices,and other significant economic problems in recent years Recent research suggests that more independent cent
48、ral banks have been able to come closer to their nations desired level of economic performance(particularly better control of inflation)The Central Banking System:Its Impact on the Decisions and Policies of Financial Institutions(continued)Organizational Structure of the Federal Reserve System Board
49、 of Governors This governing body must contain no more than seven persons,each selected by the president of the United States and confirmed by the Senate for terms not exceeding 14 years The board chairman and vice chairman are appointed by the president from among current board members,each for fou
50、r-year terms(though these appointments may be renewed)The board regulates and supervises the activities of the 12 district Reserve banks and their branch offices It sets reserve requirements,approves all changes in the discount(loan)rates posted by the 12 Reserve banks,and takes the lead in the syst
