CHAPTER 18
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
Comptroller of the Currency
 Chartering and Auditing
 Oversight for Intrastate branching, mergers, acquisitions, and
consolidations

Federal Reserve System
 Setting reserve requirements
 Controls borrowing at the discount window
 Oversight for state-chartered member banks

State Banking Commissions
 Limitations on inter- and intra-state banking as well as branching
 Non-Insured states have considerably less FED and US Government
oversight
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
Bank Holding Companies (BHC)
http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx

1980 Amendments to Bank Holding Company Act
(1956)
 Permits BHC to enter non-banking activities
 Permits BHC to acquire banks in different states

Financial Services Modernization Act (1999)
 Repeals Glass-Steagal Act (1933)
 Permits affiliations with Insurance and Brokerage firms
 Engage in any financial activity via subsidiaries of BHC
 Most important – cleared way for consolidation of industry
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
Regulation of Deposits; DIDMCA (1980)
 All depository institutions can offer NOW accounts; dealing with
disintermediation
 De facto entry of banks into money market activities

Regulation of Loans
 Attempting to limit portion of loan portfolio in high leverage
transactions
 Limiting amount of loans to any individual client
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C.
Regulation of Capital
 Capital = Total Assets minus Total Liabilities
 The greater the capital of a bank, the greater the stability (5 - 8 %
is typical)
 Recent development in the EC have begun to result in uniform
capital requirements
 Basel Accord, 1988: Greater risk level require greater capital (equity)
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
Deposit Rate Regulations
 The Problem of disintermediation; rate caps result in deposit
flight
 After 1980, rates largely deregulated on most accounts
(Regulation Q)

Loan Rate Regulations
 Truth-in-Lending regulations
 Reporting of transactions in mortgage markets
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
Intrastate Regulations
 Few limits on intra-state banking and branching
 Acquisitions by out-of-state BHC still a touchy issue,
particularly in capital deficit areas

Interstate Regulations
 McFadden Act; prevent concentration of banking power
 Competition spurs lower rates and more services to
borrowers and depositors
 Some Mutual Funds now performing limited banking-type
services via MM funds
 Large national brokerage houses offer a variety of banklike services; ML CMA
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
Capital Adequacy
 The greater the capital ratio, the stronger the bank
 Ability to absorb losses is a function of capital

Asset Quality and Average Maturity of the Loan
Portfolio
 How much credit risk exposure
 5-Cs of Credit
 -Character
-Capacity
-Capital
-Collateral
-Conditions
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
Management
 Regulatory conformance
 Internal controls

Earnings strength and Trends
 ROA measure

Liquidity
 Vault resources
 Borrowings (from Fed or Fed Funds) to cover reserve short-falls
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
FDIC INSURANCE PRICING ISSUE
 Proposals to Reform Deposit Insurance

THE INTERSTATE BANKING ISSUE
 Arguments for Interstate Banking
 Arguments against Interstate Banking

THE "TOO BIG TO FAIL" ISSUE
 Argument for Government Rescue
 Argument against Government Rescue
 Bear-Stearns? Was the Fed right to come to the "rescue" of BSC?
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What functions does the Comptroller of the Currency
perform?

What are primary objectives of Federal Reserve System?

What oversight exists for state chartered banks?

Why are Bank Holding Companies (BHC) an important?

How do regulators affect intra-state and inter-state
banking?

How did regulators deal with the disintermediation issue?

What metrics do auditors and regulators use to ensure
bank performance?

What does it mean when banks engage in off-balance
sheet activities?

Q&A: 2, 5, 12, Interp: c

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