Chapter Eighteen
BANKING REGULATION
Copyright © 2000 Addison Wesley Longman
Slide #18-1
How Asymmetric Information
Explains Banking Regulation
FDIC對倒掉的銀行(1)payoff method(2) purchase and assumption method
1. Govt. Safety Net 包括 Deposit Insurance 及lender of last
存款人會損失一些
resort
A. Prevents bank runs due to asymmetric info: depositors can‘t tell
good from bad banks, 同時會有contagion effect
B. Creates moral hazard incentives for banks to take on too much
risk
C. Creates adverse selection problem of crooks and risk-takers
wanting to control banks
D. Too-Big-to-Fail increase moral hazard incentives for big banks
and is unfair
2. Restrictions on Asset Holdings
Reduces moral hazard of too much risk taking
Copyright © 2000 Addison Wesley Longman
Slide #18-2
How Asymmetric Information
Explains Banking Regulation
3. Bank Capital Requirements
A. Reduces moral hazard: banks have more to lose
when have higher capital
B. Higher capital means more collateral for FDIC
5%以上(Well capitalized)
Leverage ratio 3%以下：常被檢查限制
Risk-based capital requirement:1988basel Accord, 1992全面實施
1998開始實施VAR
10天內最大損失的3倍
為了trading risk
tier3 capital短期證券到期時若銀行為undercapitalized ,則投資人拿不到錢。
Copyright © 2000 Addison Wesley Longman
Slide #18-3
How Asymmetric Information
Explains Banking Regulation
4. Bank Supervision: Chartering and Examination
File “call report”
CAMEL
A. Reduces adverse selection problem of risk takers or
crooks owning banks
B. Reduces moral hazard by preventing risky activities
C. New trend: assessment of risk management要銀
行自已監管風險
5. Disclosure Requirements
Better info reduces asymmetric info problem
紐西蘭經驗，讓市場監督
董事負無限責任
沒有存款保險
充分揭露各種資訊
Copyright © 2000 Addison Wesley Longman
問題：存款人有能力解讀?
有能力者不願當董事!
大部分為外商銀行
Slide #18-4
How Asymmetric Information
Explains Banking Regulation
6. Consumer Protection
A. Standardized interest rates (APR)
B. Prevent discrimination: e.g., CRA
7. Restrictions on Competition to Reduce Risk-Taking
A. Branching restrictions
B. Separation of banking and securities industries:
Glass-Steagall
International Banking Regulation
1. Bank regulation abroad similar to ours
2. Particular problem of regulating international
資產被掏空
banking
E.g., BCCI scandal 販毒、獨裁者洗錢
哪國來監督?
Copyright © 2000 Addison Wesley Longman
Slide #18-5
Major
Banking
Legislation
in U.S.
Copyright © 2000 Addison Wesley Longman
Slide #18-6
The 1980s Banking Crisis
Why?
面臨：資金來源的競爭:MMMF
資金去路的競爭:CP市場、證券化、junk bond market
1. Decreasing profitability: banks take risk to
Real estate loan, M&A loan
keep profits up
2. Financial innovation creates more
opportunities for risk taking
3. Innovation of brokered deposits enables
circumvention of $100,000 insurance limit
Result: Failures  and risky loans 
80年代末期，每年倒200家
Copyright © 2000 Addison Wesley Longman
Slide #18-7
Federal Deposit Insurance Corporation
Improvement Act (FDICIA) of 1991
1. FDIC recapitalized with loans and higher
限制brokered deposit的投保範圍
premiums
2. Reduce scope of deposit insurance and too-bigto-fail
Well capitalized
Carrot-and –stick∵不會再“姑息”
Adequately capitalized
3. Prompt corrective action provisions Under capitalized
Significantly undercapitalized
Critically undercapitalized
4. Risk-based premiums
5. Annual on-site examinations and stricter reporting
6. Enhances Fed powers to regulate international
banking
Copyright © 2000 Addison Wesley Longman
Slide #18-8
Evaluating FDICIA and Other Reforms
Limits on Scope of Deposit Insurance
1. Eliminate deposit insurance entirely
2. Lower limits on deposit insurance
3. Eliminate too-big-to-fail
4. Coinsurance (只有部分的存款才有被保險)
Prompt Corrective Action
1. Critics believe too many loopholes
2. However: regulator accountability increased by
mandatory review of bank failure resolutions
將regulator攤在陽光下檢驗
Copyright © 2000 Addison Wesley Longman
Slide #18-9
Evaluating FDICIA and Other
Reforms
Risk-based Insurance Premiums
Hard to implement
Other Proposed Changes
1. Regulatory consolidation
2. Market-value accounting
Copyright © 2000 Addison Wesley Longman
Slide #18-10
Banking Crises Worldwide
Copyright © 2000 Addison Wesley Longman
Slide #18-11
Cost of Banking Crises in
Other Countries
Copyright © 2000 Addison Wesley Longman
Slide #18-12
Calculating Capital Requirements
Assets
Reserves
Treasury
securities
Government agency
securities
Municipal bonds
Residential
mortgages
Real estate loans
C&I loans
Fixed assets
Copyright © 2000 Addison Wesley Longman
First National Bank
Liabilities
$ 3m
$10 m
$ 7m
$10 m
Checkable deposits
Nontransactions
deposits
Borrowings
Loan loss reserves
Bank capital
$ 20 m
$ 60 m
$ 11 m
$ 2m
$ 7m
$10 m
$20 m
$35 m
$ 5m
Slide #18-13
Calculating Capital
Requirements
Leverage Ratio
= Capital/Assets
= $7m/$100m = 7%
Bank is well capitalized
Copyright © 2000 Addison Wesley Longman
Slide #18-14
Calculating Risk-Adjusted Requirements
Risk Adjusted Assets =
0 x $ 3 million
+ 0 x $10 million
+ .20 x $ 7 million
+ .50 x $10 million
+ .50 x $10 million
+1.00 x $20 million
+1.00 x $35 million
+1.00 x $ 5 million
+1.00 x $20 million
$91.4 million
Copyright © 2000 Addison Wesley Longman
(Reserves)
(Treasury securities)
(Agency securities) 或interbank deposit
或fully backed
(Municipal bonds) mortgage bond
(Residential mortgages)
(Real estate loans)
(Commercial loans)
(Fixed assets)或commercial paper
(Letters of credit)
off-balance sheet activities
(Total risk-adjusted assets)
Slide #18-15
Calculating Risk-Adjusted Requirements
Core Capital Requirement
= 4% x risk-adjusted assets
= 4% x $91.4m = $3.66m
< $7m of core capital
4% OK
6% well capitalized
Total Capital Requirement
= 8% x risk-adjusted assets
(tier1)
(tier1+tier2)
8% OK
10% well capitalized
= 8% x $91.4m = $7.31m
Tier2 capital包括loan loss reserve 及
< $9m of total capital
subordinated debt
= $7m of core + $2m of loan loss reserves
Copyright © 2000 Addison Wesley Longman
Slide #18-16