Capital Markets - Banking Regulations

Question 1

Describe the Glass Steagall Act

Answer 1

Banks sold poor quality securities to trust accounts

Engaged in insider trading

Prevents firm from accepting deposits from underwriting stocks & bonds

Separates banking & securities activities

Prevents conflict of interest
- Cutting off future loans if customers don’t purchase securities

Question 2

Describe DIDMCA Regulation

Answer 2

Deregulated banking industry

Improve monetary policy

Increased competition

Banks set own IR on deposits

Banks offer NOW accounts
- Savers earn interest on deposits

Question 3

Describe the Financial Services Modernisation Act 1999

Answer 3

Banks merge with securities and insurance firms

Banks have strong rating in community lending

Offer various financial services types

Diversified products

Reduce reliance on single services

Promotes healthy competition

Question 4

Explain how Sarbanes-Oxley Act improved transparency of banks
PART 1

Answer 4

Implement internal reporting process
- Monitored by executives

Improve internal control processes

Established centralised database

Prevents accounting firm to audit client whose employees employed 1 year prior to audit

Question 5

Explain how Sarbanes-Oxley Act Improved transparency of banks
PART 2

Answer 5

Firm’s audit committee must include external members

Audit committee must not receive consulting/advising fees

Fines/imprisonment for employees who mislead investors

Question 6

Explain Financial Reform Act 2010
PART 1

Answer 6

Banks verify…
- Income
- Job statys
- Credit history

Banks that sell MBS must retain 5% portfolio

Must disclose quality of underlying assets

Established financial stability oversight council

Question 7

Explain Financial Reform Act 2010
PART 2

Answer 7

Identified risks to financial stability

Make recommendations to regulators
- E.g. Higher capital requirements

Consumer financial protection bureau
- Regulates consumer finance products
- E.g. - Online banking/credit cards