Chapter 02 Flashcards
Central banks
- implements/manages country’s monetary policy, money supply, interest rates
- in many countries, also oversees commercial banking and pmt systems
- Examples
- European Central Bank (ECB)
- Bank of England
- Fed Reserve Bank (US)
- People’s Bank of China
Fin. Stability Board (FSB)
- coordinates w/ int’nl fin. authorities and standard-setters
- develops and promotes regulatory, supervisory, and other fin. sector policies
Bank for International Settlements (BIS)
- principal center for cooperation beween int’nl central banks and other agencies pursuing monetary and financial stability
- collects, compiles, and disseminates econ. and fin. statistics
- HQ in Basel
- world’s oldest int’nl fin. institution
Bretton Woods Agreement
- post WWII rules governing $ relations btwn. world’s major financial powers
- est’ed. Int’nl Monetary Fund (IMF) and Int’nl Bank for Reconstruction and Development (IBRD) – both now part of the World Bank
Basel Committee on Banking Supervision (BCBS)
- Objectives:
- reduce systemic risk (more resilient banks)
- enhance understanding of key supervisory issues
- improve quality of banking supervision WW
- Published Basel I-III
Group of Governors & Heads of Supervision (GHOS)
- governing body of Basel Committee
- central bank governors + non-central bank heads of supervision from member countries
Basel I - III
Basel I (G10s implemented in 1992)
- min capital ratios for large banks, per credit risk of bank’s various assets
- originally “1988 Basel Capital Accord”
Basel II (3 pillars) (2004)
- min. capital requirements (addressing credit and operational risks)
- supervisory review (framework to address/evaluate risk)
- mkt. discipline (req’d disclosures re: risk metrics, capital adequacy)
Basel III (2011-2018)
- stress-test and shock-absorption (i.e. to improve banking sector’s ability to absorb shock from fin and econ stress, etc)
- improve risk mgmt. and governance
- stronger bank transparency and disclosures
Committee on Global Fin. System (CGFS)
- int’nl central bank forum
- monitors and examines broad issues re: fin. mkts. and systems
- elaborates/recommends policy to support central banks’ stability efforts
Committee on Payment & Settlement System (CPSS)
- sets standards for payment and securities settlement systems
- int’nl central bank forum: to monitor/analyze system developments (domestic pmt, settlement, and clearing), x-border and multicurrency settlement schemes
European Payments Council (EPS)
- coordinates and makes decisions re: payments, for European banking industry
- purpose: support/promote SEPA (e.g. develop pmt. schemes and frameworks for integrated euro payments mkt, define common positions for cooperative space of pmt. svcs.)
Single Euro Payments Area (SEPA)
European Union (EU) initiative to integrate/simplify pmt. processes and standards throughout euro area
- create single-set of European pmt. schemes (i.e. integrate existing nat’nl credit xfer and direct debit schemes); step towards Euro = single, fully operational ccy.
- create uniform standard for card pmts. across nat’nl borders (i.e. a consistnet consumer experience, to make/accept card pmts. throughout euro area)
- incentivize/increase electronic pmt. usage (via standard practices)
(framework in Payment Svcs. Directive (PSD))
European Securities & Markets Authority (ESMA)
- indep. EU authority
- helps safeguard EU fin system/stability and protect investors
- securities mkts’ integrity, transparency, efficiency, and functioning
- partly responsible for EMIR
European Mkt. Infrastructure Regulation (EMIR)
- European Parliament and Council adopted in 2012
- to increase stability of OTC derivatives mkt. throughout Europe
- reporting and clearing obligations similar to US’ Dodd-Frank
Int’nl Association of Deposit Insurers (IADI)
enhanced efficacy of deposit insurance systems WW
- promotes/guides int’nl. cooperation
- members rsrch. and guide other members seeking to est./ improve deposit insurance syst.
- to increase depositor confidence, reduce “bank run” risk (more stable)
Int’nl Org of Securities Commissions (IOSCO)
- int’nl standard-setter for securities mkts
- provides comprehensive technical assistance to members
- aims to est./apply rigorous regs and standards for int’nl securities transactions
- stronger enforcement against offenses
Financial Action Task Force (FATF)
- developes/promotes anti-money laundering, terrorist financing
- monitors members’ progress to implement
- reviews techniques/counter-measures
- promotes global adoption of appropriate measures
- 30+ member countries (int’nl org)
- est. “KYC” guidelines
Int’nl Assoc. of Insurance Supervisors (IAIS)
- int’nl standard-setting group for insurance regulators and supervisory entities
- covers most WW insurance premiums (190 jurisdictions, ~140 countries)
- maintenance of efficient, fair, safe, and stable insurance markets
- benefits/protects policyholders, too
Int’nl. Swpas and Derivatives Assoc. (ISDA)
- improve safety and efficiency of world’s swaps and derivatives mkt
- doc. procedures
- enforceability of netting and collateral provisions
- reduce counterparty, credit, and legal risks
- 805+ members across 67 countries
- created 1985
Fed. Reserve REG D
set reserve requirements (re: Fed. Reserve Act 1913)
Fed. Reserve REG E
EFT act provisions, consumer protection re: ATMs, ACH, CCs
Fed. Reserve REG J
check collection and settlement
Fed. Reserve REG J
check collection and settlement
Fed. Reserve REG Q
no interest on corp DDAs (per Glass-Sten)
Fed. Reserve REG Y
allows specific activities for bank hold cos. and foreign banking orgs. operating in US
Fed. Reserve REG Z
truth in lending
Fed. Reserve REG BB
banks to help credit needs of entire community where they conduct business
Fed. Reserve REG CC
expedited funds availability act (speed ck collections, etc.)
Fed. Reserve REG FD
“fair disclosure” re: investments and securities (requires public disclosure of non-public info, if shared with certain parties)
Fed. Reserve REG Y
allows specific activities for bank hold cos. and foreign banking orgs. operating in US
SEC Rule 2a-7
money mkt fund stipulations (e.g. healthy diversification, etc.)
Uniform Commercial Code (UCC)
- unform set of US laws over commercial transactions
- rights/duties of all parties
- statutory definition of commonly accepted biz practices
UCC: Article 3
negotiable instruments– esp. paper-based pmts. to corps (e.g. re: “paid in full” on cks, etc.)
UCC Article 4
bank deposits and collections
UCC Article 4a
funds xfers
UCC Article 5
letters of credit
UCC Article 9
secured transactions
BK: Ch 7
liquidate firm
BK: Ch 9
financially distressed municipality (city, county, state, etc.)
BK: Ch 11
biz reorg.
BK: Ch 13
personal BK (w/ income source)
BK: Ch 15
establishes trustee for BK with companies, assets, individuals, in more than 1 country
Volcker Rule
- restricts certain bank investment activities– specifically proprietary trading (i.e. trading securities on the bank’s own acct), hedge funds, and private equity business - after Paul Volcker (chairman of US central bank, 1979-1987)
What is “net interest margin” to banks?
- Difference btwn (1) interest rate at which the bank lends to borrowers and (2) interest rate the bank pays to depositors for funds held on deposit - primary source of bank’s earnings
List 5 specific areas of financial regulation
- Monitor and manage overall safety of banking system 2. Monetary policy 3. Guidelines to charter banks/other depository institutions 4. Protect consumers (and allocate credit to certain econ. segments) 5. Protect investors purchasing securities through FIs
“Seigniorage”
- income derived from central bank issuing currency and providing it to FIs and other investors in exchange for govt bonds
- funds central bank’s operations or is remitted to the local govt.
“Hersatt risk”
- refers to FX settlement risk, esp. between bank counterparties
- potential systemic risk caused by failure of one, large int’nl bank between contract execution and maturity/settlement (e.g. FX trades)
3 stages of “money laundering”
- placement - deposit illegal activity proceeds @ a FI
- layering - series of transactions to separate cash from criminal/terrorist origins
- integration - create appearance of a legit explanation/source of funds (e.g. donated for a charitable purpose)
Dept of Justice (DOJ)
- w/ Fed, reviews/approves bank mergers and hold co. aquisitions
- FBI (sub-group) investigates FI fraud/theft, enforces key money laundering legis.
Federal Deposit Insurance Corp. (FDIC)
- est. by Glass-Steagall Act in 1933
- protects depositors
- provides depisit insurance for covered FIs
- supervises select depository institutions
- trustee (bank failure)
- administers Deposit Insurance Fund (DIF)
- backed by full faith and credit of US govt.
- covers individuals’ DDA/savings deposits < $250K
Financial Crimes Enforcement Network (FinCEN)
- oversees/implements counter-money laundering by criminal/terrorist orgs.
- investigates, strategizes, provides intelligence/reports to other law enforcers
- serves as the US fin. intelligence unit (FIU)
- operates as a bureau of the Treasury
Financial Industry Regulatory Authority (FINRA)
independent regulator for securities firms and registered securities reps; purpose: to protects investors, reinforce mkt integrity, and provide compliance/ technology-based services
- registers and educates industry participants (brokers, registered investment advisors, etc.)
- examines brokerage firms
- writes and enforces rules re: fed securities laws
- informs/educates the investing public
- provides trade reporting and other industry utilities
- administers dispute resolution forum
created in 2007
Financial Stability Oversight Council (FSOC)
- identifies threats to stability and gaps in regs to prevent systemic risks
- coordinates btwn fed and state agencies
- does NOT make/enforce laws– only recomends
Nat’nl Credit Union Admin (NCUA)
- indep. federal agency
- charters/supervises federal credit unions
- operates the National Credit Union Share Insurance Fund (NCUSIF)– insures savings of account holders in all fed (and many state) credit unions, like FDIC for credit unions
OFAC
US Secret Service
- mission: safeguard nation’s fin infrastructure, pmt. systems
- handles CC and ck fraud, and ID theft
- est. in 1865 as anti-counterfeit currency
- now, part of Homeland Security
Securitie and Exchange Commission (SEC)
- maintain fair/orderly mkt
- regulates/supervises securities sales (stocks, bonds, derivative instruments)
- requires public corps to disclose all relevant fin info to investors, etc.
Bank Secrecy Act
- US legis., est. by FinCEN
- combat money laundering and use of secret, foreign bank accts
- requires banks to report clients’ large/suspicious money xfers
- requires any trade/business org. that receives > $10K cash to file IRS Form 8300 (ID from whom the cash came, to whom, transaction method)
Glass-Steagall Act (aka Banking Act of 1933)
Gramm-Leach-Bliley Act of 1999
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act)
- wide US legis, post ‘07-‘09 crisis
- est.
-
Fin. Stability Oversight Council (FSOC) -
- oversees fed bank regulators (i.e. OCC, Fed’s Board of Governors, FDIC)
- monitors systemic risk in fin. systs, recommendations to regulators
-
Fin. Stability Oversight Council (FSOC) -
- Commodity Futures Trading Commis. (CFTC) - regulates OTC derivatives w/ SEC (more oversight, to minimize irresponsible practices)
-
Consumer Fin. Protection Bureau (CFPB) - consolidate consumer protection, oversee federal law enforcement re: fair access to credit for individs/communitites; examines/enforces regs for:
- student lenders
- payday lenders
- all mortgage-related business
- banks and CUs w/ assets > $10B
EFT Act (1978)
Money Laundering Control Act (MLCA) of 1986
- made it a crime to structure transactions to avoid req’d reporting per Bank Secrecy Act (civil and criminal penalties)
- Requires FIs to:
- establish KYC guidelines
- be aware of large-value funds xfers
- file currency trans. reports and criminal referrals
US PATRIOT ACT (2001)
- extended MLCA obligations to non-bank FIs and non-financial businesses w/ potential for large-value transactions (car, boat, plane, jewelry dealers)
- made all foreign banks w/ US accounts subject to US jurisdiction (including power to obtain records and customer info)
- US banks: no correspondent accts for “foreign shell banks” (no physical presence in any country)
- US CC system operators: not allowed to authorize foreign banks to issue/accept US CCs w/o taking steps to prevent terrorist usage
- requires banks’ KYC (increased due diligence)
- public firms must:
- internal controls over fin reporting
- audit committee must:
- pre-approve audit/non-audit svcs. from auditor
- be briefed by auditors on firm’s acct’ing and alternative methods
- annual reports to include:
- code of ethics for sr. officers in annual reports
- disclose audit committee financial expert
- Form 8-K, if ethics code is waived/changed
*
“Red Flags Rule”
- Requires FIs and creditors develop/implement ID theft protection programs
- document/disclose, per Fair and Accurate Credit Trans. Act of 2003 (FACT)
- applies to: most entities regulated by the Fed and NCUA
- state/nat’nl banks
- state/nat’nl savings and loan assoc.
- mutual savings bank
- state/fed credit union
Foreign Acct Tax Compliance Act (FATCA)
requires US taxpayers to file/report:
- annual report of all foreign fin accts and offshore assets
requires foreign fin institutions to report:
- fin accts held by US taxpayers
- foreign entities substantially owned by US taxpayers
Report of Foreign Bank and Fin Accts (FBAR)
Requires US persons/businesses to file a report if BOTH:
- was a signer or had a fin. interest on/in a bank acct outside the US
- acct(s)’ aggregate value > $10K
at any time throughout the yr.
