Chapter 11 Flashcards
Banks chartered by the federal government and Banks chartered by state government operate side by side
U.S. has a dual banking system
created the Federal Deposit Insurance Corporation (FDIC) to insure deposits.
- Fed member banks were required to purchase insurance; almost all other banks chose to do so.
- Separated the activities of commercial banks from those of the securities industry.
Banking Act of 1933 (Glass Steagall Act):
National Banks → Office of the Comptroller of the currency; Fed has secondary responsibility.
To survive, financial institutions used the process of financial engineering
Multiple Regulary Agencies
Searching and developing new products and services to meet customer needs and improve profits
financial engineering
process of bundling certain types of assets (such as house mortgages, car loans, or credit card receivables) and repacking them into securities. The interest and principal payments are passed through to the purchasers of the securities.
Made possible because of improvements in information technology.
Securitization
A homebuyer obtains a mortgage form Institution A, which sells the loan to…
Institution B, which collects the payments each month and sells the loan to…
Institution C, which bundles the loan with some other mortgages and sells it to…
Institution D, which designs a security and sells it.
This entity that buys the security receives money from the monthly payments.
All the institutions involved earn a fee and are part of the shadow banking system
An Example of securitization
lending via the securities markets involving different financial institutions that are not subject to typical banking regulations
Shadow banking system
Reserve Requirements- act as a “tax” on deposits; the tax rises as interest rates rise.
Deposit rate ceilings- restrictions on interest that can be paid on deposits
Avoidance of Existing Regulations
Money market mutual funds- issue shares that function like a checking account.
Funds are not subject to the reserve requirement because they aren’t deposits.
Development of superregional banks (Regions Bank, PNC Bank)- bank holding companies with a significant presence across multiple states but with headquarters outside of money center cities
Two innovations that have occurred because of these regulations:
Repealed Glass-Steagall Act; allowed for consolidation across financial services and more mega-mergers.
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
