Chapter 13 Flashcards
CAMELS
- Capital Adequacy
- Asset Quality
- Management Quality
- Earnings Quality
- Liquidity
- Sensitivity
A recognized international rating system that banks supervisory authorities use in order to rate financial institutions
CAMELS
CAMELS Composite Rating
“1” - sound in every dimensions
“2” - transient, small weakness in one dimension
“3” - moderate-to-severe weakness, one to two dimensions
“4” - severe weakness in one dimension, moderate in many
“5” - immediate to near-term probability of failure
- Vault Cash
- Deposits at Federal Reserve
- Deposits at other financial institutions
- Cash items in process of collection
(aka) “Primary Reserves”
Cash and Due from Depository Institutions
Safety and soundness regulation:
layers of regulation have been imposed on Commercial Banks to protect depositors and borrowers against the risk of failure (4)
- Diversification of assets
- Capital requirements
- Deposit insurance
- Monitoring
regulation areas (6)
- Safety and soundness
- entry and charter
- monetary policy
- credit allocation
- consumer protection
- investor protection
monetary policy
regulators control and implement this by requiring minimum levels of cash reserves to be held against commercial bank deposits
limit the number of CBs in any given financial services sector, thus impacting the charter values of CBs operating in that sector
entry and chartering regulation
regulations support the CB’s lending to socially important sectors such as housing an farming
credit allocation regulation
laws protect investors who directly purchase securities and/or indirectly purchase securities by investing in mutual or pension funds managed directly or indirectly by CBs
Investor Protection Regulation
- Called for regulators to be given broad authority to monitor and regulate nonbank financial firms.
- Established a number of new government agencies tasked with overseeing the various components of the act and, by extension, various aspects of the financial system.
2010 Wall Street Reform & Consumer Protection Act
are responsible for ensuring that Commercial Banks are operating in accordance, and do so with special attention to a CB’s ability to provide social benefits to the overall economy.
Regulators
- Commercial and Investment Banking Activities
- Banking & Insurance
- Commercial Banking and Commerce
- Non-bank Financial Service Firms & Banking
Product Segmentation in the U.S. Commercial Banking Industry
Glass-Steagall Banking Act (1933)
A new legislation in 1933 that sought to impose a rigid separation between:
- commercial banking (taking deposits & lending)
- Investment Banking (underwriting, issuing, distributing stocks, bonds, etc)
The requirement to impose risk-based capital ratios on banks in major industrialized countries.
Basel Agreement
A law that serves to partially deregulate the financial industry. The law allows companies working in the financial sector to integrate their operations, invest in each other’s businesses and consolidate.
- State regulation of insurance
- Prohibited FDIC assistance to affiliates and subsidiaries of banks and savings institutions.
Financial Services Modernization Act (1999)
banking groups whose distress or disorderly failure would cause significant disruption to the wider financial system and economic activity.
Global systemically important banks (G-SIBs)
Intrastate Restrictions:
- Many states required banks to have a single location.
Interstate Restrictions:
- McFadden Act (1927)
- Riegle-Neal Act (1994)
- Subsidiaries were created in each state
Geographic Segmentation
McFadden Act (1927)
Federal legislation gave individual states the authority to govern bank branches located within the state. This includes branches of national banks located within state lines.
- was repealed in 1994 by the Riegle-Neal Act.
Common Equity Tier I (CET1)
- Common stock, Retained earnings, Accumulated income
- Less goodwill
Tier I (CET1 plus following:)
- Noncumulative preferred stock
- Instruments with no maturity
Tier II
- loan loss reserves, preferred stock, subordinated debt
(CET1 + Tier 1)
A capital buffer of a bank’s total exposures that needs to be met with an additional amount of Common Equity Tier 1 capital.
The buffer sits on top of the 4.5% minimum requirement for Common Equity Tier 1 capital. Its objective is to conserve a bank’s capital.
Capital Conservation Buffer
An additional capital requirement for large, internationally active institutions - Can vary between zero and 2.5 percentage points, with 0 being the setting in normal times.
Countercyclical Buffer
