Chapter 13 Test 2 Flashcards
How many types of regulations are there and what are they
6 types of regulation seek to enhance the net social benefits of commercial banks services to the economy
Safety and sound regulation
To balance profitability with stability
-To protect depositors and borrowers from bank failures
Diversification of Assets
Banks spread investments to reduce risk and avoid major losses
Lending Limits
A bank can’t lend more than 15% of its equity to a single borrower to prevent excessive risk
Capital Requirements
Banks must hold a minimum amount of equity to absorb losses
- Ensures stockholders take the hit instead of depositors
FDIC Insurance
Protects depositors by guaranteeing their money if a bank fails
-Prevents panic withdrawals
Regulatory Monitoring & Surveillance
On-site inspections – Regulators visit banks to check financial health
Financial reports – Banks must submit reports for off-site review
Net regulatory burden
costs of following regulations - benefits of being regulated
Monetary policy regulation
banks must keep a minimum amount of cash in reserves to make sure they can cover withdrawls
Credit allocation regulation
banks are encouraged to lend to important sectors like housing and farming
- may require a bank to hold a certain amount of assets in specific industries
Qualified thrift lender test
requires savings institutions to hold 65% of their assets in residential mortgage-related assets to retain a thrift charter
Consumer protection regulation
imposed to prevent the bank from discriminating unfairly in lending
Investor protection regulation
protects people who invest through banks(buying stocks, mutual funds, or pension funds)
- prevent banks from taking advantage of investors through:insider trading, lack of disclosure, malfeasance, breach of fiduciary duty
Entry and charting regulation
control who can start a bank and what banks are allowed to do
-today banks can offer insurance and investment services which used to be seperate industries
Segmentation of the U.S financial system
when a company creates different versions of a product to meet the needs of different types of customers.
commercial banking- accepts deposits and makes loans
investment banking- handles underwriting, issuing and selling securities
Glass steagall Act- seperated commercial and investment banking
FSMA- removed this seperation, allowing banks to do both
What are the three types of geographic expansions
Domestic, within a state or region, international
Regulations on commercial bank liquidity
banks must hold liquid assets to avoid risk of illiquidity and insolvency
-regulators set minimum reserve requirements for liquid assets
Regulations on capital adequacy
Basel 1-Introduced risk based capital requirements for banks globally
Basel II- adjusted risk measures(derivates, loans, collateral)
Basel III- required banks to hold more capital, avoid rating agencies, and apply scenario analysis
How can banks satisfy capital requirements
Hold onto retained earnings
- reduce dividends
- issue stock
- sell assets
USA patriot act of 2001
updated the bank secret act to help banks screen customers when they open accounts, stop money laundering, and catch people funding terrorism
International banking act of 1978
established equal regulation- foreign banks mmust follow the same rules as U.S banks
-if a foreign banks assets are over 1 billion they must hold federal reserve reserves
- federal reserve examinations; foreign banks are also subject to inspections
Riegel Neal Interstate Act of 1994
allowed u.s and foreign banks to operate across states
