Regulatory Stuff

Question 1

McFadden act 1927

Answer 1

Compelled states to afford the same branching rights granted to national banks by the federal reserve act to state banks

Question 2

Glass-Steagall

Answer 2

Separated commercial and investment banks and created the FDIC. Motivated by stock market crash where banks engaged in speculative risk taking. Also didn’t want banks bailing out their own underwritten securities

Question 3

Securities Act 1933

Answer 3

Required all sales and offers of securities to be registered with, and regulated by the SEC

Question 4

Investment Act 1940

Answer 4

Goal was to build confidence in the financial system by requiring companies with more than 100 investors to register with the SEC and adhere to disclosure requirements. Also required mutual funds to limit leverage

Question 5

Community reinvestment act

Answer 5

Required all banks with FDIC insurance protection be subjected to oversight by federal banking agencies to ensure they extend credit/loans in a non-discriminatory way

Question 6

Dodd Frank - Hotel California regulation

Answer 6

Bank holding companies with more than $50 billion in assets and received assistance during the crisis cannot avoid regulation by removing their bank holding company status

Question 7

Dodd Frank - Volker Rule

Answer 7

Section 619, prevented proprietary trading

Question 8

Dodd Frank - other important policies

Answer 8

Coordinated govt oversight of large financial firms, increased FDIC DIF from 1.15% to 1.35% and expanded deposit guarantee. Also reduced TARP funding by $225 billion and limited Fed 13(3) for individual firms. Also addressed executive compensation

Question 9

Dodd Frank - Executive compensation

Answer 9

Shareholders could vote on executive compensation as well as compensation during a merger. Required disclosure of compensation in relation to company performance

Question 10

Maiden Lane

Answer 10

SPV created by the NY fed to help distressed financial institutions

Question 11

TAF - term auction funding

Answer 11

Injected liquidity through auction of funds to the highest bidder

Question 12

TALF - term asset-backed securities loan facility

Answer 12

Non-recourse funding for AAA asset backed securities

Question 13

TSLF - term securities lending facility

Answer 13

Lent treasuries to primary dealers in exchange for MBS

Question 14

PDCF - primary dealer credit facility

Answer 14

Non-recourse funding for AAA assets that others would not accept

Question 15

AMLF - asset backed commercial paper MMMF liquidity facility

Answer 15

Non recourse funding for banks to purchase assets backed by commercial paper from MMMF facing significant withdrawls

Question 16

TARP - troubled asset relief program

Answer 16

Congress authorized $700 billion to purchase assets, preferred equity and warrants from financial institutions. Bailed out auto industry and gave money to homeowners with a mortgage

Question 17

TLGP - temporary liquidity guarantee program

Answer 17

Debt guarantee: provided debt guarantee for financial institutions

Transaction guarantee: provided unlimited deposit insurance for non-interest bearing accounts

Question 18

SEC extraordinary measures

Answer 18

Banned short selling on certain bank equities to prevent further price volatility

Question 19

Why did SEC view shortselling ban as a failure

Answer 19

Created an artificial price floor for bank equities so that the price didn’t reflect true demand, reduced liquidity and also didn’t restore investor confidence

Question 20

Macro prudential regulation

Answer 20

Regulators must consider broad economic risks when addressing financial institutions.

Question 21

Basel regulatory framework

Answer 21

Set of international banking regulations that aimed to ensure the safety and soundness of the global financial system

Question 22

Basel 1

Answer 22

Classified bank assets into risk categories (0%, 10%, 20%, 50%, 100%) and set capital requirement for banks equal to 8% of total assets

Question 23

Basel 2

Answer 23

Redefined risk weighting to include asset credit rating and also separated capital into 3 tiers

Question 24

Basel 3

Answer 24

Reset capital requirements where tier 1 capital must be 8% of total assets, tier 2 must be 6% of total assets, got rid of tier 3 capital and also forced banks to hold counter cyclical reserve buffers and introduced leverage and liquidity requirements

Question 25

How could risk weighting have contributed to the bank crisis

Answer 25

Since treasuries and other govt backed securities have a risk weighting of 0% banks did not need to hold capital against them even though they were subjected to massive interest rate risk. Thus many banks don’t have adequate capital to make up for losses on treasuries