McGraw-HillIrwinCopyright2013byTheMcGraw-HillCompaniesInc.Allrightsreserved.ChapterTwoTheImpactofGovernmentPolicyandRegulationontheFinancial-ServicesIndustryMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-2KeyTopicsThePrincipalReasonsforBankingandFinancial-ServicesRegulationMajorFinancial-ServicesRegulatorsandLawsTheRiegle-NealandGramm-Leach-Bliley(GLB)ActsTheCheck21FACTPatriotSarbanes-OxleyBankruptcyAbuseFederalDepositInsuranceReandFinancial-ServicesRegulatoryReliefActsEmergencyEconomicStabilizationActandtheGlobalCreditCrisisMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-3KeyTopics(continued)FINREGispassedintolawtoavoidseveredisruptioninthefinancialsystemanddealwithsystemicrickSomeKeyRegulatoryIssuesLeftUnresolvedTheCentralBankingSystemOrganizationandStructureoftheFederalReserveSystemandLeadingCentralBanksofEuropeandAsiaFinancial-ServicesIndustryImpactofCentralBankPolicyToolsMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-4IntroductionThischapterisdevotedtoastudyofthecomplexregulatoryenvironmentthatgovernmentsaroundtheworldhavecreatedforfinancial-servicefirmsinaneffortto:SafeguardthepublicssavingsBringstabilitytothefinancialsystemPreventabuseoffinancial-servicecustomersFinancialinstitutionsmustcontendwithsomeoftheheaviestandmostcomprehensiverulesappliedtoanyindustryRegulationisanuglywordtomanypeopleBurdensomeCostlyDamagingtoinnovationandefficiencyMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-5BankingRegulationWhyarebankscloselyregulatedBanksareamongtheleadingrepositoriesofthepublicssavingsBanksarecloselywatchedbecauseoftheirpowertocreatemoneyintheofreadilyspendabledepositsbymakingloansandinvestmentsBankshavealonghistoryofinvolvementwithfederalstateandlocalgovernmentsIntheUnitedStatesbanksareregulatedthroughadualbankingsystemBothfederalandstateauthoritieshavesignificantregulatorypowersMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-6TABLE21BankingsPrincipalRegulatoryAgenciesandTheirResponsibilitiesMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-7RegulationTheoriesOneoftheearliesttheoriesaboutregulationcontendsthatfirmsinregulatedindustriesactuallyseekoutregulationItbringsbenefitsintheofmonopolisticrentsbecauseregulationsoftenblockentryintotheregulatedindustryAmorerecenttheoryarguesthatregulationscanincreasecustomerconfidencewhichmaycreategreatercustomerloyaltytowardregulatedfirmsThereisanongoingstrugglebetweenregulatedfirmsandtheregulatorsRegulatorydialecticFinancial-servicemanagerswillsearchtofindwaysaroundnewrulesinordertoreducecostsandallowinnovationtooccurMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-8MajorBankingLawsWhereandWhentheRulesOriginatedNationalCurrencyandBankActs(186364)ThefirstmajorfederalgovernmentlawsinU.S.bankingweretheNationalCurrencyandBankActspassedduringtheCivilWarTheselawssetupasystemforcharteringnewnationalbanksthroughanewlycreatedbureauinsidetheU.S.TreasuryDepartmenttheOfficeoftheComptrolleroftheCurrency(OCC)TheComptrollernotonlyassessestheneedforandchartersnewnationalbanksbutalsoregularlyexaminesthoseinstitutionsMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-9MajorBankingLawsWhereandWhentheRulesOriginated(continued)TheFederalReserveAct(1913)Aseriesoffinancialpanicsinthelate19thandearly20thcenturiesledtothecreationoftheFederalReserveSystem(theFed)TheFedsprincipalrolesaretoserveasalenderoflastresortandtohelpstabilizethefinancialmarketsandtheeconomyTheirmostimportantjobtodayistocontrolmoneyandcreditconditionstopromoteeconomicstabilityMcGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-10MajorBankingLawsWhereandWhentheRulesOriginated(continued)TheBankingActof1933(Glass-Steagall)TheGlass-SteagallActdefinedtheboundariesofcommercialbankingbyprovidingconstraintsthatwereeffectiveorethan60yearsThislegislationseparatedcommercialbankingfrominvestmentbankingandinsuranceTheFederalDepositInsuranceCorporation(FDIC)wascreatedtoguaranteethepublicsdepositsuptoastipulatedmaximumamountinordertoenhancepublicconfidenceinthebankingsystemInitially$2500andtodayitisupto$250000McGraw-HillIrwinBankManagementandFinancialServices7e2008TheMcGraw-HillCompaniesInc.AllRightsReserved.2-11MajorBankingLawsWhereandWhentheRulesOriginated(continued)TheFDICImprovementAct(1991)TheFDICwastheobjectofcriticismduringthe1980sand1990sThislegislationpermittedtheFDICtoborrowfromtheTreasurytoremainsolventcalledforrisk-basedinsurancepremiumsanddefinedtheactionstobetakenwhendepositoryinstitutionsdidnotmeetcapitalrequirementsPriorto1993theFDICimposedfixedinsurancepremiumsonallde