OUTLINE: Bank Regulation in a Time of Crisis 1
Remember 3
The Equation (Equity, Assets, Debt, Loans, Deposits, Reserves, Capital) 3
Model Bank Balance Sheet & 3
Banks’ role in the Money Supply 3
Money Supply 3
Safety and Soundness 3
Liquidity Risk: What’s Bad About Bank Runs 4
Reserve Requirements 4
*NB: upper bound is $71M as of 12/29/11 4
Deposit Insurance (DI) 5
How to price DI? 5
The Canary in the Coal Mine Model: Who are good monitors: depositors vs. shareholders vs. debtholders? 5
Solvency Regulation (a.k.a. Capital Regulation) 6
What is “Capital”? Meanings of Capital 6
Capital Requirements 6
Capital Regulation 6
Debt v. Capital 6
Capital vs. Reserves 7
Basel II: Refining the Risk-Based Standards 7
Types of Capital Risk Under Basel II 8
Basel II Pro & Con 9
Basel III: Capital Standards 9
Procyclicality 9
MMMFs and Recapitalization 9
BHC and Recapitalization 10
Enforcing Adequate Capital Requirements: Deterrence, Asset Sales, Recapitalization 10
Recapitalization: Where to get the money? 10
Contingent Convertible Debt Requirements (article by Calomiris et al.): Better than the other Recapitalization options! 11
Prompt Corrective Action (PCA) 13
Bank Failure 13
Receivership: A primer 14
Chartering & Change in Ownership 14
Buying a Bank 15
Bank Powers 15
National Bank Act: Enumerated Powers 15
National Bank Act: Incidental Powers 16
Real Estate 16
Securities 17
Q1: Can banks be dealers (buy and sell securities for its own accounts)? 17
Q2: Can banks be brokers (buys and sell securities for client accounts)? 17
Q3: Can banks underwrite securities 17
Insurance Powers of National Banks 18
Insurance Brokerage 18
Insurance Underwriting 18
Prudential Rules: Loans to One Borrower & Insider Loans 18
Loans to One Borrower 18
Insider Loans 19
Affiliations 19
Affiliations: Bank Holding Companies 19
Affiliates Rules 19
Section 23A 19
Bank Holding Company Basics 20
Restrictions on Nonbank Activities: Ownership Clause and Activities Clause 20
Ownership of a Nonbank Sub 20
Ownership of a Bank Sub Engaging in Nonbank Activities 21
Bank Holding Company Regulation: Notice, Reporting & Examinations 22
Affiliations: Financial Holding Companies 22
FHCs: Merchant Banking and The “Wall” Between Banking and Commerce 23
Merchant Banking Under G-L-B 23
Insurance Company Investments Under G-L-B 24
Dual Banking System 24
Consumer Protection and Basic Financial Services 24
Usury 24
Usury for National Banks 24
Usury for State-Chartered Banks 24
Consumer Protection Statutes 25
Equal Credit Opportunity (ECOA) 25
Redlining 25
Truth in Lending Act 25
Lender Liability 25
Community Reinvestment Act 26
Pre-Emption 27
*equity = amount by which a firm’s total assets (what firm owns) exceed the firm’s total liabilities (what the firm owes)
*Illiquid: Loans & Deposits: can be used to explain what a bank is: financial intermediaries
*Liquid: Reserves & Capital: address the instability in banking. Reserves are for liquidity; Capital is for solvency problems.
1. Buy or sell U.S. Treasuries
3. Reduce or increase reserve requirement
*I.e., Fed loans $10k to Bank A (i.e., it buys Bank A’s stockpile of gov’t bonds); how much money does this create?