Ngân hàng, tín dụng - Chapter 15: The regulation of markets and institutions

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 15 The Regulation of Markets and Institutions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-2 Learning Objectives • Describe the different methods of regulating primary, secondary, and intermediated financial markets • Understand the United Stated dual banking system and the array of regulators who oversee it • Explain universal banking and its possible benefits and risks Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-3 Introduction • Financial system is one of most intensely regulated sectors in US economy – Promote competition – Protect individual consumers – Assure stability of financial system – Facilitate monetary policy 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-4 Regulation of Financial Markets in the United States • Desire to protect individual investor • Best protection is adequate information about securities • Full disclosure broadens investor’s participation in financial markets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-5 Regulation of Financial Markets in the United States (Cont.) • Regulation of the Primary Market – Securities Act of 1933 • Requires disclosure of information for newly issued publicly traded securities • Privately held firms are not required to reveal financial information to the public at large, only to the lenders – Securities Exchange Act of 1934 • Created the Securities and Exchange Commission (SEC) to administer provisions of 1933 Act • Publicly traded security must file registration statement and preliminary prospectus disclosing information about issue Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-6 Regulation of Financial Markets in the United States (Cont.) • Regulation of the Primary Market (Cont.) – Securities Exchange Act of 1934 (Cont.) • The prospectus does not state the interest rate on a bond issue or price for equity issues—determined in the market when sold • If information is adequate, SEC approves the statement and sale • Approval by the SEC does not imply that it views the new issue as an attractive investment—merely means disclosure of information is adequate 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-7 Regulation of Financial Markets in the United States (Cont.) • Regulation of Secondary Market – Securities Exchange Act of 1934 • Extended 1933 Act to include periodic disclosure of relevant financial information for firms trading in secondary market • 10K Report—Annual financial statement and relevant information about a firm’s performance and activity • Insider Trading Laws – Prohibit insiders from trading on private information not previously disclosed to public – Corporate officers and major stockholders must report all their transactions of their own firm’s stock Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-8 Regulation of Financial Markets in the United States (Cont.) • Regulation of Secondary Market (Cont.) – Securities Exchange Act of 1934 (Cont.) • SEC and other regulatory agencies – Have authority to regulate securities exchanges, OTC trading, dealers, and brokers – Basically rely on self-regulation by markets and firms under their control • Fed sets margin requirements on stocks—how much of purchase price an investor can borrow Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-9 Regulation of Commercial Banks in the United States • Protect individual depositor • Foster a competitive banking system • Ensure bank safety and soundness 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-10 Regulation of Commercial Banks in the United States (Cont.) • U.S. Banking Regulatory Structure – Dual banking system • Federal and State banks existing side-by-side • Legislation in 1860’s established federally chartered banks under supervision of Comptroller of the Currency (US Treasury Department) • Intent was to drive existing state chartered banks out of business by imposing a prohibitive tax on issuance of state banknotes Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-11 Regulation of Commercial Banks in the United States (Cont.) • U.S. Banking Regulatory Structure (Cont.) – Dual banking system (Cont.) • However, state banks survived due to acceptance of demand deposits in lieu of currency • State chartered banks are supervised by regulators in their respective state • Federally chartered banks tend to be larger, but state banks are more numerous Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-12 Regulation of Commercial Banks in the United States (Cont.) • U.S. Banking Regulatory Structure (Cont.) – Federal Reserve Act of 1913 • Required national banks to become members of the Fed, while state banks had option. • All state banks currently fall under regulation of the Fed (member or not) – Federal Deposit Insurance Corporation (FDIC) • All member banks of Fed (national and some state banks) are required to carry FDIC insurance • A majority of state banks not members of the Fed have opted to participate in FDIC program 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-13 Regulation of Commercial Banks in the United States (Cont.) • U.S. Banking Regulatory Structure (Cont.) – Multiple and sometimes conflicting supervisory authority at Federal level – Fed, Comptroller of Currency (Department of the Treasury), and FDIC frequently clash over interpretation of certain laws – Suggestion that all regulation should be combined in a single agency, but no legislation exists to unify the structure Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-14 Regulation of Commercial Banks in the United States (Cont.) • Protecting Individual Depositors and Financial System Stability – Rather than relying on disclosure, thrust of bank regulation is on bank examinations and prompt corrective action when necessary – The primary liabilities of a commercial bank are their demand deposits • Paid on a first-come/first-serve basis • Banks must maintain sufficient liquidity to meet demand deposits Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-15 Regulation of Commercial Banks in the United States (Cont.) • Protecting Individual Depositors and Financial System Stability (Cont.) – The primary liabilities of a commercial bank are their demand deposits (Cont.) • Difficult and costly for banks to sell illiquid assets • Fear that a bank is insolvent will cause a run on the bank or a system-wide bank panic (Figure 15.a1) • Periodic examination of a bank by regulatory agencies to insure banks are solvent 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-16 Regulation of Commercial Banks in the United States (Cont.) • Deposit Insurance – FDIC established by Banking Act of 1933 to insure deposits at commercial and mutual savings banks. – Federal Savings and Loan Insurance Corporation (FSLIC) insured deposits in S&Ls – Resulted from large number of bank failures in the early 1930’s – Intent is to protect small savers and reduce the incentive for insured depositors to join a bank run Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-17 Regulation of Commercial Banks in the United States (Cont.) • Deposit Insurance (Cont.) – Currently insure deposits up to $100,000, but actual coverage may be more. – Coverage depends on procedure used by FDIC: • Payoff method—Bank goes into receivership and FDIC pays out funds up to $100,000 • Assumption method—FDIC merges failed bank with a healthy one and deposits of failed bank are assumed by solvent bank • “Too big to fail” Doctrine—FDIC may extend loans to very large banks in trouble to allow continued operations Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-18 Regulation of Commercial Banks in the United States (Cont.) • Moral Hazard and Deposit Insurance – Existence of FDIC eliminates possibility of large- scale bank failure and “run on the banks” – Moral Hazard • Depositors have little incentive to monitor riskiness of their banks 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-19 Regulation of Commercial Banks in the United States (Cont.) • Moral Hazard and Deposit Insurance (Cont.) – Moral Hazard (Cont.) • Shareholders and directors of banks have incentive to make their banks riskier at the expense of the FDIC • However, several factors may reduce risk taking – Risk averse—banks are privately owned and directors are paid based on performance – Bank examination and other regulatory efforts • “Too big to fail” doctrine man unintentionally exacerbate the moral hazard problem • Recently bank failures have increased due to banking deregulation and commercial banking activities becoming riskier Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-20 Regulation of Commercial Banks in the United States (Cont.) • Risk-Based Capital Requirements – Bank capital provides a cushion against failure – Banks are required to maintain a capital-asset ratio based on a measure of the riskiness of their total assets – Risk-based capital requirements—as a bank’s assets become riskier regulators will force banks to increase their capital – These requirements are agreed upon by the United States and members of the Bank for International Settlements (BIS) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-21 Regulation of Commercial Banks in the United States (Cont.) • Prompt Corrective Action (PCA)—FDIC Improvement Act of 1991 – Established procedures to handle troubled banks – Designed to close banks/thrifts before FDIC is exposed to excessive losses – Prevent regulatory forbearance—when regulators keep an insolvent institution operating in hopes of “turning it around” – Banks are ranked according to their perceived risk and more restrictions placed on riskier banks – FDIC established risk-based deposit insurance premium— charge insurance premium based on the perceived risk of the bank 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-22 Regulation of Nondepository Financial Intermediaries • Depends very much on the type of liabilities they issue • Pension funds and life insurance companies – Heavily regulated because their liabilities are purchased by small investors and need to protect small investors – Employee Retirement Income Security Act (ERISA) • Established the Pension Benefit Guaranty Corporation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-23 Regulation of Nondepository Financial Intermediaries (Cont.) – Employee Retirement Income Security Act (ERISA) • Guarantees defined benefits pension plans, subject to a maximum amount • Establishes minimum reporting, disclosure and investment standards – Life Insurance Companies • Regulated at the state level • Impose risk-based capital requirements • Perform periodic audits • Implicit and explicit restrictions on pricing of particular products Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-24 Regulation of Nondepository Financial Intermediaries (Cont.) • Finance companies raise funds by issuing debt and equity and have virtually no regulation beyond the securities laws governing publicly traded securities • Mutual Funds – Regulated by the SEC – Also subject to state regulations – Motivation is protection of individual investors through full disclosure 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-25 The Glass-Steagall Act, A Collapsing Barrier • Segregated the banking industry from the rest of the financial services industry • Banks are barred from owning corporate stock and other activities deemed too risky • The Genesis of Glass-Steagall – Prior to 1933, investment banking and commercial banking were conducted under same roof – Following the financial collapse of the 1930s, it was felt that investment banking activities were too risky for banks Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-26 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Genesis of Glass-Steagall (Cont.) – This combination represented a substantial threat to financial system stability – Although there was little empirical evidence to support this contention, the legislation mandated separation of the two activities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-27 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Erosion of Glass-Steagall – Commercial banks exerted pressure on the Federal Reserve and courts to reduce the barriers caused by Glass-Steagall – Bank-holding Companies • Permitted banks to conduct nonbanking activities through subsidiaries • In 1970 Federal Reserve was given power to determine what activities were permissible • Activities had to be closely related to traditional banking • During the 1970s and 80s banks acquired more freedom to engage in nontraditional banking activities 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-28 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Erosion of Glass-Steagall (Cont.) – In 1989 the Federal Reserve granted five banks the power to underwrite corporate debt through a Section 20 affiliate – Gradually the Federal Reserve granted more and more banks the right to underwrite corporate debt Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-29 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Erosion of Glass-Steagall (Cont.) – The Gramm-Leach-Bliley Act (1999) • Allowed affiliates of financial holding companies to engage in various banking activities and insurance underwriting • Overall responsibility for regulation lies with the Federal Reserve through its role as the “umbrella” regulator • Individual affiliates of holding companies are subject to regulation by functional supervisors such as the SEC • This regulation framework blends the disclosure-based and inspection-based approaches to regulation • Federal Reserve has power to ensure capital adequacy of holding companies and insure depository institutions are not threatened by other activities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-30 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Risk of Universal Banking – The issue of risk has become a key issue in the debate over Gramm-Leach-Bliley – Some concern that the risk of securities activities, especially the underwriting business, may jeopardize the stability of the banking system – Would bank losses in securities activities lead to more bank failures and significant losses to FDIC – Just because investment banking is riskier than commercial banking, this does not mean that the combination of the two will be riskier 11 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-31 The Glass-Steagall Act, A Collapsing Barrier (Cont.) • The Risk of Universal Banking (Cont.) – The portfolio theory of risk suggests that diversification may reduce risk when commercial banking combine with investment banking and life insurance activities – Perhaps it is time to let the banks decide for themselves whether universal banking reduces risk Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-32 TABLE 15.1 Principal Financial Regulators in the United States Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-33 TABLE 15.2 Status of Insured Commercial Banks, 2007 (dollars in billions) 12 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-34 TABLE 15.3 Capital Ratios—An Example Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-35 TABLE 15.4 Summary of Prompt Corrective Action* (any restrictions in one category apply to all lower categories as well)