Banking and Market Regulation

History of Banking

• Need for “money” • Where to store the money • Banks and religion • Italian banks (banco = bench) • London goldsmiths • Investment/commercial banks

Types of Institutions

• Depository institutions • Commercial banks • Thrift institutions • Credit unions

• Non-depository institutions • Finance companies • Property and casualty insurance • Life insurance • Mutual funds • Pension funds

History of Financial System in the United States

• Bank of North America (1781) • First Bank of U.S. (1791–1811) • Second Bank of U.S. (1816–1836) • “Free Banking” Era (1837–1863) • Dual Banking System (1860s)

• National Bank Act (1863) • National banks to be regulated on the federal

level while state banks are regulated according to state laws

The Federal Reserve System

• National Bank Act (1863–1864) • Created federally charted banks • Established Comptroller of the Currency

• Federal Reserve Act (1913) • Established Federal Reserve System

• McFadden Act (1927) • Granted states authority to limit bank

branching of national banks • Allowed national banks to follow the

branching laws set by the state

Supervision and Separation Between I-Banking and C-Banking

• Federal Home Loan Bank Act (1932) • Created Federal Home Loan Bank (FHLB)

system to supervise/regulate savings and loan associations (S&Ls)

• Banking Act of 1933 (Glass-Stegall Act) • Created Federal Deposit Insurance

Corporation (FDIC) to insure bank deposits • Prohibited banks from underwriting corporate

securities

The Pillars of Securities Regulation

• Securities Act (1933) and Securities Exchange Act (1934) • Created Securities and Exchange

Commission (SEC) to regulate issuance/sale of securities to the public

• FSLIC Act (1934) • Part of FHLB system • Established FSLIC to insure deposits of

savings associations (then FDIC in 1989)

Money Market Funds

Money Market Funds (1972) • Created first money market mutual fund • Allowed depository institutions to

circumvent federal ceilings on interest paid • Permitted small investor to receive current

market rates

Deregulation During the 80s • Depository Institutions Deregulation and Monetary

Control Act (1980) • Granted thrift institutions broader deposit and credit powers • Phased out federal deposit ceilings • Imposed uniform deposit reserve requirements on all depository

institutions • Garn-St. Germain Depository Institutions Act (1982)

• Authorized S&Ls and banks to offer money market deposit accounts and increased S&L lending powers

• Permitted adjustable rate mortgages • Provided for mergers or government loans to troubled institutions

The Saving and Loan Crisis

The savings and loan crisis of the 1980s and 1990s refers to the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995 • The Federal Savings and Loan Insurance

Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989

• The Resolution Trust Corporation (RTC) closed or otherwise resolved 747 institutions from 1989 to 1995 (government-owned asset management company)

Regulatory Reaction to the Crisis

• Competitive Equality Banking Act (1987) • Placed moratorium on banks offering new services such as

insurance and securities underwriting • Allowed interstate emergency acquisition of banks and bank

holding companies (BHC) • Allowed FSLIC/FDIC to operate failed banks until buyer found

• Financial Institutions Reform, Recovery and Enforcement Act (1989) • Restructured federal supervisory agencies responsible for S&Ls

with deposit insurance under FDIC • Allowed BHC to acquire solvent and insolvent S&Ls

’90s- Deregulation Continues

• Banking Act of 1994 • Permitted interstate banking through mergers

• Gramm-Leach-Bliley Act of 1999 • Repealed last portions of Glass-Steagall Act • Allowed for the affiliation of banks and

insurance underwriters • Created a new financial holding company that

could underwrite/sell insurance/securities, invest/develop real estate, and other activities

Deregulation Continues (cont.)

• Commodity Futures Modernization Act 2000 • Attempted to define what a “commodity” is, as

it relates to trading and futures and • Removed over-the-counter (OTC) derivative

transactions from regulation by Commodity Futures Trading Commission and SEC: credit default swaps

Banking in the European Union

• Full harmonization of the banking system in Europe. Still some level of national authority.

• Banks can operate in any country either I- Banking or C-banking: “universal banking” • “Reciprocal treatment” or “national treatment”

• Calls for a single financial regulator in Europe

Capital Ratio and International Rules

• Capital ratios: prudent relationship between capital and lending

• Today relationship between capital and assets: “risk weighted assets” • Capital must be percentage of risk weighted

assets • Basel Committee sets international standards

The End The Development of Financial Institutions and Markets in the U.S.