Download the impact of government policy and regulation on banking

THE IMPACT OF
GOVERNMENT POLICY AND
REGULATION ON BANKING
AND THE FINANCIAL
SERVICES INDUSTRY
Bank Regulation- Pros and Cons of
Strict Rules
1. To protect the public's savings
2. To control the money supply
3. To ensure adequate supply of loans
and to ensure fairness
4. To maintain confidence in the system
Pros and cons (cont.)
5. To avoid monopoly powers
6. To provide support for government
activities
7. To support special sectors of the
economy
Major Banking Laws
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National Currency and Banking Acts – 1863/64
Federal Reserve Act – 1913
McFadden-Pepper Act – 1927
Glass-Steagall Act – 1933
FDIC Act – 1935
Bank Holding Company Acts – 1956, 1966, 1970
Bank Merger Acts – 1960, 1966
Social Responsibility Acts
Depository Institution Deregulation and
monetary Control Act (DIDMCA) - 1980
Regulated Nonbank Financial
Service Firms
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Credit Unions
Savings Associations
State Savings Banks
Money Market Funds
Life and Property/Casualty Insurance
Companies
Finance Companies
Mutual Funds
Security Brokers and Dealers
Financial Conglomerates
Federal Reserve Act of 1913
• Passed After a Series of Financial Panics
at the Beginning of the Century
• Created the Federal Reserve System
• Gave the Fed the Authority to Act as the
Lender of Last Resort
• Created to Provide a Number of Services
to Member Banks
• Today the Fed Controls the Money Supply
Federal Reserve activities
• The Federal Reserve System supervises
and examines the activities of statechartered banks that choose to become
members of its system and qualify for
Federal Reserve membership.
other services the Federal
Reserve System provide to banks
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checking clearing
the wiring of funds,
shipments of currency and coin
loans from the Reserve banks to qualified
depository institutions,
• supplying information concerning
economic and financial trends and issues.
FED activities (Cont.)
• regulates the acquisitions and activities of
bank holding companies. However, the
Fed's principal responsibility :
• monetary policy -- the control of money
and credit growth in order to achieve
broad economic goals
FDIC Act 1935
• Addressed the Issues Left Out of the
Glass-Steagall Act
• Gave the FDIC the Power to Examine
Banks and Take Necessary Action
FDIC main activity
• The Federal Deposit Insurance
Corporation (FDIC) insures the deposits of
bank customers, up to a total of $100,000
per account owner, in banks that qualify
for a certificate of federal insurance
coverage.
FDIC (Cont)
• The FDIC is a primary federal regulator
(examiner) of state-chartered, nonmember banks.
• It is also responsible for liquidating the
assets of banks declared insolvent by their
federal or state chartering agency.
The Central Banking System: It’s
Impact on Banks and the
Decisions and Policies of
Banks and Their FinancialService Competitors
Organizational Structure of the Federal
Reserve System
• the Fed consists of a governing board and a policy
making council
• the Fed’s board of governors works with the 12
regional Federal Reserve banks
B. The Central Bank's Principal
Task –
– Making and Implementing Monetary Policy to
make sure that the supply and cost of money
and loans contribute to the economy
What is monetary policy
• Monetary policy consists of regulation and
control over the growth of money and
credit in an attempt to pursue broad
economic goals such as full employment,
avoidance of inflation, and sustainable
economic growth. Its principal tools are:.
Monetary policy tools
1. The Open-Market Policy Tool
2. The Discount Rate Policy Tool
3.Changing Reserve Requirements on
Deposits and Other Bank Liabilities
These tools aim at keeping unemployment
low, inflation low and to ensure high
economic growth
Open market operations
• consist of the buying and selling of securities by
the central bank in an effort to influence and
shape the course of interest rates and the
growth of money and credit.
• therefore, affect bank deposits -- their volume
and growth -- as well as the volume of lending
and the interest rates attached to bank
borrowings and loans as well as the value of
bank stock.
• OMO is the preferred tool, because it is
also the Fed’s most flexible tool. It can be
used every day and any mistakes can be
quickly reversed.
Discount rate tool
• The Discount Window is the department in
each Federal Reserve Bank that receives
requests to borrow reserves from banks
and other depository institutions which are
eligible to obtain credit from the Fed for
short periods of time. The rate charged on
such loans is called the discount rate.
Reserve requirement
• Reserve requirements are the amount of
cash and deposits at the Federal Reserve
banks that depository institutions raising
funds from sources of reservable liabilities
(such as checking accounts, business
CDs, and borrowings of Eurodollars from
abroad) must hold
European Central Bank (ECB)
• Like the Fed the ECB consists of a governing
board and a policy making council and just like
the Fed’s board of governors works with the 12
regional Federal Reserve banks
• the ECB has a cooperative arrangement with
each EU member nation’s central bank.
• The central goal is price stability, which is
largely achieved through open market
operations and reserve requirements.