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

• 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

• 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 state-chartered banks that choose to become members of its system and qualify for Federal Reserve membership.

other services the Federal Reserve System provide to banks

• 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, non-member 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 Financial-

Service 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.