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Lecture Financial markets and institutions: Chapter 13 - Anthony Saunders, Marcia Millon Cornett

Chapter 13 - Regulation of commercial banks. In this chapter, we reviewed the regulations imposed on CBs. We provided an overview of historical and current regulations on CBs' product offerings and geographic expansion opportunities. The recent loosening of regulations in these areas is likely to result in the emergence of many large U.S. | 8- McGraw-Hill/Irwin Chapter Thirteen Regulation of Commercial Banks 13- McGraw-Hill/Irwin Commercial Banks Commercial banks provide many unique services information, liquidity, price-risk reduction, transaction cost, maturity intermediation, and payment services money supply transmission, credit allocation, intergenerational wealth transfers, and denomination intermediation Failure to provide these services can be costly to both users and suppliers of funds Accordingly, commercial banks are regulated at the federal (and sometimes state) level 13- McGraw-Hill/Irwin Commercial Bank Regulation Safety and soundness regulation assets must be diversified: cannot make loans greater than 10% of their equity capital to any one borrower must maintain adequate equity capital levels to protect against insolvency risk provision of guarantee funds such as the Deposit Insurance Fund (DIF) protects depositors in the event of default and prevents bank runs monitoring and surveillance: banks must submit (publicly accessible) quarterly reports and are subject to on-site examinations 13- McGraw-Hill/Irwin Commercial Bank Regulation Monetary policy regulation the Central Bank (the Federal Reserve) directly controls the quantity of notes and coin (i.e., outside money) in the economy however, the bulk of the money supply is held as bank deposits, called inside money regulators require cash reserves to be held at commercial banks 13- McGraw-Hill/Irwin Commercial Bank Regulation Credit allocation regulation regulators encourage (and often require) lending to socially important sectors of the economy (e.g., housing and farming) usury laws cap interest rates that can be charged on loans Investor protection regulation protects investors against insider trading, lack of disclosure, malfeasance, and breach of fiduciary responsibility 13- McGraw-Hill/Irwin Commercial Bank Regulation Entry and chartering regulation the entry of commercial banks is . | 8- McGraw-Hill/Irwin Chapter Thirteen Regulation of Commercial Banks 13- McGraw-Hill/Irwin Commercial Banks Commercial banks provide many unique services information, liquidity, price-risk reduction, transaction cost, maturity intermediation, and payment services money supply transmission, credit allocation, intergenerational wealth transfers, and denomination intermediation Failure to provide these services can be costly to both users and suppliers of funds Accordingly, commercial banks are regulated at the federal (and sometimes state) level 13- McGraw-Hill/Irwin Commercial Bank Regulation Safety and soundness regulation assets must be diversified: cannot make loans greater than 10% of their equity capital to any one borrower must maintain adequate equity capital levels to protect against insolvency risk provision of guarantee funds such as the Deposit Insurance Fund (DIF) protects depositors in the event of default and prevents bank runs monitoring and .