INT’L FINANCIAL SYSTEM JOINT CLASS FOURTEEN US REGULATORY STRUCTURE Prof. David K. Linnan Univ. of South Carolina School of Law UI-UGM-USC-UNDIP-USU Joint Videoconferenced Class November 7, 2002
Download ReportTranscript INT’L FINANCIAL SYSTEM JOINT CLASS FOURTEEN US REGULATORY STRUCTURE Prof. David K. Linnan Univ. of South Carolina School of Law UI-UGM-USC-UNDIP-USU Joint Videoconferenced Class November 7, 2002
INT’L FINANCIAL SYSTEM JOINT CLASS FOURTEEN US REGULATORY STRUCTURE
Prof. David K. Linnan UI-UGM-USC-UNDIP USU Univ. of South Carolina School of Law Joint Videoconferenced Class November 7, 2002
RESTRUCTURING REGULATION
CAPITAL VS BANKING MARKETS Banking- Central Banking Functions vs Prudential Regulation Capital markets, but also insurance, pension funds & other financial institutions
RESTRUCTURING REGULATION
CAPITAL VS BANKING MARKETS US Structures Dual Banking system Securities & Exchange Commission (plus state blue sky agencies) CFTC State insurance regulation Pension regulation (state & federal)
US BANKING REG HISTORY
HOW WE GOT HERE
National Bank Act of 1864 Pre-existing state banks (free banking tradition since 1838, meaning not a specific charter as business license), so created dual banking system and defined “business of banking” as to this day deposit-taking & extension of credit
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Federal Reserve Act of 1913 Created Federal Reserve as central bank plus gave prominent role in banking supervision
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Edge Act of 1919 International banking authorization for banks to create special purpose subs (so Citi is not new phenomenon)
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
McFadden Act of 1927 Established dominance of state banking laws to determine interstate banking structures, essentially prohibiting interstate branching in theory to preserve community banking
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Banking Acts of 1933 & 1935 As response to 1930s banking crisis, 1. separate commercial from investment banking (so commercial banks could not be universal banks in European model, investment banking being core capital markets activity), 2. established interest ceilings on deposits, 3. established FDIC as insuror with regulatory powers, 4. restricted bank activities particularly interlocking directorates and insider lending, 5. generally broadened supervisory powers
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Federal Home Loan Bank Act of 1932 and Federal Credit Union Act of 1934 Established parallel institutions with special housing & mutual markets covered also by insurance, with own parallel regulatory structure
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Bank Holding Company Act of 1956 & 1970 amendments Federal regulation for bank holding companies under Federal Reserve, in effect upholding longstanding rule that financial & industrial sector ownership separated
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Savings & Loan Holding Company Act of 1967 Parallel S & L regulation like BHCA, but under FHLBB
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Depository Institutions Deregulation & Monetary Control Act of 1980 1.
2.
3.
4.
First big deregulatory financial sector statute, phasing out deposit interest rate ceilings, Expansion of permissible S & L activtties Authorizing (negotiable nationwide order of check-like instrument) NOW withdrawal, a accounts special Background of S & Ls suffering asset & liability mismatch & opening up competition in sector more generally
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Garn-St. Germain Depository Institutions Act of 1982 1. Authorised money market deposit accounts duplicated (basically, competition from mutual fund industry selling commercial paper destroyed interest rate ceiling & this competition’s product), 2. Strengthening S & L industry again
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Competitive Equality Banking Act of 1987 Targeting so-called non-bank banks as unregulated activity lenders, definition, but given that businesses were trying either to not take deposits (usually), or not make loans going all the way back to 1864 banking grandfathering institutions Credit, etc.) like consumer finance & industrial lenders (Household Finance, GE
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Financial Institutions Reform, Recovery and Enforcement Act of 1989 1.
Replaced FHLBB with OTS in Treasury as supervisory authority for S & Ls, 2.
Created Resolution Trust Corporation managing failed thrifts & selling assets, (RTC) for 3.
Re-regulated much of S & L asset side (investments, meaning lending mostly), cutting back on non-housing loan activities plus commercial real estate lending Functionally, a decent burial for the S & L industry debacle of 1980s
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Riegle-Neal Interstate Banking Branching Efficiency Act of 1994 and Basically enabling undid the interstate McFadden branching Act and in so nationwide branching (in part in response to pressure on S & L side, meaning banks threatened to convert to thrifts, since they did not have the same constraints)
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
Gramm-Leach-Bliley Act of 1999 Basically undid formal prohibition in Glass-Steagall Act of Citigroup, commercial banks meaning doing investment banking activity and 1956 BHCA of insurance activity if done through a bank holding company structure, with the result that we now have Citibank SalomonSmithBarney-Travellers supermarket”- however, as there “financial had been regulatory loosening since early 1980s under regulatory interpretation of what was permitted “banking business,” etc.
US BANKING REG HISTORY
HOW WE GOT HERE (Cont’d)
How do you regulate Citigroup realistically as a worldwide financial conglomerate? Instead, drifting under Basel Accord towards what begins to look a little like capital markets SRO self-regulation ….
We have gotten here because 1.
2.
technology changing the nature of financial services, the sheer size of institutions like Citi (growing concentration), 3.
blurring of lines re financial products such as uninsured money market funds as SEC-regulated investment companies investing in commercial paper versus traditional insured bank deposits, and 4.
financial engineering practices like securitization and the secondary mortgage market with GNMA guarantee under which for housing we really no longer need S & Ls as real dedicated lenders.
OTHER MODELS?
HOW WE GOT HERE (Cont’d)
What are the appropriate regulatory models outside US (consolidated financial sector regulators looking at UK first)?
US probably stuck with Fed as central bank vs. Fed Banking Regulators (OCC, FDIC, Fed) vs. State Banking Regulators vs.
SEC vs. State Blue Sky vs. CFTC vs. Credit Unions, etc. and federal/state regulatory split on insurance generally as matter of political economy, 1.
Unless and until we have a high-enough profile financial institution debacle to trigger another round of regulatory reform.
2.
So, was Enron that debacle in waiting or is it really a regulatory success?
3.
In what regulated engaged?
business, if any, was Enron actually