Regulation of Commercial Banks

This set of flashcards covers vocabulary and key concepts regarding the regulation of commercial banks, including specific legislative acts, types of regulation, and capital adequacy ratios.

Safety and soundness regulation

Layers of regulation imposed on commercial banks to protect depositors and borrowers against the risk of failure.

Monetary policy regulation

The control and implementation of policy by regulators through requirements for minimum levels of cash reserves to be held against commercial bank deposits.

Credit allocation regulation

Regulations that support commercial bank lending to socially important sectors such as housing and farming.

Consumer protection regulation

Regulations imposed to prevent commercial banks from discriminating unfairly in lending.

Investor protection regulation

Laws protecting investors who purchase securities directly or indirectly through funds managed by commercial banks.

Entry and chartering regulation

Regulations that limit the number of commercial banks in a financial services sector and define the scope of permitted activities, impacting charter values.

Net regulatory burden

The difference between the private benefits to a commercial bank from being regulated and the private costs it faces from adhering to those regulations.

2010 Wall Street Reform and Consumer Protection Act

Also known as Dodd-Frank, it aimed to promote robust supervision, protect consumers from financial abuse, and provide tools to manage financial crises.

Qualified thrift lender (QTL) test

A requirement that savings institutions hold $65$ percent of their assets in residential mortgage-related assets to retain a thrift charter.

Community Reinvestment Act (CRA) of 1977

A law where compliance examinations produce ratings ranging from "outstanding" to "substantial noncompliance" to ensure banks meet local credit needs.

Home Mortgage Disclosure Act (HMDA) of 1975

Regulation specifically concerned about discrimination in lending on the basis of age, race, sex, or income.

Consumer Financial Protection Bureau (CFPB)

A bureau created in 2010 to protect consumers from unfair, deceptive, and abusive practices, such as secretly opening unauthorized accounts.

Glass-Steagall Act

Legislation that traditionally imposed a rigid separation between commercial banking (deposit taking/lending) and investment banking (underwriting/distributing securities).

Financial Services Modernization Act (FSMA) of 1999

The act that repealed the Glass-Steagall barriers between commercial banking and investment banking.

Shadow banking

Activities of nonbank financial service firms that perform banking services but remain unregulated by the federal government as of December 2019.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

Legislation that allowed U.S. and foreign banks to branch interstate by consolidating subsidiaries or through acquisitions, making full interstate banking a reality.

Regulatory forbearance

A policy of not closing economically insolvent depository institutions, but allowing their continued operation.

FDIC Improvement Act (FDICIA) of 1991

Legislation passed to restructure the bank insurance fund and prevent its potential insolvency.

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

An act that restructured the savings association fund (SAIF) and bank insurance fund (BIF) and transferred management to the FDIC.

Basel III

A set of capital requirements passed in 2010 (fully effective in 2019) to raise the quality, consistency, and transparency of the bank capital base.

Common equity Tier I risk-based capital ratio

$$\frac{\text{Common equity Tier I capital}}{\text{Risk-weighted assets}}$$

Tier I leverage ratio

$$\frac{\text{Tier I capital}}{\text{Total exposure}}$$

Capital conservation buffer

A buffer introduced by Basel III designed to ensure depository institutions build up a capital surplus.

Countercyclical capital buffer

A buffer introduced by Basel III that may be declared by any country experiencing excess aggregate credit growth.

International Banking Act (IBA) of 1978

A law declaring that foreign banks in the U.S. are to be regulated the same as national domestic banks.