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Financial Regulation (Dodd-Frank Bill & Future Regulation (July 2010,…
Financial Regulation
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Government Safety Net
provides protection for depositors,otherwise their loss of money would result in bank failure, the inability to assess the quality of a bank's assets can lead to panics as well
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Deposit Insurance Scheme: a payoff method that allows the bank to fail and pays off despots up to the insurance limit
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"Too Big to Fail"
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but this does increase the moral hazard risk and gives depositors and creditors little reason to monitor the banks - AIG
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Prompt Corrective Action
FDIC Improvement Act of 1999 created 5 groups for bank's capital standard
- Group 1 - well capitalised
- Group 2 - adequately capitalised
- Group 3 - undercapitalised
- Group 4 - significantly undercapitalised
- Group 5 - critically undercapitalised
Basel 3 - June 1999
- Pillar 1 - linking capital requirements to actual risk for large international banks
- Pillar 2 - steps to strengthen the supervisory process
- Pillar 3 - increased market discipline mechanisms
Issues:
- meant banks didn't require enough capital to weather the financial crisis
- relied on credit ratings for weight - proven unreliable by the crisis
- pro cyclical credit standards restrict credit exactly when it is needed
- doesn't address liquidity problems
Basel 3 Net Stable Funding Ratio - the amount of available stable funding relative to the amount of required stable funding, ratio should be at least 100% on an ongoing basis
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Disclosure Requirements
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Sarbanes - Oxley Act 2002 established Public Company Accounting Oversight Board to oversee the audit industry
mark to market (fair value) accounting assets are valued in the balance sheet at what they could sell for in the market
Consumer Protection
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Fair Credit Billing Act 1971 - e.g. credit card issuers must provide information on financial charges
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Financial Supervision
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Examinations - to monitor capital requirements & restrictions on asset holdings to prevent moral hazard
CAMEL rating:
- capital adequacy
- asset quality
- management
- earnings
- liquidity
- sensitivity
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