Session 6 · Bank Regulation
History → Core framework → 2008 reforms → 2018 tailoring → recent updates. Lots of click‑to‑reveal explainers for FIN310.
1) Why Regulate? What problem are we solving?
Safety & Soundness
Prevent failures that harm depositors and the economy.
Consumer Protection
Fair treatment: disclosures, fees, and lending practices.
Financial Stability
Avoid systemic crises and contagion.
Plain‑English examples
- Capital is like a cushion: more losses you can absorb before failing.
- Liquidity is like your cash-on-hand for emergencies.
- Stress tests are fire drills: can the bank handle bad scenarios?
2) U.S. Regulation Timeline (very short)
Click to expand the mini‑timeline
- 1863–64: National Bank Acts → OCC supervision.
- 1913: Federal Reserve Act → Fed created (lender of last resort, payments).
- 1933: Banking Act → FDIC deposit insurance; Glass‑Steagall separation.
- 1980–82: DIDMCA & Garn‑St Germain → interest‑rate deregulation, S&L era changes.
- 1994: Riegle‑Neal → interstate branching.
- 1999: Gramm‑Leach‑Bliley → removed Glass‑Steagall separation (affiliations allowed).
- 2010: Dodd‑Frank Act (post‑2008) → systemic risk council, stress tests, Volcker Rule, CFPB.
- 2018: EGRRCPA (S.2155) → tailoring thresholds and relief for some banks.
- 2023+: Post‑regional‑bank stress → proposals to strengthen capital, liquidity, and resolution.
3) Who Regulates Whom? U.S. overview
Federal Reserve (Fed)
- Holding companies (BHC/LHC) & state member banks
- Capital & liquidity rules (Basel framework), stress tests
OCC
- National banks & federal savings associations
- Chartering, supervision, enforcement
FDIC
- Deposit insurance & resolution of insured banks
- Supervises state non‑member banks
Also relevant
- CFPB (consumer financial protection)
- State regulators (state‑chartered banks, non‑banks)
4) Capital & Risk‑Weighted Assets (Basel III intuition)
Capital ratios compare loss‑absorbing equity to risk‑weighted assets (RWA). Higher = safer (all else equal).
CET1 Ratio Calculator (toy)
What is CET1?
Common equity, retained earnings, minus deductions (e.g., intangibles). Basel III sets minimums plus buffers.
Risk Weight Toy
Reality check
Actual risk weights vary (mortgages, corporates, commitments). We use simple examples for intuition.
5) Liquidity: LCR & NSFR (intuition)
LCR Toy
Why it matters
LCR ≥ 100% aims to ensure enough liquid assets for a 30‑day stress window.
NSFR Toy
Plain words
Stable funding for one‑year horizon; ≥100% is the idea.
6) Post‑2008: Dodd‑Frank Act (2010) — Big Themes
Systemic Risk
FSOC created; enhanced prudential standards for larger firms.
Stress Tests
Supervisory scenarios to test resilience; public disclosures.
Volcker Rule
Limits proprietary trading at banking entities (with exemptions).
Resolution
Orderly liquidation authority; living wills for large firms.
Consumer
CFPB established for consumer financial protection.
Derivatives
Central clearing and margining for many swaps.
Click for student notes
- Goal: lower failure probability and reduce damage if failure happens.
- Capital & liquidity raised vs. pre‑2008; more data and transparency.
7) 2018 Tailoring (EGRRCPA / S.2155)
Regulatory requirements were tailored based on size and risk profile.
Click to see simple category intuition
- Category I: Largest GSIBs — toughest standards.
- Category II–IV: Large banks with varying complexity — standards scaled (capital, liquidity, stress).
- Smaller banks: Some relief in certain rules (e.g., reporting/threshold adjustments).
What students should remember
Bigger/complex = more rules; smaller/simpler = relatively lighter. Thresholds and tests vary over time.
8) Recent Updates (Post‑2023 regional‑bank stress)
- Supervisors emphasized interest‑rate risk management and uninsured‑deposit concentrations.
- Proposals to strengthen capital and long‑term funding for larger banks (often called “Basel III endgame” and related measures).
- Focus on resolution readiness (e.g., pre‑positioning collateral, liquidity in resolution, and communication).
Student takeaway
- Duration risk + fast digital outflows can be dangerous together.
- Stronger cushions (capital/liquidity) and planning help stability.
9) Stress Tests & Living Wills
Stress Loss Toy
What it means
Regulators assess whether capital remains above requirements after severe losses and distributions.
Living Will (Resolution Plan)
- How to be resolved safely if the firm fails
- Critical operations, liquidity, and separability
- Reducing complexity ahead of time
10) Deposit Insurance (FDIC)
Helps prevent runs and protects small depositors up to insured limits.
Coverage Primer
Click for common categories
- Single accounts, joint accounts (limits apply per depositor per bank)
- Trust/retirement categories have special rules
Run Dynamics
Uninsured balances can move quickly; communication and access to liquidity are key.
11) Mini Tools
12) Quick Quiz
Q1. Capital ratios mostly protect against:
Q2. LCR ≥ 100% means the bank has enough:
Q3. The 2018 tailoring idea was to:
13) Homework — Reg Policy Brief (300–500 words)
- Pick a bank profile (large diversified vs. regional lender). State the top two risks (with one metric each).
- Using the tools above, set two scenarios: (i) rate shock, (ii) deposit outflow. Report CET1/LCR/NSFR impacts.
- Recommend two mitigants (capital/liquidity/hedging/funding mix/communications) with a sentence on trade‑offs.