Lecture Legal and regulatory aspects of banking supervision – Chapter 6

The following will be discussed in this chapter: General types of bank regulations, privacy regulations, anti-money laundering and anti-terrorism regulation, community re-investment regulation, deposit account regulation, deposit insurance regulation, consumer protection, withdrawal limit and reserve requirement,…

MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING

SUPERVISION

OSMAN BIN SAIF

Session: SIX

Summary of Previous Session

• Sub Prime mortgage: the main cause of banking crisis 2008

– Story telling

• General Principles of Bank Regulations

Agenda of this session

• General Types of Bank Regulations

• Privacy Regulations

• Anti-money laundering and anti-terrorism regulation

• Community re-investment regulation

• Deposit account regulation

• Deposit insurance regulation

• Consumer protection

• Withdrawal limit and reserve requirement

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Agenda of this session (Contd.)

• Interest on demand deposits

2) restrictions on pricing (interest rate controls

and other controls on prices or fees);

3) line-of-business restrictions and regulations

on ownership linkages among financial

institutions;

Types of Regulations (Contd.)

4) restrictions on the portfolio of assets that

banks can hold (such as requirements to

hold certain types of securities or

requirements and/or not to hold other

securities, including requirements not to hold the control of non financial companies);

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5) compulsory deposit insurance (or informal

deposit insurance, in the form of an

expectation that government will bail out depositors in the event of insolvency);

6) capital-adequacy requirements;

Types of Regulations (Contd.)

7) reserve requirements (requirements to hold a

certain quantity of the liabilities of the central bank);

8) requirements to direct credit to favored

sectors or enterprises (in the form of either formal rules, or informal government

pressure);

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9 expectations that, in the event of difficulty,

banks will receive assistance in the form of

“lender of last resort”;

11 special rules concerning mergers (not always

subject to a competition standard) or failing

banks (e.g., liquidation, winding up, insolvency, composition or analogous proceedings in the banking sector);

Types of Regulations (Contd.)

11) other rules affecting cooperation within the

banking sector (e.g., with respect to payment systems)

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Privacy Regulations

• Regulation P governs the use of a

customer's private data Banks and other financial institutions must inform a

consumer of their policy regarding

personal information, and must provide an

"opt-out" before disclosing data to a affiliated third party The regulation was

non-enacted in 1999

Anti-money laundering and

anti-terrorism Regulation

• The Bank Secrecy Act (BSA) requires

financial institutions to assist

government agencies to detect and

prevent money laundering

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Anti-money laundering and terrorism Regulation (Contd.)

anti-• Specifically, the act requires financial

institutions to keep records of cash

purchases of negotiable instruments, file reports of cash transactions exceeding

$10,000 (daily aggregate amount), and to report suspicious activity that might

signify money laundering, tax evasion or other criminal activities

Community reinvestment

Regulation

• The Community Reinvestment Act of 1977

requires insured depository institutions to reinvest in the communities they serve

• There should be an emphasis on

low-income and moderate-low-income (LMI)

census tracts and individuals

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Community reinvestment

Regulation (Contd.)

• Insured depository institutions must

display a CRA notice, and each branch must have a current CRA public file or access to it via the company's intranet, and must provide the information in

person or by mail

Deposit account regulations

Deposit Insurance

• The United States was the second country (after Czechoslovakia) to officially enact

deposit insurance to protect depositors

from losses by insolvent banks

• In 1933 the Glass–Steagall Act

established the Federal Deposit Insurance Corporation (FDIC) to insure deposits at

opening a new savings account

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Consumer protection (Contd.)

• On passing the law in 1991, Congress

noted it would help promote economic

stability, competition between depository institutions, and allow the consumer to

make informed decisions

Withdrawal limits and reserve

• Defines what qualifies as DDA/NOW

accounts See Regulation Q for eligibility rules for interest-bearing checking

accounts

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Withdrawal limits and reserve

requirements (Contd.)

• Defines limitations on certain withdrawals

on savings and money market accounts

– Unlimited transfers or withdrawals if made in person, by ATM, by mail, or by messenger

– In all other instances, there is a limit of six (6) transfers or withdrawals No more than three (3) of these transactions may be made

payable to a third party (by check, draft, of-sale, etc.)

point-– Some banks will charge a fee with each

excess transaction 22

Interest on demand deposits

• Until 2011, Regulation Q prohibited banks

from paying interest on demand deposit accounts A "demand deposit" account

includes many, but not all checking

accounts, and does not includeNegotiable Order of Withdrawal accounts (NOW

accounts)

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Consumer protection

• The Home Mortgage Disclosure

Act (HMDA) of 1975, implemented

by Regulation C, requires financial

institutions to maintain and annually

disclose data about home purchases,

home purchase pre-approvals, home

improvement, and refinance applications involving one- to four-unit and multifamily dwellings It also requires branches and loan centers to display a HMDA poster

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Consumer protection (Contd.)

• The Equal Credit Opportunity Act (ECOA)

of 1974, implemented by Regulation B,

requires creditors which regularly extend credit to customers—including banks,

retailers, finance companies, and

bank-card companies—to evaluate candidates

on creditworthiness alone, rather than

other factors such as race, color, religion, national origin, or sex Discrimination

based on marital status, receipt of public assistance, and age is generally

prohibited (with exceptions), as is

discrimination based on a consumer's

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Consumer protection (Contd.)

• The Truth in Lending Act (TILA) of 1968, implemented by Regulation Z, promotes

the informed use of consumer credit by

standardizing the disclosure of interest

rates and other costs associated with

borrowing TILA also gives consumers the right to cancel certain credit transactions involving a lien on the consumer's

principal dwelling, regulates certain card practices, and provides a means of resolving credit-billing disputes 27

credit-Debt collection

• The Fair Credit Reporting Act (FCRA) of

1970 regulates the collection, sharing, and use of customer-credit information

• The act allows consumers to obtain a copy

of their credit report from credit bureaus

that hold information on them, provides

for consumers to dispute negative

information held and sets time limits, after

Debt collection (Contd.)

• It requires that consumers be informed when negative information is added to their credit records, and when adverse action is taken based on a credit report

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Credit cards

• Provisions addressing credit-card

practices aim to enhance protections for

consumers who use credit cards and

improve credit-card disclosure under the Truth in Lending Act:

• Banks would be prohibited from increasing the rate on a pre-existing credit card

balance (except under limited

circumstances) and must allow the

Credit cards (Contd.)

• Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges

• Banks would be required to give

consumers the full benefit of discounted promotional rates on credit cards by

applying payments in excess of the

minimum to any higher-rate balances first, and by providing a grace period for

purchases where the consumer is

otherwise eligible

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Credit cards (Contd.)

• Banks would be prohibited from imposing interest charges using the "two-cycle"

method, which computes interest on

balances on days in billing cycles

preceding the most recent billing cycle

• Banks would be required to provide

consumers a reasonable amount of time

to make payments

Lending limits

• Lending-limit regulations restrict the total amount of loans and credits that a bank

may extend to a single borrower

• This restriction is usually stated as a

percentage of the bank's capital or assets

– For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus

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Lending limits (Contd.)

• Loans to Insiders (Regulation

O) establishes various quantitative and

qualitative limits and reporting

requirements on extensions of credit made

by a bank to its "insiders" or the insiders of the bank's affiliates The term "insiders"

includes executive officers, directors,

principal shareholders and the related

Central banking regulation

• Extensions of Credit by Federal Reserve Banks (Regulation A) establishes rules

regarding discount window lending, the

extension of credit by the

Federal Reserve Bank to banks and other institutions

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Central banking regulation

(Contd.)

• The Federal Reserve Board made

significant amendments to Regulation A in

2003, including amendments to price

certain discount-window lending at market rates and to restrict borrowing to banks in generally sound condition

above-Regulation of bank affiliates and

holding companies

Their Affiliates (Regulation W) regulates

transactions, such as loans and asset

purchases between banks and their

affiliates

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Regulation of bank affiliates and

holding companies (Contd.)

• The term "affiliate" is broadly defined and includes parent companies, companies

that share a parent company with the

bank, companies that are under other

types of common control with the bank

(e.g by a trust),

• companies with interlocking directors (a

majority of directors, trustees, etc are the same as a majority of the bank's),

Summary of this session

• General Types of Bank Regulations

• Privacy Regulations

• Anti-money laundering and anti-terrorism regulation

• Community re-investment regulation

• Deposit account regulation

• Deposit insurance regulation

• Consumer protection

• Withdrawal limit and reserve requirement

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Summary of this session

THANK YOU

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