Purpose and Structure: Banks and Regulatory Agencies. 2013, Cerfis Group, Inc.

Transcription

1 Bank Operations Institute Dallas, Texas October 13, 2013 Purpose and Structure: Banks and Regulatory Agencies

2 Financial Intermediaries Commercial banks (community) Thrifts Savings banks Savings and Loans Credit Unions Credit Unions Non-profit financial institution owned and operated by its members Member must belong to a participating organization Deposits determine ownership Savings and lending services Chartered and supervised by NCUA 1

3 COMMERCIAL BANKS What do banks do? Deposit function Payments function Credit function 2

4 The Deposit Function Deposit Function: Types of accounts Demand The check MICR Indorsements Indorsement in blank Special Restrictive Qualified Combination 3

5 Deposit Function: Types of accounts Time Accounts Savings Accounts Certificates of Deposit Time Accounts Money Market Demand Accounts (MMDA) Negotiable Orders of Withdrawal (NOW) Deposit Function: The Depositor Capacity Identity Authority 4

6 Deposit Function: Cash Items v. Collection Items Characteristics of Cash Items: Must be payable on demand or presentment May not have papers or documents attached May not have special instructions attached Characteristics of Collection Items: May be payable on demand or at some future date May or may not have papers or documents attached May or may not have special instructions attached Deposit Function: Local clearings and Transit Local items Direct presentation by messenger Services of another bank Clearing house association Transit Items Services of another bank Clearing house association SWACHA, NACHA 5

7 The Payments Function Payments Function: Customer Expectations Efficiency Safety Speed Convenience 6

8 Payment Function: Methods Cash Not convenient Possible loss Checks Places responsibility of proper exchange on bank Less likelihood of loss Electronic Funds Transfer (EFTS) Credit Function 7

9 Credit Function: Consumer Sources Personal finance companies CVLI Asset-based lenders Mortgage loans Credit Union borrowings Credit Function: Business Loan Sources Factoring Vendors Short-term term promissory notes Secured Unsecured Longer term notes for capital expenditures 8

10 Credit Function: Banks create money! Money Supply (M1) Currency in circulation plus Checkable deposits plus Travelers Checks FOMC operations Banking Entities Commercial Banks: National Banks State Member Banks State Non-Member Banks Bank Holding Companies 9

11 National Banks National Banks Chartered and examined by the Office of the Comptroller of the Currency ( OCC ), an agency of the U. S. Treasury Department National or NA in title Federal a Reserve e System member Deposits insured by the Federal Deposit Insurance Corporation ( FDIC ) 10

12 Office of the Comptroller of the Currency ( OCC ) Established by National Currency Act of 1863 as a bureau of the U. S. Department of the Treasury Four district offices: New York City, Chicago, Dallas, and Denver Headed by Comptroller of the Currency OCC Powers Examine national banks & thrifts Approve/deny applications New charters Branches Capital Other changes to structure t Take supervisory actions Issue rules and regulations 11

13 OCC s Objectives Ensure safety and soundness Foster competition Improve efficiency Ensure fair and equal access to financial ca services Federal Deposit Insurance Corporation ( FDIC ) U. S. government corporation created by Glass- Steagall Act of 1933 Guarantees deposit accounts in member banks up to $250,000 per depositor Demand deposit accounts Negotiable Order of Withdrawal accounts ( NOW ) Money market deposit accounts ( MMDA ) Savings accounts Certificates of deposit ( CD ) Negotiable instruments FDIC Reform Act raised coverage on Individual Retirement Accounts ( IRA ) to $250,000 12

14 State Member Banks State Member Banks Chartered by the State of its domicile Examined by the State and the Federal Reserve Member of the Federal Reserve System Deposits insured by FDIC 13

15 Federal Reserve System ( Fed ) Create by the Federal Reserve Act of 1913 as the central bank of the United States to: Conduct the nation s monetary policy Supervise and regulate banking institutions to ensure safety and soundness and protect consumer rights Maintain stability and contain systemic risk Provide services to depository institutions and the U.S. government The Fed s Structure Federal Reserve Board of Governors Federal Open Market Committee ( FOMC ) Federal Reserve Banks (12) Member e Banks 14

16 Fed Regions Fed Membership Investment: 6% of member s capital + surplus Dividend: 6% dividend 15

17 Other Considerations IRS Sub S designation Bank Holding Companies any company that has direct or indirect control of a bank Shareholders: Controlling: 25% or more Principal: 10% or more Bank Holding Company Act of 1956 (12 U.S.C. 1841(a)(2)(A)) and regulated and supervised by the Federal Reserve Change of Control: Regulation Y , and

18 BHC Advantages Easier to raise capital than traditional banks Shareholder debt assumption Ease of acquiring banks and non- bank entities Stock issuance and repurchase Governance issues BHC Disadvantages Added expenses of extra administrative layer If BHC has 500 or more shareholders and $10 million in Assets, must register with SEC Regulation/examination 17

19 Addressing BANKING as a RISK Business Financial Risks Interest Rate Price Liquidity Management Risks Strategic Governance Credit Reputation Business/Legal Operational Risks Transaction Compliance Regulatory Rating: CAMELS Capital Asset Quality Management Earnings Liquidity Sensitivity 18

20 Capital: Common Shareholders Equity Perpetual Preferred +Common Stock +Surplus +Undivided Profits +Accumulated Other Comprehensive Income +Other Equity Capital Minimum Leverage Capital Requirement " shall consist of a ratio of Tier 1 capital to total assets of not less than 3 percent if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general is considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the CAMEL rating system) established by the Federal Financial Institutions Examination Council. "For all but the most highly-rated institutions meeting the conditions set forth in paragraph (b)(1) of this section, the minimum leverage capital requirement for a bank (or for an insured depository institution making an application to the FDIC) shall consist of a ratio of Tier 1 capital to total assets of not less than 4 percent 19

21 Capital Adequacy from a Practical Standpoint Capital should be reflective of the risk profile of the institution s balance sheet. Regulatory Rating: CAMELS Capital Asset Quality Management Earnings Liquidity Sensitivity 20

22 Federal Laws and Regulations Bank Secrecy Act Fair Credit Reporting Act (FCRA) Lending Limits Pass Through Insurance (PTI) Right to Financial Privacy Act Sarbanes-Oxley Act of 2002 USA PATRIOT Act Federal Reserve regulations Federal Reserve Regulations Reg A-Extension of Credit by Federal Reserve Banks Reg B-Equal Credit Opportunity Reg C-Home Mortgage Disclosure Act (HMDA) Reg D-Reserve Req for Depository Institutions Reg E-Electronic Electronic Funds Transfer Act Reg F-Limitations on Interbank Liabilities Reg G-Credit for securities transactions by commercial lenders and non-financial corporations Reg H-Membership of State Banks in the FRS Reg I-Issuance Issuance and Cancellation of FRB Capital Stock Reg J-Collection of checks and Fedwire Reg K-International Banking Operations Reg L-Management Official Interlocks Reg M-Consumer Leasing Reg N-Relations with Foreign Banks and Bankers 21

23 Federal Reserve Regulations Reg O-Loans to Insiders Reg P-Privacy Privacy of Consumer Financial Information Reg Q-Prohibition Against Payment of Interest on Certain Deposit Account Types Reg R-Exceptions for Banks from Definition of Brokers (SEC 1934) Reg S-Reimbursement for Certain Financial Records Reg T-Credit by Brokers and Dealers Reg U-Credit for Persons other than Brokers/Dealers for Carrying Margin Stock Reg V-Fair Credit Reporting Reg W-Transactions Between Member Banks and Affiliates Reg X-Borrowers of Securities Credit Reg Y-Bank Holding Companies and Change in Bank Control Reg Z-Truth in Lending Federal Reserve Regulations Reg AA Unfair or Deceptive Acts or Practices Reg BB Community Reinvestment Reg CC Availability of Funds and Collection of Checks Reg DD Truth in Savings Reg EE Netting Eligibility for Financial Institutions Reg FF Obtaining and Using Medical Information in Connection with Credit Reg GG Prohibition of Funding of Unlawful Internet Gambling 22

24 Dodd-Frank Wall Street Reform and Consumer Protection Act Create a Sound economic Foundation to Grow Jobs, Protect Consumers, Rein in Wall Street and Big Bonuses, End Bailouts and Too Big to Fail, Prevent Another Financial Crisis gov/public/ _Dodd_Frank_Wall_Street_R eform_comprehensive_summary_fi nal.pdf 23

25 Highlights Consumer Protection Ends Too Big to Fail Bailouts Advance Warning System Transparency & Accountability for Exotic Instruments Executive Compensation and Corporate Governance Protects Investors Enforces Regulations on the Books 24