* In the words of Fred C. Dobbs in the Pulitzer winning WSJ series, Way back in American history there has always been a conflict between the federal government intervening in the banking business vs. the Federal government staying out of the banking business
* In 1830 when Andrew Jackson (the founder of the Democrat Party) was elected president. He terminated the fed government sponsored US Bank, and resolved the conflict.
* The fed government basically stayed out of the banking business until the ’30s, when FDR took office, and the fed government intervened deeply into the ‘banking business,’ which was defined by the IRS, FDIC, Comptroller of the Currency, SEC (if ...view middle of the document...
WHO ARE THESE REGULATORS
* In the US there are federal and state regulators and institutions that have either a federal or a state charter.
* They have oversight over a wide array of banking institutions and activities
* At the federal level, there are five financial industry regulators:
* Comptroller of the Currency (OCC)
* Federal Deposit Insurance Corporation (FDIC)
* Federal Reserve System (FRS)
* At the state level, each state has an agency or agencies that are charged with supervising and regulating state-chartered banks and thrifts.
* In Europe the EBA (European Banking Authority) supervises bank regulations.
* The EBA is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector.
* Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector.
REAL EXAMPLES OF BANK FAILURES
* The Bankers’ Panic of 1907 in the US also known as Knickerbocker Crisis
* During the financial crisis that started in 2007, the biggest bank failure in U.S. history occurred when Washington Mutual with $307 billion in assets closed its doors
SO HOW DOES A BANK BECOME WEAK?
* A weak bank is one whose liquidity or solvency is impaired or will soon be impaired unless there is a major improvement in its financial resources, risk profile, business model, risk management systems and controls, and/or quality of governance and management.
* Banks close when they are unable to meet their obligations to depositors and others.
* When a bank fails, the Federal Deposit Insurance Corporation (FDIC) covers the insured portion ($250,000) of a depositors balance.
* To receive this benefit, member banks must follow certain liquidity and reserve requirements and pay annual insurance premiums between 13 and 53 cents per $100.
* Banks are classified in five groups according to their risk-based capital ratio:
* Well capitalized: 10% or higher
* Adequately capitalized: 8% or higher
* Undercapitalized: less than 8%
* Significantly undercapitalized: less than 6%
* Critically undercapitalized: less than 2%
* When a bank becomes undercapitalized, regulator issues a warning to the bank.
* When significantly underutilized, the regulator can change management and force the bank to take other corrective action.
* When critically undercapitalized the chartering authority closes the institution and appoints the FDIC as receiver of the bank.
* In the event of bank failure, the FDIC acts as the receiver of the failed bank, taking control of the bank's assets and deciding how to settle its debts.
Arguments for Intervention in a Weak bank
* Bank are interconnected so the failure of a large bank may affect other banks so the regulators act in a prevention role in...