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1、 K.Cuthbertson,D.Nitzsche,FINANCIAL ENGINEERING:DERIVATIVES AND RISK MANAGEMENT(J.Wiley,2001)K.Cuthbertson and D.NitzscheLectureRegulation in the UK and USA,Version 1/9/2001,K.Cuthbertson,D.Nitzsche,Topics,Reasons for ConcernUK:Regulatory FrameworkUS:Regulatory Framework for Banks and S&LsUS:Moderni
2、sing the Financial System1992 Onwards,K.Cuthbertson,D.Nitzsche,Reasons for Concern,Increased global competition,narrowing of margins More firms raise money from the capital markets,which leaves banks with less credit worthy companiesCollateral(e.g.in the form of land and buildings)less secure,bankin
3、g crises associated with falling property prices(e.g.in Japan in the 1990s and Thailand in 1997/8)Margins on lending have been squeezed by increased competition and the ending of cartelsThe growth in off balance sheet items,such as forwards and swaps has led to increased credit risk exposure.,K.Cuth
4、bertson,D.Nitzsche,UK REGULATORY FRAMEWORK,K.Cuthbertson,D.Nitzsche,UK,REGULATORY FRAMEWORK,STRUCTURAL REGULATION who is allowed to engage in activities“fit and proper persons”,capital base.CONDUCT REGULATIONensures product quality eg.Good risk control,accounting,no misleading informationFSA:Financi
5、al Services AuthorityUK,K.Cuthbertson,D.Nitzsche,REPUTATION EFFECT?Self Regulation?,K.Cuthbertson,D.Nitzsche,Board of Banking supervision to assist the Governor of the Bank of England in his supervisory responsibilities.To be licensed as a bank,requires a minimum level of paid up capital and those r
6、unning the bank must be fit and proper persons.Bank auditors should have close liaison with the supervisors and banks are legally obliged to report large exposures(eg.to a specific borrower).,UK Banking Act(1987):,K.Cuthbertson,D.Nitzsche,Capital adequacy and liquidity ratios were to be monitored bu
7、t there were no minimum mandatory targets to be set across the board.As in the 1979 Banking Act,depositor protection was retained.(This is now currently at 20,000 per depositor,or 75%of a persons total deposits,whichever is the smaller).CAMEL approach:Capital Adequacy,Asset Quality,Management Qualit
8、y,Earnings and Liquidity.Adopted Basle Accord of 1988,for credit risk and principle of subordination,UK Banking Act(1987):,K.Cuthbertson,D.Nitzsche,Loosened restrictions on the lending and depositsAllowed diversify(eg.selling insurance,buying and selling shares,entry into Estate Agency).A(fixed maxi
9、mum)proportion of lending could now be unsecured(rather than solely backed by property)and they could enter the wholesale deposit market for a proportion of their deposit funds.UK Building Societies therefore became more like banks and they are now allowed to convert to full public liability compani
10、es(eg.Abbey National plc,Halifax plc).,UK Building Societies Act(1986),K.Cuthbertson,D.Nitzsche,Security and Investment Board(SIB).The SIB was to oversee and certify the rule books of a group of self-regulatory organisations(SROs).If an individual(firm)is allowed to become a member of an SRO,then th
11、is becomes a license to practice.The rule books of the SROs were therefore the effective entry hurdle.Regulatory Capture,Financial Services Act 1986,K.Cuthbertson,D.Nitzsche,Took over the resposibilities of the Security and Investment Board(SIB)and the group of self-regulatory organisations(SROs).Re
12、sponsibility for regulation of banks and building societies also(later)transferred to FSAFSA is now the super regulator Overseas,compliance with Basle rules on market and credit risk for banks,as well as regulation of investment and life assurance funds.Bank of England retains responsibility for sys
13、temic risk in the banking system,Financial Services Authority,FSA(1999/2001),K.Cuthbertson,D.Nitzsche,US REGULATORY FRAMEWORKFORBANKS AND S&Ls,K.Cuthbertson,D.Nitzsche,USA:Bank and S&L Failures in 1980s,S&Ls failed with huge losses to the taxpayerPayouts from the Federal Savings and Loan Insurance C
14、orporation(FSLIC),so it became insolvent.The defaults in banking were less severenumerous banks failed and again(some of)their deposits,covered by the Bank Insurance Fund of the Federal Deposit Insurance Corporation(FDIC).The FDIC sustained losses in the 4 years to 1991 and also threatened to become
15、 insolvent.,K.Cuthbertson,D.Nitzsche,Regulatory procedures Corrective Action:only allow the bank to remain open if it can raise enough capital to satisfy minimum capital requirements within a reasonable period of time.Forbearance:allow the bank to continue operating with low capital and some additio
16、nal restrictions on its behaviour so it can rebuild its capital base.Government Investment:the government provides some or all of the capital the bank needs to comply with minimum capital requirements.,USA:Bank and S&L Failures in 1980s,K.Cuthbertson,D.Nitzsche,USA MODERNISING THE FINANCIAL SYSTEM19
17、92 onwards,K.Cuthbertson,D.Nitzsche,USA:MODERNISING THE FINANCIAL SYSTEM,Increase Capital Ratio of Weak Banks by:Divesting assets(eg.Closing branches)Issue new equityIncrease margins:rL-rD.This may imply increased profitsMerge with“healthy”bank or non-financial company,K.Cuthbertson,D.Nitzsche,Limit
18、 Deposit Insurance,$100,000 per individualEliminate coverage for brokered depositsDont pay out to uninsured depositors(e.g.Continental Illinois)Investigate Risk Based Deposit Insurance PremiumsGet private sector to insure some deposits,K.Cuthbertson,D.Nitzsche,The Regulators,annual on-site investiga
19、tionaccurate capital measures/reservingsome market value reportingimprove reporting from auditors,K.Cuthbertson,D.Nitzsche,FIVE ZONES OF CAPITAL ADEQUACY,Zone 1:engage in wide range of activitiesnew acquisitions granted(mergers)Zone 2:regulator expects to move to Zone 1will not allow new activities unless managers are adequate,K.Cuthbertson,D.Nitzsche,Zone 3:dividend restrictions,remove managementconstraints on loans(type)Zone 4/5:bank into conservatorshippresumption that congress cannot stop/impede regulator,FIVE ZONES OF CAPITAL ADEQUACY,K.Cuthbertson,D.Nitzsche,ENDS LECTURE,
