Regulations of National and Commercial Bank - Term Paper Example

?Regulations of National and Commercial Bank Banking industry has been under regulation for various reasons such as to provide the safety of depositsand to prevent bank failures. Banks are regulated in the types of products, mainly financial products; total number of branches; cash reserve; the interest rate limits to pay on deposits; ceiling on lending to a single customer; and even merging and acquisitions are also regulated for the larger interest of the customers. Previously, the word ‘banks’ used to indicate only commercial banks, but now credit unions, savings banks provide nearly the same kind of services; however, they differ in some respects as some specialize in providing housing finance and some on consumer credit. Nevertheless, every banking institution come under the regulatory fold either under a state government of federal body. The regulations are enforced in many respects and cover many aspects. The Federal Reserve The Federal Reserve, the Fed, can be called as banker's bank and a regulator of majority of commercial banks and financial institutions and also country's money manager. The Federal Reserve is the United States central bank. This is the biggest regulatory body of the nation. All national and commercial banks take cue from the Fed in their day to day activities. The Fed's mandates aims at promoting sustainable growth, stability of prices, high levels of employment, and maintain the purchasing power of the dollar keeping moderate long-term interest rates. In the U.S, the term ‘National bank’ has a clear definition: those who come under the purview of the National Bank Act. They are supervised by the Office of Comptroller of the currency (OCC), under US Treasury Department. Banks forms under this act are required to follow the designation “National Association” or in short “N.A.” in their title so as to indicate their affiliation with the governing body. Many banks however are regulated by the state governments under respective state laws. Deposits of National and State banks are insured by the FDIC, known as Federal Deposit Insurance Corporation. It should be noted that banking regulations in US are not governed by a single body unlike UK or Japan. The U.S banking sector works under the highly-regulated environments in the world. Some of them can be listed as anti-money laundering, anti-usury lending, fraud prevention, promotion of lending to lower-income population, disclosures and many more. It will be worthwhile to have a look at some of the regulations that are in force to regulate the various aspects of national or commercial banks. Anti-Money Laundering and Anti-terrorism Certain acts are promulgated to control money laundering activities which are stated as per the following. (Regulations) The Bank Secrecy Act This act has been formulated keeping in mind money laundering aspects where in all national or commercial establishments are required to assist government agencies. Banks under this act keep necessary records that are necessary to detect the suspicious activities of the transactions exceeding $10,000 on aggregate daily basis. (Regulations) USA Patriot Act This act necessitates banks to place limits on new accounts until the identity of account holder is verified. (Regulations) Deposit Account Insurance Regulation It was Glass–Steagall Act who paved the way for Federal Deposit Insurance Corporation (FDIC) for insuring deposits at commercial banks. In 1933, U.S was the first country to implement insurance for deposit holders to protect the depositors from bankruptcy of the banks. (Regulations) Regulation D or Withdrawal Limits Federal Reserve has put a limit on number of withdrawals and transfers from any saving or money market account. This regulation is applicable to all U.S banking institutions who offer such accounts. The limit is placed at six for all outgoing transactions through any method. Lending Regulations Regulation Z or the Truth in Lending Act (TILA) of 1968 is meant for consumer credits that informs the standard interest rate applicable and other costs on borrowing. TILA also specifies certain rights to the consumer in which they cancel the credit transactions that covers lien on the consumer’s housing. (Regulations) Regulation B or the Equal Credit Opportunity Act (ECOA) of 1974 necessitates banks and other credit institutions to extend the credit based on person's creditworthiness rather than any other factors such as creed, sex, color, race or origin. This act essentially aims at eliminating any kind of discrimination and to protect the right of consumers for fair dealing and evaluation. Regulation C or the Home Mortgage Disclosure Act (HMDA) of 1975 makes it mandatory to disclose annual data about dwelling purchases, dwelling improvement, and dwelling purchase pre-approvals or refinance loans. It is also required to display a HMDA poster at its all centers and branches. (Regulations) Credit Card Regulations On credit cards, banks need to follow certain rules that aim at enhancing protections for consumers using credit cards. 1. All consumers should be provided with appropriate amount of time to make payments. 2. Banks cannot charge interest rates using the method which calculates interest on outstanding based on days in billing cycles. 3. Banks need to provide a grace period for purchases depending upon eligibility. 4. Banks cannot enhance the rate on a pre-existing credit card and consumers must be given a reasonable period of time to pay off the balance. 5. Banks cannot calculate charges in excess of the minimum in a way that leads to maximize interest charges (Regulations) Lending Limit Regulation Commercial banks provide loans either for short terms such as working capital, financing inventories, or on long terms for financing capital equipments, land and buildings or to consumers for housing and other domestic requirements. All this lending is governed and regulated by some state or federal agencies to protect the concerned parties. There are a lending-limit regulations that restrict the credits and loans that are extended to a single borrower. Usually, it depends upon the bank's total capital or assets. A national bank cannot issue loans or credits to a single person exceeding 15% of the bank's capital and surplus. In certain exceptional circumstances, national bank may go for issuing loans or credits up to 25% of the bank’s capital and surplus when the extra portion exceeding initial lending limit is fully secured. (Regulations) Debt Collection Regulation The Fair Debt Collection Practices Act (FDCPA) The Act gives guidelines to the banks or debt collectors, specifies rights of consumers with respect to debt collectors, and also lists penalties in case of violation. Its purpose is to remove abusive practices employed in the collection of consumer debts and to facilitate consumers with the right to dispute and if necessary, obtain necessary validation regarding the accuracy of debt information. This act also aims that consumer should be informed when any negative information is added to their credit reports or some adverse action is being taken against the customer. (Regulations) Central Banking Regulation Regulation A establishes rules under which credit extension by the Federal Reserve is granted to banks through discount window lending. Many banks refrained from using discount-window borrowing because it was seen as a distress on banks financial position. For this reason, in 2003, the Federal Reserve Board made certain amendments in its regulation to make it a more attractive funding option. (Regulations) Monetary Policy Objectives by Federal Reserve Reserve Requirement The Federal Reserve regulates banking industry. Commercial banks are required to maintain certain reserve as per the direction and regulation by The Federal reserve. Currently, the central bank requires that banks maintain 10% of their deposits on hand. Some countries do not have such requirements. It is required to be regulated in the sense that at any given time banks do not face issue of ‘bank runs’ as that was observed during 1931. These are used for the purpose of money supply to maintain from excessive liquidity to credit crunch as observed during the cycle of boom and bust. Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934 Regulation R establishes that banks may conduct certain securities activities for its customers, without registering with the Securities Exchange Commission as a securities broker, as part of its custodial, and deposit "sweep" functions. (Regulations) Home Mortgage Disclosure (Regulation C) This regulation as specified in the Home Mortgage Disclosure Act intends to provide the public with loan data that serve the purpose to determine whether the institution is serving the housing needs of their communities. Moreover, it helps find out any discriminatory lending patterns and to restore antidiscrimination statutes. (Regulations) Deceptive or Unfair Acts or Practices (Regulation AA) Banks are also regulated for deceptive or unfair acts or practices by this act of Federal Reserve. Comptroller of the Currency is the agency, which foresees the compliance for national and commercial banks. (Regulations) Are These Regulations Sufficient? But the moot question remains that in spite of plethora of regulations in banking sector why did US confront a great financial crisis in banking sector? Banks like US Bank Corp, the Bank of New York, JP Morgan Chase, Wells Fargo, City Bank and many more have reached largely to the state of bankruptcy. Down fall of these banks certainly does not augur well for the economy of US. Healthy and flourishing banking system is a back bone of economy of any country. The banking system needs to be vibrant and healthy where people can keep their money without any fear and repose their full faith in the system. The fact is that banks are currently able to get money at a negligible interest rate and then they engage in risky arbitrage activities. Perhaps, they know that government is there to bail them out. Why it is that such large institutions are allowed to leverage them heavily with short-term borrowing? Most of the banks were found to be operated with leveraging of as high as 1:100 and even more during acute crisis period. Government literally had to rush to save many of these banks and institutions. Why authorities are not taking stricter actions and pressing them hard to increase their equity and bring down the leveraging to a reasonable level? (Reinhart, Carmen 2009) Though we often heard authorities saying that they do intend to raise the capital on banks but then never implemented seriously. Excessive leveraging with short-term borrowing, whether it is banking, corporate, consumer or government, they are always vulnerable to financial or economic crises. With the continuing recessionary trends, the public fury is exploding never seen before. The two leading central banks-- U.S Federal Reserve and European Central Bank are said to be the two most responsible entities for framing the regulatory policies and putting biggest economies of the world into great crisis. (Reinhart, Carmen 2009) The two central banks stand accused but they have not been convicted yet. Their lax attitude led to the insurmountable crisis that surfaced first in U.S. and then spread to Europe; however, it is very clear that regulators like Federal Reserve failed to identify it in time. Their failures to understand the complexities involved and treat it at appropriate level shook the global financial world. Another charge against these two central banks is that they responded slowly in lowering interest rates as the crisis escalated. It took almost 16 months for the Fed to bring the interest rate from 5.25 percent to 0.25 percent. Similarly ECB also took almost 20 months to slash the interest from 4.25 percent to 1.0 percent. (Horne, J. Paul.) A sensible new dynamic regulatory framework is need of an hour if the U.S is to avoid another financial meltdown. That is what experts opine about the present regulatory setup. History has revealed that bitter pill is always necessary to stem the speculative bubbles that cause economic turmoil and recessions. The regulatory aspect require complete overhaul. On the political front leaning toward populist measures will not work for a long. Unprecedented unemployment rate prevailing in the economy is an indication that crisis is deepening and no solution to the overall economic doom is surfacing. U.S government faces an uphill task of restructuring and unifying the financial regulatory structure. The time has come to bring forth some radical structural changes in the Fed to enable them to enforce a tighter control on all banking institutions where a scope for rampant speculation and uncontrolled use of depositor’s money is not available on platter. After all, it is the public money that comes to rescue to bailout these giant financial behemoths. References: 1. Reinhart, Carmen; Rogoff, Kenneth 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press, New jersey 2. Regulations. 22 March 2011 http://www.federalreserve.gov/bankinforeg/reglisting.htm#C 3. Horne, J. Paul. European Affairs. 22 March 2011 http://www.europeaninstitute.org/February-%E2%80%93-March-2010/the-independence-and-regulatory-roles-of-the-us-and-european-central-banks-get-a-fiery-political-trial.html Read More