Commercial Bank Administration FIN4324 Mid Term Exam Study Guide 1 FDIC Deposit Insurance and Deposit Insurance Pricing 6 questions a Federal Deposit Insurance Corporation FDIC is a United States government corporation operating as an independent agency created by the Banking Act of 1933 Glass Steagall Act i The FDIC was created after the Great Depression due to many banks experiencing Bank Runs The FDIC was created to provide federal insurance for bank deposits Banks pay premiums based on their deposits Almost all banks in the U S hold this insurance today ii The original amount of money insured by the FDIC was 2 500 the minimum amount insured by the FDIC increased several times throughout its 80 year history with the most notable changes being a minimum insured amount of 100 000 in 1980 and most recently a temporary increase to 250 000 in 2008 made permanent by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 iii The FDIC acts as receiver and liquidator when chartering authority makes closure decision 1 Administers risk based deposit insurance premiums are based upon capital adequacy and CAMELS ratings 2 Depending on the bank s composite CAMELS risk rating it is placed in one of three risk categories a Risk Category A CAMELS Rating 1 or 2 b Risk Category B CAMELS Rating 3 c Risk Category C CAMELS Rating 4 or 5 3 The CAMELS ratings or Camels rating is a United States supervisory rating of the bank s overall condition used to classify the nation s fewer than 8 000 banks This rating is based on financial statements of the bank and on site examination by regulators like the Federal Reserve the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation The scale is from 1 to 5 with 1 being strongest and 5 being weakest These ratings are not released to the public but only to the top management of the banking company to prevent a bank run on a bank which has a bad CAMELS rating a b c C Capital adequacy A Asset quality M Management capability d e f E Earnings L Liquidity S Sensitivity to market risk 4 The Deposit Insurance Subsidy can be thought of as the reduction in interest expense the bank can generate on the insured deposits it provides a Investors will accept a lower deposit rate because of the deposit insurance they receive 2 Various Definitions of banking Glass Steagal and Gramm Leach Bliley Acts 12 questions a Commercial Bank Commercial banks are the only financial intermediaries that 1 accept demand deposits liabilities and 2 make commercial loans assets they represent the largest group of depository institutions measured by asset size i Under the Glass Steagall Act of 1933 these two characteristics defined the legal definition of a commercial bank and distinguished it from investment banking Investment banking consists primarily of securities underwriting and related activities such as making primary and secondary markets in securities and facilitating corporate mergers and acquisitions iii Banks are also distinguishable from other depository intermediaries ii because they 1 offer the widest variety of types of deposit liabilities 2 make use of several types of non deposit liabilities and 3 offer the broadest array of loans iv A major difference between banks and other firms is their high leverage or debt to assets ratio b Banks by size and type consumer oriented banking activities such as residential and i Retail Banks consumer loans and small time and savings deposits 1 ex Bank of America Wells Fargo SunTrust ii Wholesale Banks commercial loans funded by purchased funds commercial oriented banking activities such as 1 ex Citigroup CitiBank US Bancorp PNC Financial iii Investment Banks banking activities designed to help customers raise funds consisting of advising underwriting marketing and distributing financial securities 1 ex JPMorgan Goldman Sachs Morgan Stanley Jeffries Inc The sum of noninterest bearing demand deposits and c Transaction accounts interest bearing checking accounts 100 000 or more that can be resold in the secondary market An interest bearing checking account d NOW account e Negotiable CDs Fixed maturity interest bearing deposits with face values of Time deposits with a face value below 100 000 Time deposits with a face value of 100 000 or more An interbank market for short term borrowing and lending The difference between lending and deposit rates The coexistence of both nationally and state chartered Banking activity of deposit taking and lending Banking activity of underwriting issuing and distributing f Retail CDs g Wholesale CDs h Federal funds market of bank reserves Interest rate spread i j Dual banking system banks as in the United States k Commercial banking Investment banking l securities m Unit bank n Glass Steagal Act A bank with a single office i aka Bank Act of 1933 ii Prohibits payment of interest on demand deposits iii Establishes the FDIC iv Seperates banking from investment banking v Establishes interest rate ceilings on savings and time deposits vi Allows Federal Reserve to set stock margin requirements o The Gramm Leach Bliley Financial Modernization Act 11 12 1999 i Repeals the anit competitive aspects of the Glass Steagall Act of 1933 ii Permits mergers and affiliations between banks thrifts and brokers investment and insurance companies iii Permits banks thrifts insurors and investment brokers to sell each others iv Prohibits non financial companies from buying banks thrifts insurors or products brokers v Allows wider access to borrowing from Federal Home Loan banks for small banks and thrifts vi Strengthens consumer privacy and CRA protection 3 Chartering Branch Banking Bank Holding Companies and Changing Structure of Banking Markets 13 questions a Charters Dual Banking System i State Charters 1 First form of bank charter in the US dating back to early 1700s 2 Granted by State Agency a Office of Financial Regulation Division of Financial Institutions Licensing and Chartering 3 The state system is characterized by a State chartering b Bank powers established under state laws c Operation under state standards d Subject to state supervision 4 Application to appropriate state agency 5 No Federal requirement that they join FED or have FDIC deposit insurance a However all states today require state chartered banks to have FDIC deposit insurance b A small but growing number of state chartered banks elect to join the FED ii Federal Charters 1 First established by the National Banking Act