Exam 15: Regulation of Financial Institutions

Safety and soundness regulations promote price competition among banks.

All state banking authorities have the power to charter banks.

What is the main problem with all the additional regulations that came along with the Dodd-Frank Act and the increased capital requirements? Are they worth the cost? Explain.

The FDIC or the Federal Reserve must approve all state bank charters.

Banks are regulated in part to protect the nation's money supply, much of which is a liability of the banking industry.

Traditional level-premium deposit insurance fees encouraged excessive risk-taking.

The Federal Reserve frequently changes reserve requirements for banks since the impacts of these changes on the money supply are small.

The Dodd-Frank Act of 2010 requires large banks to submit a plan to regulators called a living will that specifies how the bank could best be liquidated in the event of failure in order to limit taxpayer losses.

Federal deposit insurance has prevented widespread bank panics.

Explain why depository institutions are the most regulated firms in the financial services industry.

What is a GSIB? Describe the moral hazard associated with these institutions. What is the main additional regulation on these banks?

The Dodd-Frank Act required the FDIC to assess deposit insurance premiums to average consolidated total assets minus average tangible equity instead of on adjusted domestic deposits.

In the United States, fixed premium that used to be charged for deposit insurance, regardless of risk that banks took, led to a problem known as moral hazard.