Commercial Banks and Other Financial Intermediaries, Part 5
Question 1: Describe recent innovations in federal regulation of depositary institutions.
Answer 1: Federal regulation of depositary institutions seeks to maintain efficiency, solvency, and liquidity, and most of all to reduce risks for consumers. Unfortunately, federal regulation does not always meet this goal. Accordingly, the financial crisis of 2008 illustrated the failures of the regulatory system. In the wake of these problems, the federal government has instituted a series of stress tests for major depositary institutions. A stress test is a computer model that measures a bank’s performance after some cataclysmic event. In order to remain in business (that is, to avoid being closed or forced into merger by the federal government), banks must prove their durability and stability. At the same time, the government is said to be developing a systemic risk regulator that would measure the stability of the economy as a whole.
There are lots of good resources about Commercial Banks that you can find available.
Question 2: Describe the restrictions placed on national banks.
Answer 2: The federal government places certain restrictions on national banks in exchange for those banks’ rights to buy and sell government securities and the banks’ respective memberships in the FDIC. National banks cannot lend more than 15 percent.
Question 3: Describe brokerage companies and insurance companies, including their regulation.
Answer 3: Brokerage companies are the primary depositories of investment accounts for the purpose of trading stocks and bonds. Formerly, brokerage firms appeared more distinct from banks than they are now. The main difference at present is outlined by the Glass-Steagall Act of 1933, which forbids banks from underwriting corporate securities. The Securities Investor Protection Corporation (SIPC) insures brokerage firms. Insurance companies are the primary vendors of life, health, property, and disability insurance. According to the McCarran-Ferguson Act, the federal government can regulate insurance if the state governments are not doing a good job. The National Association of Insurance Commissioners is composed of the commissioners of insurance from each state; this group has no power over insurance regulation but is charged with administering the law and recommending new laws.
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