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1、FINANCIAL ENGINEERING:DERIVATIVES AND RISK MANAGEMENT(J. Wiley, 2001)K. Cuthbertson and D. NitzscheLectureRegulation in the UK and USAVersion 1/9/2001 K.Cuthbertson, D.NitzscheTopicsReasons for ConcernUK: Regulatory FrameworkUS: Regulatory Framework for Banks and S&LsUS: Modernising the Financial Sy
2、stem1992 Onwards K.Cuthbertson, D.NitzscheReasons for ConcernIncreased 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, banking crises associa
3、ted 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.Cuthbertson, D.Ni
4、tzscheUK REGULATORY FRAMEWORK K.Cuthbertson, D.NitzscheUK, REGULATORY FRAMEWORKSTRUCTURAL 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 : Financial Serv
5、ices AuthorityUK K.Cuthbertson, D.NitzscheREPUTATION EFFECT ? Self Regulation ? K.Cuthbertson, D.NitzscheBoard 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 runn
6、ing 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):Capital adequacy and liquidity ratios were to be monitored but there were no minimum man
7、datory 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 Quality, Earnings and Li
8、quidity. Adopted Basle Accord of 1988, for credit risk and principle of subordination UK Banking Act (1987):Loosened restrictions on the lending and depositsAllowed diversify (eg. selling insurance, buying and selling shares, entry into Estate Agency). A (fixed maximum) proportion of lending could n
9、ow 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 companies (eg. Abbey National plc, Hal
10、ifax plc). UK Building Societies Act (1986) 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 this becomes a license to practice. The rule boo
11、ks of the SROs were therefore the effective entry hurdle. Regulatory CaptureFinancial Services Act 1986Took over the resposibilities of the Security and Investment Board (SIB) and the group of self-regulatory organisations (SROs).Responsibility for regulation of banks and building societies also (la
12、ter) 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 systemic risk in the banking systemFinancial Services Authority, FS
13、A (1999/2001)US REGULATORY FRAMEWORKFORBANKS AND S&Ls K.Cuthbertson, D.NitzscheUSA : Bank and S&L Failures in 1980sS&Ls failed with huge losses to the taxpayerPayouts from the Federal Savings and Loan Insurance Corporation (FSLIC), so it became insolvent. The defaults in banking were less severenume
14、rous 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 insolvent. Regulatory procedures Corrective Action: only allow the bank to rema
15、in 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 additional restrictions on its behaviour so it can rebuild its capital base.Government Investment: the governm
16、ent provides some or all of the capital the bank needs to comply with minimum capital requirements.USA : Bank and S&L Failures in 1980sUSA MODERNISING THE FINANCIAL SYSTEM1992 onwards USA : MODERNISING THE FINANCIAL SYSTEMIncrease Capital Ratio of Weak Banks by:Divesting assets (eg. Closing branches
17、)Issue new equityIncrease margins: rL - rD. This may imply increased profitsMerge with “healthy” bank or non-financial companyLimit Deposit Insurance$100,000 per individualEliminate coverage for brokered depositsDont pay out to uninsured depositors (e.g. Continental Illinois)Investigate Risk Based D
18、eposit Insurance PremiumsGet private sector to insure some depositsThe Regulatorsannual on-site investigationaccurate capital measures/reservingsome market value reportingimprove reporting from auditors FIVE ZONES OF CAPITAL ADEQUACYZone 1 :engage in wide range of activitiesnew acquisitions granted
19、(mergers)Zone 2 :regulator expects to move to Zone 1will not allow new activities unless managers are adequateZone 3 : dividend restrictions, remove managementconstraints on loans (type)Zone 4 / 5 :bank into conservatorshippresumption that congress cannot stop/impede regulatorFIVE ZONES OF CAPITAL ADEQUACYENDS LECTURE K.Cuthbertson, D.Nitzsche
