Regulation of banking outline
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- Bu səhifədəki naviqasiya:
- National Bank Act, 12 USC § 71
- 12 USC § 3207
- § 12 USC § 78
- 2. problems of mutual organization
- 3. credit union membership
- 1. officer director liability
- FIRREA 12 USC § 1821(k)
- 2. liability of attorneys, accountants appraisers
- IV. Bank Holding Co. a. intro
- 1. bank
- BHCA, 12 USC § 1841(b)
- 3. control
- 12 USC § 1841(a)(3)
- 12 USC § 1843(a)
| §301(5)(t) - 3 capital standards for fed insured savings associations
a. 1.5% tangible capital to total assets - tangible capital includes only common stock & RE b. 3% leverage ratio c. risk-based capital requiremt
a. power to shut down institution 1. S&L crisis - loss of $150 billion a. govt agency - FHLBA (Fed Home Loan Bank Board) behaved like bank shareholder by taking more risk at end when equity was wiped out (losses > reserve) b. loss from bank offering interest rate to depositors when insolvent - so transfer of assets from FDIC to private depositors c. other losses/waste - overblding in real estate, transaction costs of entire process 2. strategy to merge insolvent institution w/solvent one a. benefits 1. cheaper than to liquidate 2. govt doesn’t like to close banks b/c may lead to public concern & panic b. inducemts for private bank to purchase insolvent bank 1. buyer can include consideration paid over FMV less liabilities as asset that can be amortized over time usually 40yrs a. value of deduction b. on bks looks like this 1. time 1 - assets of $10m reserves, $100m loans; liabilities of $100m deposits & net worth of $10m equity 2. time 2 due to devaluation of assets - assets of $10m reserves, $50m loans; liabilities of $100m & net worth of -$40m equity 2. buyer can get regulatory concessions like entering new geo mrkt whereas before prohibited b. govt liable for damages in breach of K - US v. Winstar Corp (1996) - Souter 1. govt inducemt for private parties to purchase S&Ls in trouble via permitting goodwill to be counted towards core capital & then change in regulation that prohibited such treatmt under FIRREA 1989 2. liability a. for loss of value due to change in regulation - restitution b. not for loss of future earning potential duel to change in regulation c. loss incurred when institution was seized & forced out of business b/c of change - uncertain e. swaps & derivatives - part of business of banking as end-users or dealers -issue - recent finacial disasters due to derivatives trading
a. derivative - K that allows or obligates a party to the K to buy or sell an asset 1. value - depends on value fluctuation of underlying asset (stock, commodity, index, interest rate, exchange rate, etc.) 2. function a. cheaper alternative to investing in underlying asset b. end-users can arbitrage differences btwn price of derivative & underlying asset or btwn prices in different capital mrkts c. enables end-users to regulate their risk, exposure to various elemts like fluctuations in interest rate 3. 2 common types a. option based - provides price insurance, gives owner right to buy or sell at specific price for a fee called the option price b. forward based - freezes price of underlying asset, one parties agrees to sell & the other agrees to buy at specific price on specific date in future & neither party pays a fee 1. swap - type of forward where 2 parties exchange different stream of cash flows b. trading 1. over the counter (OTC) where identity & credibility of parties are important a. sophisticated end-users - corp & sovereign entities 2. exchanges - standardized so don’t need to know the identity of the parties involved c. regulatory concern 1. notional amt - $4trillion at 1991 end, notional amt of swaps greater than value of NYSE & TSE combined a. inference - larger part of economy w/various complexities make it more risky than risky real estate investmts, which may potentially lead to significant problems down the line 2. 1988 intl capital adequacy standards - called for capital reserve for credit risks including nontraditional financial products like derivatives 3. current concern - top mgt of banks unaware of risks of derivatives for own bank a. lack of info/understanding of risks on regulator’s part - risk of individual derivative & risk of portfolio of derivatives
a. derivatives types 1. traditional financial K - forwards, futures, swaps, options 2. other traded instrumts w/embedded options 3. combo of forward & option b. types of parties 1. end-users - party entering into K to reach hedging or position taking objective as normal course of business, can be financial institutions, institutional investors, corp, govt 2. dealers - intermediaries via mrkt making, include mostly major banks & securities firms c. risks of derivatives 1. credit risk 2. mrkt risk 3. liquidity risk 5. legal risk d. use by banks 1. risk mgt tool - identify & mg risk via hedging, reduces financing costs & increases yield of certain assets 2. revenue source - via mrkt making, position taking & risk arbitrage a. mrkt making - act as distributor of K’s & being compensated by spread btwn bid & ask prices, fees b. position taking - taking a position c. arbitrage - taking advantage btwn price discrepancies of same asset in different mrkts e. guidelines for risk mgt 1. oversight by board of directors & sr mgt 2. risk mgt process intergrating risk limits, measuremt procedures, info systems, continuous risk mgt, frequent mgt reporting 3. internal controls & audit procedures
-allocation of control
a. issue - ability of mgt activity to bind institution
a. board supervisory role over mgt
-regulation of board & mgt
a. min of 5 directors for national banks b. to be elected by shareholders
a. have to be US citizen b. majority of directors have to reside in state of bank location c. have to own stock in institutions - national banks $1k par value d. can’t serve on other boards of unaffiliated co. but may be waived by agency - 12 USC §3207 1. can’t if in same area - §3202 2. can’t if other co. has more than $500m in assets regardless of location e. can’t serve in officer, director, e-e capacity of any securities firm unless permitted by Fed in regulation if overlap not undully influence investmts policy or advice of bank - §12 USC §78 f. 30days notice to fed agency for any addition to board or senior executive officer if: - 12 USC §183(1)(i) 1. bank is less than 2yrs old 2. bank undergone change of control w/in last 2yrs, or 3. not in compliance w/min capital adequacy standards
1. potential inability for govt in determining who is best for job 2. potential for abuse 3. no hearing for those rejected g. agency informal powers 1. can w/hold approval of application 2. can deny other necessary approval 2. problems of mutual organization -mutual organization
a. mgt elected by such owners b. result 1. little monitoring by owners b/c fed insured 2. mgrs self-perpetuation c. implications 1. difficult to takeover b/c not publicly held 2. owners lose out to mgrs on appreciation of value if institution converts to stock ownership a. appreciation when value of concern > amt held on deposit b. mgrs take lots of stock & options in new institution
a. reasons to convert 1. easier access to capital 2. tougher capital adequacy requiremts difficult to meet in old form 3. very profitable for mgrs - cashing out appreciation value b. form 1. subscription offers a. existing depositors & mgrs first right to purchase new shares b. proceeds to institution treasury & not to owners (depositors) c. mgr abuse 1. underprice stock prior to conversion, or 2. acquire more shares than entitled to 2. merger w/another firm a. mgt abuse 1. purchase price below value & inside benefits to old mgt c. regulation of abuses 1. FDIC & OTS (Office of Thrift Supervision) - tighter appraisal standards a. originally permitted b/c benefits of conversion > costs thereof 2. court - not going to interfere b/c technical compliance present
1. institution 2. depositors 3. FDIC insurance system
-eligibility
a. unrelated occupational groups each w/own common bond permitted - by National Credit Union Administation 1982 1. permitted unprecedented growth of fed credit unions b. court - limited common bond to mean that all members of union have to have same common bond - First National Bank & Trust Co. v. National Credit Union Administration (1996)
-intro - gen issues
a. liability insurance would not be available b/c cost too high b. costs of imposing liability > benefits of imposing liability 1. officer & director liability -basis of liability
a. fiduciary duty - under common law 1. of care a. sound business judgmt defense - reasonably well-informed & considered ex ante means no liability 2. of loyalty b. duty of reasonable care to ensure that institution obeys applicable law
c. duty to whom 1. institution 2. shareholders 3. depositors 4. debtholders when near insolvency - become similar to equity then a. no fiduciary duty to them at otherwise b/c can protect themselves via K, conflict of interest btwn debt & equity holders
1. FDIC becomes negative equity holder when insolvent b/c no gain potential but unlimited loss potential 2. Miller - disagrees b/c govt has significant rights after insolvency on claims of bank’s assets
a. private right of action must be explicit or must have been intended by Congress b. FIRREA 12 USC §1821(k) - applicable to fed chartered banks 1. directors or officers of such personally liable for damages in cividl action on behalf of FDIC for gross negligence or other conduct showing great disregard of duty of care, including tortious conduct determined under state law & other federal claims preserved
1. liability of e-es of solvent institution 2. what if state standard lower - ie, for negligence & not only gross negligence a. Atherton v. FDIC (1996) - fed statute here does not preempt other state or other fed causes of action
a. breach of duty b. breach of K c. gross negligence d. negligence
a. state chartered bank - state law applies unless fed preemption b. fed chartered bank - fed common law applies, state law can be persuasive but not binding -parties w/right of action
a. shareholders of bank b. shareholders of parent when suing sub in bank holding co. structure
2. liability of attorneys, accountants & appraisers -basis of liability
a. elemts 1. existence of duty 2. breach of duty 3. causation 4. damage
a. state rule of decision applies to imputation law where not such fed common law & not going to create such fed common law - O’Melveny & Myers v. FDIC (1994) - Scalia -parties who may sue
a. charges - material misleading info & omission, obstruction of investigation b. settlemt 1. $41m fine 2. appointmt of banking lawyer 3. disclosure of material facts to banking agency c. issues 1. to whom do lawyers owe duty to 2. resulted in higher insurance premiums & decreased coverage 3. chilling effect on zealous advocacy 4. shift such representation to sm firms who don’t have such deep pockets so fed agency not likely to go after them? IV. Bank Holding Co. a. intro -bank holding co.
a. co. that controls bank or another co. that controls bank b. technical requiremts 1. co. has to exist a. partnership counts as co. b. formal or informal voting agreemts btwn 2 or more shareholders can qualify as co.are c. presence of 1 dominating figure may count as co. d. if person controls mgt or can control way shares are voting then may count as co.
2. there has to be control a. bright line test - control bank if 25% of any class of voting securities even if that class represents only 1% of total equity 1. can own 2. beneficiaries of trust where TRS has voting power - more complicated but probably will lead to imputation of control 3. informal power to control securities - probably will lead to imputation of control
1. convertible security w/out currently vested voting rights 2. lg amt of nonvoting securities b. board control test - control if control election of majority of directors 1. dominating shareholder presumption of having control over bank c. residual test - direct or indirect control over mgt/policies of bank
a. Fed has to give hearing - opportunity to rebutt presumption b. safe harbor - if don’t have 5% of voting securities then presumption of no control but can be rebutted c. loopholes 1. structure bank sub as nonbank - but nearly closed 2. avoid via putting together group that is not corp - some possibility of avoidance
a. offer flexible operation b. relief from regulatory constraints - extremely important b/c if can control bank w/out being bank holding co. then can avoid banking restrictions 1. all activity restrictions except securities 2. all geo restrictions c. economies of scale & scope compared to stand-alone banks
a. historical - fear that lg economic units could exert undue influence on politics b. fear that controlling bank holding co. may compromise financial integrity by causing more favorable loans to affiliated co. c. belief that banks need special protection against failure d. ensure that bank holding co. will be additional buffer for sub banks e. to prevent favoritism of making loans only to sub customers, etc.
-applicable statute
a. under Fed jurisdiction b. bank holding co. definition - any co. that controls bank or another co. that is or becomes bank holding co. (co. w/control over bank) 1. bank -issue of what is bank
a. institution insured by FDIC or b. accepts demand deposits or other checking deposits & engaged in business of making commercial loans
a. institution accepting demand deposits & engages in business of making commerical loans b. loophole 1. institutions that offered checking accounts but not demand deposit b/c required notice or offered things like CD, commercial paper that were not considered commercial loans a. benefits for nonbank - could keep charter, FDIC insurance b. benefits to nonbank owner 1. can be owned by any corp. & doesn’t have to by corp. engaged in business closely related to banking 2. can own nonbank geo unrestricted 2. court - attempt to plug unsuccessful b/c matter for Congress & not courts - Fed v. Dimension Financial Corp (1986) a. tried to expand definition of demand deposit accounts & commercial loans
-statute only applies if institution is not bank
a. issue whether individuals w/common bond control bank constitutes co. b. existence of partnership controlled by state law 1. Uniform Partnership Act §6(1) - partnership is association of 2 or more persons to carry on as co-owners business for profit 2. share of business profits if prima facie evidence of being partner 3. control -control definition separate from stock ownership
a. having power to vote 25% of any class of voting securities of bank or bank holding co. b. controlling election of majority of board of bank or bank holding co. c. exercising direct or indirect control over institution mgt or policies
-acquisition causing co. to become bank holding co. requires approval from Fed under BHCA c. restrictions on bank holding co. activities: closely related to banking test -statute
a. in determination of whether closely related to, Fed to consider whether benefits outweigh costs 1. benefits - such as greater convenience, increased competition, gains in efficiency 2. costs - such as undue concentration of resources, decreased or unfair competition, conflicts of interest, unsound banking practices b. Fed issued Regulation Y that covers activities that are examples of activities that are closely related to business of banking -court interp
a. tier 1 - determination whether activity of acquired co. is closely related to banking 1. based on following factors a. history of banks providing such services b. services operational & functionally similar to those historically provided by banks c. proposed services integrally related to historical services 2. categorical & determined on case by case basis
3. activity not related to business of banking but necessary & incidental to activity closely related to banking to be permitted - Association of Data Processing Services v. Fed (1984) - Scalia a. effect - expands function of incidental via closely related to banking another degree 1. explicit restrictions provided by BHCA so not permitting indefinite expansion although that is what seems to be happening b. justification - tech changes - courier service didn’t deal w/complex tech
b. tier 2 - once decided that activity is closely related to banking, to decide if costs outweigh benefits
a. courier services - National Courier - new part of Regulation Y issued by Fed 1. bank holding co. or nonbank sub of bank holding co. a. can engage in internal courier & in courier of banking or financial material among banks 1. passes both tiers of test - closely related & proper incident b. cannot engage in unsolicited courier service of nonfinancially related material where such service not reasonably available 1. doesn’t past tier 1 of test - not closely related b. financial data processing & transport & selling computer hardware & excess capacity - Association of Data Processing Services v. Fed (1984) - Scalia 1. bank holding co. via nonbank sub can engage in a. passes both tiers of test - closely related to, proper incident to c. S&L
1. bank holding co. can acquire insolvent S&L - Citicorp (1982) order of approval by Fed a. passes both tiers of test - closely related to, proper incident to b. past bank holding co. couldn’t acquire S&L - up to 1977 1. S&L activities closely related to business of banking 2. benefits do not outweight costs
c. effect - Citibank permitted to expand into CA, geo once restricted from 2. Congress later permitted acquisitions of healthy S&L by banks & bank holding co. d. debt & equity securities 1. bank holding co. via nonbank sub can w/certain limitations deal & underwrite nongovt debt & securities (already could engage in govt securities) - JP Morgan (1987) order of approval by Fed a. historically 1. banks - permitted to deal & underwrite in govt securities 2. nonbanks - permitted to deal & underwrite in govt securities; to deal & underwrite other securities if not engaged principally under Glass Stegall Act Yüklə 175,5 Kb. Dostları ilə paylaş:
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