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Banking
University of North Carolina School of Law
Broome, Lissa Lamkin

Banking Law

Professor Lissa Broome

Fall 2011

Review Outline

[Highlighted material was not covered this year and you are not responsible for it.]

I. The Business of Banking

A. Unique characteristics of banks

1. Financial intermediation (versus direct investment)

2. Depository (versus non-depository) intermediary

a) Transaction (checking) accounts

B. Use of banks to effectuate monetary policy

1. Structure of the Federal Reserve System

2. Reserve requirements

a) Interest on required reserves to begin on 10/1/2010 under the Financial Services Regulatory Relief Act of 2006

b) Emergency Economic Stabilization Act of 2008 (EESA) accelerated this to 10/1/2008

3. Open market operations

4. Discount rate and federal funds rate

5. Initiatives in the wake of the financial crisis

a) Loans under 13(3), 12 U.S.C. § 343 of the Federal Reserve Act in unusual and exigent circumstances, secured to the satisfaction of the Federal Reserve bank, and borrower cannot secure adequate credit from other banking institutions

(1) $29 billion loan to JP Morgan Chase to assist in its purchase of Bear Stearns

(2) Lehman did not receive a loan purportedly because of lack of adequate collateral

(3) $85 billion loan to AIG (just two days after Lehman failure)

(4) Extraordinary aid to Citigroup and Bank of America

(5) New credit and liquidity programs (all have ended)

(a) Term auction facility – 28-day or 84-day loans

(b) Term asset-backed securities loan facility

(c) Commercial paper funding facility (short-term loans to businesses)

(d) Money Market Investor Funding Facility

(e) Asset-Back Commercial Paper Money Market Mutual Fund Liquidity Facility

(f) MBS Purchase program (Fed still holds over $1 trillion of MBS)

b) Dodd-Frank:

(1) 13(3) applicable only to a program or facility with broad-based eligibility

(2) Fed and Treasury regulations for emergency programs to provide liquidity, but not aid a failing company

c) FDIC’s systemic risk authority (an exception to the least cost method to resolve failing banks) used to provide unlimited deposit insurance to non-interest bearing transaction accounts and provide guarantees of bank unsecured debt

d) Dodd-Frank:

(1) § 1105 – Authority for FDIC to create widely available program to guarantee obligations of solvent banks or holding companies

6. Dodd-Frank Structural Reforms

a) Financial Stability Oversight Council (FSOC)

(1) Membership

(2) Designate systemically significant institutions

(a) BHCs with assets over $50 billion

(b) Nonbank financial institutions (financial if over 85% of revenue or assets come from financial in nature activities

(3) Fed oversight and could be more stringent capital, leverage, and liquidity requirements

(4) May require an orderly liquidation without the possibility of reorganization

C. Characteristics of banks

1. Dual charter (national or state available)

a) National banks are fewer in number, but larger in asset size

b) Most new banks are state chartered, nonmember banks

2. Most bank assets held by holding companies

D. Bank income statement

1. Interest income & fee-based income

E. Bank balance sheet

F. Challenges to unique characteristics of banks

II. History of Bank Regulation

A. Federal bank efforts pre-Civil War

B. State banks and state bank notes

C. National Bank Act of 1863

1. Creation of national banks and OCC

2. Beginning of the dual bank charter system

3. Creation of national bank notes to serve as a federal currency

D. Federal Reserve Act of 1913

1. To implement country=s monetary policy

2. Federal regulator of state member banks

E. Banking Act of 1933

1. Created FDIC to provide federal deposit insurance

a) Federal regulator of state nonmember banks

2. Placed limits on savings deposit interest; prohibited interest on checking accounts

3. Contained the Glass-Steagall Act to separate commercial banking from investment banking

F. Bank Holding Company Act of 1956

1. If owned more than one bank, then could only own banks or companies engaged in activities Aclosely related@ to banking

a) 1970 amendment made BHCA apply to a BHC owning only one bank

2. Douglas Amendment authorized interstate banking only if permitted by law of host state; absence of such state laws meant that no interstate banking took place until later

a) Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed the Douglas Amendment and permitted interstate branching as of 1997

3. FRB given regulatory responsibility over BHCs and nonbank subsidiaries

G. 1980-91 flurry of legislative activity in response to the savings and loan crisis (see below)

H. Gramm-Leach-Bliley Act of 1999 (GLBA)

1. Authorizes FHCs to engage in activities that are financial in nature, including insurance, securities, and merchant banking

2. Functional regulation

a) But FRB retains Aumbrella@ supervision

3. Privacy

I. Financial Crisis – September 2008

1. 9/07: Fannie Mae and Freddie Mac into government conservatorship

2. 9/15: Bank of American announces agreement to buy Merrill Lynch

3. 9/16: AIG gets $85 billion loan form FRB NY

4. 9/16: NAV of the Reserve Primary Fund “breaks the buck”

5. 9/21: Fed approves applications of Goldman and Morgan Stanley to become BHCs

6. 9/25: Washington Mutual failed and was sold to JP Morgan Chase

7. 9/29: FDIC announces sale of Wachovia to Citigroup with FDIC assistance (later Wells Fargo trumped the Citi offer with more money and requiring no FDIC assistance)

8. 9/29: House of Representatives rejects EESA legislation

J. Emergency Economic Stabilization Act of 2008 (EESA) (10/3/2008)

rturned it by passing the Credit Union Membership Enhancement Act

4. Possible conversion to mutual savings bank, which could then convert to stock savings bank.

D. Savings and Loan Crisis

1. Caused primarily by rising interest rates, making the thrift business model untenable

a) Short term deposits funding long-term, fixed rate home mortgage loans

b) Limits on savings deposit interest rates resulted in disintermediation

2. Monetary Control Act of 1980

a) Increased deposit insurance from $40,000 to $100,000 per account

b) Phased out interest rate cap

c) Authorized NOW accounts (interest bearing checking accounts for thrifts and banks)

d) Provided thrifts some limited authority to make consumer loans and nonresidential real estate loans

3. Garn – St Germain Act of 1982

a) Authorized money market deposit account

b) Expanded thrift lending authority to (30% of assets to consumer loans; 40% of assets to nonresidential real estate); 10% of assets to commercial loans)

c) Capital requirements reduced from 4% to 3%

d) BHCs could buy failed thrifts

4. FIRREA of 1989

a) See above

b) BHCs could buy healthy thrifts if satisfied the Qualified Thrift Lender (QTL) test (70% of assets in housing or consumer-related lending)

c) Powers of state s&ls limited to powers of federal s&ls

5. FDIC Improvement Act of 1991 (FDICIA)

a) Introduced risk-based premiums for federal deposit insurance

b) Powers of state banks limited to powers of national banks

c) Prompt corrective action based on capital adequacy

E. Financial Crisis and Dodd-Frank

1. Subprime mortgage products

2. OTS abolished July 21, 2011 and its functions transferred to

a) OCC – federal thrifts (rulemaking for federal and state; supervisory for federal)

b) FDIC – state chartered thrifts (supervisory for state)

c) FRB — SLHCs

F. S&L Holding Companies

1. 1967 – Unitary holding company not subject to activity restrictions

2. 1987 – CEBA and QTL (70% of assets in housing or consumer-related lending to be free of activity restrictions as a unitary holding company)

3. 1999 – GLBA closed unitary thrift loophole; grandfathered in existing unitaries

G. Demutualization or Conversion of Mutual Institutions to Stock Institutions

H. Review of statutory and regulatory themes based on history of thrift regulation