Industry sign banking missouri form myself
you okay the last time we were talking about the camels rating is this risk rating to kind of tell us the situation that banks are in the bank regulators come in federal regulators examine the banks they they've got call reports where the banks are just submitting data regularly and then there was also an examination and from all that information we get a camel score and that as I mentioned to you last time tells us whether the bank is running a lot of risk or doing a good job keeping wrists down so the banking system is safe and so anyway one thing I didn't really get to that is a problem with regulations you know we've got these camels scores and one problem is this is that the regulator's don't always do a good job of applying that to the banks you know we're sort of assuming here that banks can go out and make mistakes and then the regulator's come in and detect that by doing their examinations and so forth and that's all true the only thing is there's one more step in the process that's necessary and that is for the regulator's to say hey you broke the rules here's what you're going to do didn't just break the rules but you're you know you're taking too much risk an unacceptable amount and we're gonna require you to do this or that and then actually follow through on that and so that is a problem with all of this is there isn't such a thing as perfect regulation and that doesn't mean to say that all the regulators are no good this would be a problem that anybody's gonna have you know it's like a matter of having a lot of different issues to deal with 7,000 banks in the United States and you can only deal with so many things at a time the regulatory bodies don't just have infinite numbers of resources they only have so many people working there and also there's a change in what you might call technology so sometimes there are risks being taken that aren't detected and so we you know maybe the camel score doesn't fully reflect the risk that a bank is taking and so forth so anyway but a problem with all of this if if everything worked the way it's supposed to just in theory we get a camel score a bank that gets a one or two would be told yeah you're doing a fine job and we'll see you next time thanks it got three four five we would tell them this is not acceptable we'll reach an agreement on what you need to do to bring your your level of risk into some acceptable limit and then the banks would follow through and then we wouldn't have bank failures but we do have bank failures and in some years we have quite a few back figures most years it's a small number but in a few years we have a lot of bank failures how can that be and the answer is all of this theory isn't necessarily put into practice I was reading something where'd I get this from the New York Times and it was from an editorial they wrote a few months ago but they were talking about lending standards and basically what led up to this financial crisis that really started in 2007 and then continued into 2008 and 2009 so they were describing this process and here's what they wrote the damage now becoming apparent demands that policymakers take stock of how the economy arrived at this place the bubbles and housing and mortgages would not have been possible were it not for the progressive deterioration and regulation over the past several decades so they're talking about years and years and years that went by decades where that regulation of mortgage lending housing lending and then of course what happened in the housing market that that was just kind of pushed onto the back burner that's not a big issue the anti-regulatory ethos in turn derived its potency from a pervasive ideology that markets are self-regulating and self-correcting and therefore best handled with incentives and voluntary best practices rather those rules and boundaries so I guess what they're saying here is and it's not only with respect to bank regulation but also Fannie Mae and Freddie Mac and all sorts of laws passed by Congress and so forth but there's this issue that in this housing bubble that the housing bubble but the prices that became so employed in housing that this was something that was not perceived as a big problem and it was like oh you might be taking risks about lending to businesses you might be taking risks you bankers might be taking risk and the securities you buy you might be taking risk in many different ways of investing in derivatives or getting involved in that market but we're not so worried about housing and so we won't really look at that and so over the years these problems built up and then all of a sudden a lot of these home loans went bad they were defaulted on and also then a lot of the securities that were purchased on mortgage-backed securities issued by the GSEs and and the mortgage banks or investment banks but those bonds went bad lost value and then the bankers were in trouble and so this is something that we need to keep in mind as well to some extent I already talked about the capture theory of regulation you know it can be that all of this stuff is not strictly enforced because to some extent the regulator's feel you know a kinship with the banks and just don't want to be too tough on them and that would be just capture theory but then to some extent it's what I already mentioned and that is that the regulatory bodies are stretched then they only have so many resources so many examiner's and so forth so many employees so much time to go out and look they're trying to focus their attentions on the worst banks and then that means that some that are you know rated 3 rather than 4 or 5 maybe they skate through and don't really get called to task here's another one and it comes back to this issue of the camel score but how could it be that you know we weren't on top of all these risks this is another article by the way that first one that I quoted from was dated January 31st 2008 so that was back in the middle phases of that financial crisis here's something else a milestone in the deregulation effort came in the fall of 2000 so now we're looking back a decade came in the fall of 2000 when a lame-duck session of Congress passed a little notice piece of legislation called the Commodities Futures Modernization Act the bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks bonds and futures contracts so we've got we've got bank regulators we've got the Securities and Exchange Commission we have these regulatory bodies that are watching over these risky activities financial activities and what this says is and in 2000 fall of 2000 some of these more exotic derivatives that new technology are coming along and rather than say to the Securities and Exchange Commission and the Federal Reserve Board and so forth hey you get on top of this this is all taken away from them by this law that was passed in 2000 and so the riskiness of these assets was not fully understood and then we get to a point in 2007 2008 2009 when the value of these assets comes down and then banks and investment banks and so forth get caught up and all that and we see a lot of failures this was signed in the law what it said by a lame-duck session of Congress in 2000 it would have been Bill Clinton as president and that wasn't something Bill Clinton was pushing but in his I think December of 2000 and so that would have been in his last month of office that he would have signed that so lame-duck Congress lame-duck president here comes a bill okay let's sign it and go home to Christmas and so anyway that's kind of how we get into these sometimes let's talk a little bit about the regulator's themselves who are they and I've already mentioned each one of these regulators has already been mentioned briefly but I want to kind of bring the discussion together you know and talk about each one OCC office of the controller of the currency the controller the currency you recall was created with this National Bank Act in 1863 okay under President Lincoln the OCC charters and regulates national banks national banks are just privately owned banks just commercial banks but they have a national charter issued in Washington DC by the OCC okay there are sixteen hundred of these national banks pause fifty banks that are chartered overseas there are foreign banks okay and they have branches operating in the United States but basically sixteen hundred US banks have national charters and that's who the the OCC regulates okay and regulations supervision the supervision part is watching to see are you following the rules okay these are typically the largest banks typically I say and these sixteen hundred banks hold about two-thirds of all bank assets so if we go the entire banking system with about seven thousand banks right and so here's sixteen hundred of them less than a fourth and they hold two-thirds of all bank assets and that's a rounded off number okay and these banks national banks must and all underlie must be members the Federal Reserve they call them Fed member banks members of the fan and they must have FDIC insurance why do banks become national banks you know one reason to become a national bank is there's some prestige involved in that and buy prestige I don't just mean to say the banker can walk around say look at me I got a National Bank but what I mean is this is that when we're deciding or to put our money we depositors and we're thinking yeah do I want to trust them then when we see that word national maybe not consciously but subconsciously we start thinking that's a little safer place to put it that's a National Bank and so that's one of the reasons banks do that sometimes you'll have a small Bank that's not doing big business or anything like that and they'll get this national charter it may be that they're a small bank just getting a start and maybe they think you know people aren't gonna trust us with their money they never heard of us before what can we do to add something that will make people trust us more and give us the money and maybe that'll help us grow more rapidly let's get a national charter another reason for getting a national charter is it may be that the bank wants to get involved in more sophisticated financial activities okay and it may be that they want to open branches in other states or even other countries and so once you have in mind doing these more sophisticated things or spreading yourself you know into other areas and other markets further away then the National Charter is something that's more appropriate as well okay by the way I mentioned about the prestige or the safety that's attached to just having that word National Bank and that is for sure done something else that I used to hear I don't hear it so much anymore but used to hear people mentioned was when you walk in a bank sometimes you'll see these big marble columns you notice I'm very high ceiling and these big marble columns and sometimes you know the marble floor and things like that or granite and you think oh man this is solid and so then the it wasn't a joke but the understanding among bankers would be yeah we'll put that in there that'll make people feel like their money is safe you know now that doesn't mean that we're managing them safely it doesn't mean that nobody could rob the bay it doesn't really mean anything other than we've spent a lot of money on these marble columns okay but there's this subconscious feeling that people have when they walk in and they see these big columns and that high ceiling and you just think wow this is solid as a rock I'm gonna give them my money and so anyway part of the reason that we see those big buildings like that is to give us this feeling and it's usually subconscious there's nobody we got to sign up I guess nobody that says solid as a rock you know leave your money here but there's that feeling solid as a rock that we get and then we go I feel good about that man I don't know if you see these but a lot of times there will be a new Bank it gets a charter and the first thing they do they get a charter and it takes time to build a building and so what they'll do is they'll start their office out of a really a mobile home have you seen those and they'll just bring them right up on the lot and then like there it is and it would take like I can opener to break into one of those you know I'm saying this get there and go like that and this is all the way around in this crawl right on in anyway I can't open it you don't see a lot of you know bank robbers that are outfitted with can openers maybe something electric so you can get in and out what do you think electric plug that in would you anyway how would you feel about that though I mean really if they have insurance and you give them your money and if they get robbed by somebody with a can opener then you don't lose anything they have insurance so would you feel good about that would you feel good about having a bank and it's and I don't mean to say temporarily but just permanently in a mobile home out on some lot with maybe no grass or anything like that and just walk up there and take two or three steps up and go in and say here's my money and then leave how would you feel about that and most if we're gonna go eh I don't think so but I mean theoretically if they're paying you interest and treating you an honest way and give your money back when they promise and it's all the same right but people I think most people don't feel good about that I don't know and then when the bank grows they would get a double-wide I'm just making this up because you know somebody has to okay so anyway here's our first bank regulator we won't talk about let's talk about a second one and I'm gonna focus on there's the the order why I'm gonna turn to number two is the state Banking Authority is because of the chartering and I'm not gonna write all this stuff down again but it's the they Charter and regulate state banks and by the way I mentioned to you that if a bank has that word national in its name it has a national charter they don't have to use that term national in their name if they have a national Charter and banks that have a state charter usually do not have the word state in their name okay now we have about 7,000 banks we know there are about 1600 of them with national charters how many you think we have a state charter those of you who want to do the math at home we have about 5,400 banks with state charters these tend to be community banks right okay and by the way we haven't most of these 1,600 nationally chartered banks are community banks - we have of the what money center banks and the regional banks maybe four or five hundred money center and regional banks four or five hundred most all not everyone are in this group and so roughly a thousand or 1100 or 1200 of these banks right here that our national banks are community banks they're not huge okay so anyway 50 banks okay this turns into how many states do we have fifty so this is about a hundred a few more per state I told you that we have around three hundred banks in this state what a state okay and then what FID membership is optional FDIC is usually fifty I see insurance on foreign deposits usually required by the state authorities that is to say you go and say hey I want to get a charter and they say okay go get FDIC insurance and if you say I don't really want to do that they go okay we really don't want you to have a charter why not because they don't they the chartering authority in your state they do not want a lot of uninsured banks around the state because they're just waiting for a disaster the the bank fails depositors go oh my gosh I can't get my money back I think that we'd have to go back to the late 1980s I believe it's hard for me to know I read a lot of stuff about the history of it and so forth but I think if we go back to the late 1980s there were still several states five six eight ten that had their own Deposit Insurance and so then the banks would have Deposit Insurance issued by the states some state authority and not by the FDIC and what happened was here's the deal if you get a bank or two that failed and assuming they're not huge banks and you can go into the state
nsurance fund and pay off depositors or handle those problems but if you have some recession that is really severe and you have 20 banks that fail it's like that wipes a system out if it's done on a state level so anyway the states at that point paid people off and just said that's it now go get your insurance from the FDIC and if you don't want to do that then just don't do business in this state and so anyway the requirement of getting FDIC insurance would come from these state authorities or from the National chartering authority and it's always been the case since there was an FDIC as soon as they said FDIC exists on what year the law in 1933 since that year every National Bank has had FDIC insurance and it's been in more recent years that virtually every state charter bank has FDIC insurance okay I mentioned a term before let me throw it in here again dual banking we have a dual banking system and the dual banking system means you can get a charter in Washington from the OCC or a charter at your state level okay and so we've got two sets of basic chartering authorities two sets of regulations and there was this tendency to shop around for lacks standards and that's not nearly as much as it is but if we go back 50 years 75 years a hundred years then what would happen is you say yeah let's start a bank and then you'd say what do you have to do to get a national Charter and I say this and this and this and you go hmm I don't really want to do all those things hold myself to those standards what would I have to do and you know the state of this pick a state how about New York boy that's a lot of standards - what about Delaware well I don't like to hear the sound of that one what about you know and just keep going there's 50 states I'm not a hundred years ago but a lot of states and just keep looking you find let's say boy these guys have no standards at all that's where I want to do business now that would be if you were maybe not a very good manager and not totally ethical and so then if banks are going to that state and getting their Charter then other states nearby tonight say gosh banks don't want to open up here they're going over there because their standards are lower and then there's a tendency to let's compete let's lower our standards a little bad here's a rule or two that we had that maybe we can get rid of it and then that stage starts attracting more banks in the next state says yeah we ought to do that too and so this whole idea was thought to sort of bring about a competition toward the bottom in terms of lowering standards but over the last twenty years or so it's really gone in the opposite direction one reason for that is no matter what these chartering authorities say their rules are we depositors have our own rule and basically our rule is this I'm not putting my money in a bank that doesn't have FDIC insurance and so if we say I'm not putting my money in any bank without FDIC insurance then even if these chartering authorities had no standards and just said do what you want as long as the FDIC says we have standards to get insurance from us then that would prevent these banks from engaging in all sorts of risky sort of shady activities and so anyway this shopping around for lacks standards is a historical problem that is not a severe anymore not nearly as severe as it used to be but we still refer to this terminology as a dual banking system it is unlike banking systems banking what institutions in most countries of the world most countries are going to have the equivalent of a controller of the currency national charters if you want to open open a bank and France you go to Paris you get a charter and then you bank in France and wherever you want to be okay and sure I could throw around a few French names just to impress you but I'm not gonna do that okay the third banking authority Federal Reserve and you know officially the Federal Reserve System and we always call it the Fed so then the Fed these are call member banks the banks that joined the Federal Reserve System they go in and they apply say I want to join and those banks are called member banks sometimes they'll be called Fed member banks but just member banks okay it includes all of these nationally chartered banks and they'll in general the largest of the state chartered banks and I'm just saying in general any bank can apply and as I said before with the National charter you might say hey there's some amount of prestige or safety or whatever involved with being a member bank let's become a member bank and there are some services provided okay these state chartered banks that are fed members tend to be me say this so you understand the state chartered banks that join fed membership tend to be as big as the nationally chartered banks so it is and as a rule the largest of the state charter banks that become fed members okay there are about I'm gonna put a number up here 700 that's a ballpark number but there are about 700 state chartered banks that are fed member banks you remember there are 1600 nationally chartered banks so what's that add up to four thousand anybody say four thousand about 2300 member banks of the Federal Reserve System okay well let me go back these what these 1600 nationally chartered banks are holding two-thirds of all the bank assets and so now if we go pick up another 700 tends to be fairly large banks then what we're saying here is that and I don't know the exact number but a very high percent I wouldn't be surprised if 90 percent of all bank assets are owned by or held by the banks that are fed member banks and I'm not telling you that it is 90 percent but I would not be surprised by that these are these tend to be our biggest banks in the United States but there are community banks in there there are what I told you probably a thousand or more community banks in this group of national charter banks so it's not like they're all big but on average these are pretty big banks okay why do you get fed membership well here's what you do number one is if you have fed membership you have an account at the Federal Reserve and that's where you keep your reserves you can keep reserves in the vault but you know you don't need a lot of cash in the vault and so then you keep your reserves at the Fed and the good news about that is if they're at the Fed they can be transferred quickly right another thing is you might want to service the Fed provides which is check Clarion Services bundle up your checks hand them over the Fed really anymore it's electronically send a picture of them to the Fed but anyway you get your checks to the Fed they'll clear them or they'll collect those for you give you credit into your account I've been to the st. Louis Federal Reserve Bank and I've seen those machines they have that do the check clearing process and they are monster machines and they put a big stack of checks on there and they suck them through you know so fast it's hundreds of minute hundreds and hundreds per minute they got lots of machines and in the course of a day they can clear millions of those checks and they are not the Federal Reserve's not the only one Clarion checks but because some large banks do their own but the point is they have the biggest machines out of the most okay one of our graduates that took this course several years ago but an econ major here at this university worked up there and was actually in charge of that department that's how I got to go through the room and sort of stand up next to the machines and watch him you know like move so fast and it's really just an incredible process but anyway that is a service that pretty much all banks need is check Clarion services and so a lot of banks will join for that service I mentioned to you before and so I'll come back to it again a bank with regard to national banks a bank that wants to get involved in more sophisticated activities and a bank that wants to do business further from home those are the types of banks that find rules and regulations that would govern that kind of activity and if you want to do these more sophisticated things far from home and you just want to have a state charter and no Fed membership you start saying oh I want to do this and the regulator in your state says we don't allow that you want to involve yourselves in certain derivatives you know financial securities or you want to open a foreign branch or where we're not set up for that no and so then once you start saying this is what I want to do then you start saying you know we've got to have a membership at the Fed or we need to have a national charter fed membership is required of national banks and it is an option I'll put it over here an option for state chartered banks okay but it is absolutely every national bank since there's been national a sense there's been a federal reserve every national bank has to be a Fed member bank okay what else did I have in my notes here all fed members member banks must have FDIC insurance FDIC insurance coverage on deposits and the Fed regulates BH C's remember what those are bank holding companies so in addition to regulating member banks and this the Federal Reserve has regulated these member banks since they open their doors when 1914 so since 1914 the feds been regulating member banks but you remember we had two bank holding companies acts one of 1956 and the other one do you remember the year 1970 and so those bank holding company acts of 1956 and 1970 they are the ones that said to the Federal Reserve you regulate those bank holding companies and there was a big movement underway 1956 the big movement under way of creating bank holding companies was to get around the laws on branch in that restricted branching oh let's open more offices well you can't okay so we'll have a bank holding company and it will open more banks not branches but separately chartered banks and so anyway so we get the Bank Holding Company Act of 1956 it regulated multi bank bank holding companies and then we've got a bunch of banks that before 1970 the movement gets underway let's create bank holding companies to get around glass-steagall and get into other activities and then along comes of any Holding Company Act of 1970 to regulate banks getting these other business activities so we've got the Federal Reserve regulating bank holding companies how many bank holding companies are there there's about 5,000 bank holding companies and so what we have is and really what you can say is every bank that is large or medium sized or even on the largest part of small did that make any sense at all because many things I say don't 5,000 out of 7,000 banks are owned by bank holding companies and what do we had I said lighting maybe 90% maybe of all bank assets are held by these 2300 well there's twice that many banks that are owned by bank holding companies and so really just the smallest banks are not owned by bank holding companies so this puts the finger the feds finger in every pie in the country you know so to speak of regulating banks and finally number four and I know you were waiting for finally the FDIC oh by the way before I go on to that I was talking most recently here about the bank holding companies I printed out a list am I gonna pass it out but just on one page I printed out 28 bank holding companies and the largest bank holding company is the bank of america corporation that owns Bank of America okay I don't know if you recall but I was telling you that Bank of America the bank has total assets of what did I say one point either 1.1 or 1.3 trillion dollars we talked about that the other day well the bank holding company that owns Bank of America has not only those assets but the assets of subsidiary operations that are not banks Bank of America Corporation total assets 2.3 trillion dollars so this corporation this bank holding company has got a trillion dollars in assets outside of banking and they're doing all sorts of other activities that are simply not banking for example investment banking or loan companies that lend money to people but not lending money to people that are derived from deposits but just other small loan companies and things like that JP Morgan Chase slightly over two trillion dollars in assets this is JP Morgan Chase & Company the bank holding company that owns JP Morgan Chase the bank Citigroup the bank holding company that owns Citibank Citigroup has assets of 1.9 trillion dollars so huge corporations right anyway so they're about 5,000 of these the 28th largest and I'm not even gonna name it but the 28th largest has total assets bank holding company of right at 70 billion dollars so we're talking trillions and trillions of dollars in assets okay FDIC I've already mentioned this to you and another connection all fad member banks and all national nationally chartered banks must have FDIC insurance and then also anymore almost all state charter banks must have because the state chartering authority requires it okay and out of the 7,000 banks I don't know the exact number but we're talking 6,800 out of 7,000 I'm gonna put a question mark there because I don't know the banks that have a bank charter and do not have FDIC insurance most of them are what I've told you before are non deposit trust companies an on deposit Trust Company it does not accept deposits therefore they don't need insurance deposit insurance anyway an on deposit trust company and they are managing people's money for them but they have a bank charter and they're because today if you go out I mean you know we've had a lot of bank failures and people lost money from this if you went out today and put up you know a big building with big marble columns and things like this and say we're now accepting deposits no FDIC insurance people would say no way I just am NOT interested in putting my life savings in your hands and hoping for the best okay so anyway virtually all is the way I normally said virtually every bank in the United States has FDIC insurance to qualify the banks got to do two things it's got to meet safety standards you know and operating standards still lead to safety like these camels score scores and so forth but you've got to be safe and then you got to pay your premium and then all the other things about can you open branch offices and things like that that would fall under the heading of other regulators okay and as I mentioned before the FDIC is the only regulator of state chartered non-member banks so if you get a start state charter and you don't join the Fed system then you're only federal a regulator will be the FDS and so that is setting a four on standards as long as the FDIC does its jobs then we're not going to have the riskiest operations out here taking people's deposits and in recent years they like all the other regulators have faced some challenges doing that okay let me draw a little picture and then we'll go on see if I can put this all together so we have about 7,000 banks we have 1600 with national charters 5,400 with state charters and that gives us our 7,000 banks more or less I'm rounding off of these 7,000 banks we have would I tell you 2300 that are fed member banks and we have what's the rest mmm 4700 non-member banks and all of those national banks are fed member banks and then out of those every one of these fed member banks has FDIC insurance and virtually all have FDIC insurance so and I made up that number a moment ago I don't know the exact number today but 6,800 what FDIC insured banks and these 200 over here are non insured they all have our every non insured Bank is a non-member not a member of Fed and state chartered and I even told you that most of those banks as far as I know all of them are not taking deposits they are trust companies with a bank charter now here's the deal every bank then is going to be regulated a supervised regulated examine by some federal authority except for these 200 or whatever yes sir a credit union has a different kind of insurance or regulated in a different way and I do not mean to include credit unions or savings and loans thrift institutions that are called I here I am just talking about commercial banks but a credit unions got something called NCUA that issue that provides it's not really deposit insurance with a credit union
I don't know if we talked about this early but perhaps if you have an account at a credit union you go in and say here I want to put this on my checking account that is not really a checking account it looks like a checking account you've got a little check you can write and so forth but that's really called a shared draft account and so when we put money in a credit union let me back up credit unions are not owned by shareholders and then operated to earn a profit and then we've got customers that come in off the street to buy checking account services credit unions are owned by their members right and the people who give them money in fact if you say I want to put a hundred dollars into credit union that's create a treat it as an investment like you are buying into the credit union and so then when you go out and write that check you're not really saying take money out of my deposit you're really saying sell my shares of ownership in that institution and then take the proceeds and honor this draft and so that's called a shared draft so anyway what I'm saying to you is this is really not Deposit Insurance that we're providing for people well we're insuring your shares we're ensuring that when you ride a draft this is all legal fictions if somebody hands you a check you look at it you look at a bank check and they look the same but they're really insuring your ownership so when I say FDIC though there are different standards different body a regulatory body and so forth different pool of money different numbers different rules and I mean almost nothing I've ever said this semester refers to credit unions or thrift institutions safe zones mutual savings banks there are what I'm 1200 more or less thrift institutions or savings and loans about 1200 that are on top of the 7000 and around I think 10,000 credit unions can they make commercial as well it depends on what the rules and regulations are but a credit union for example is not accepting demand deposits in theory right so anyway it's also credit unions don't have to pay taxes and you know and so like if they generate a profit what they do is they hand that back to the shareholders and you pay income taxes on that so they don't pay taxes and a lot of credit unions don't pay rent because like it might be that a university or a school or a manufacturing company they might have a credit union and say hey we'll give you free office space here and so it's really a different kind of an animal let me finish up with this except for these the small number of banks every single bank has at least one federal regulator but some have three FDIC the Federal Reserve and the control of the currency and so this could require enormous resources from bankers turning in forms basically hosting these bank examiners that come in and so not only would it require a lot of resources among on the part of banks to comply but also it require a lot of bank examiners stuff like that so what happens is the FDIC and the Fed and the control of the currency they all get together and share information and they share responsibility and one of them says like oh I'll go see these 1600 and another and says hog go see those 700 and nother one says I'll go see those others and then we'll share all this information and then that keeps the basically that call of regulation down not only the cost as I say for the regulator's but also for the banks that are being regulated we're gonna try and finish this material up on bank regulation next time so long I'll see you
