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EI 4

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EI 4
Should Regulators Intervene to Take Over Weak Banks?
-why the need for regulators?

Bank regulation:
- prevents banks from failures
- provides transparency to the banking system
- protects depositors

-who are these regulators?
In U.S.
National banks are regulated by the OCC, the Fed and the FDIC
State banks by their respective state agency, the Fed (if members) and the FDIC (if insured by it)

In E.U. the EBA supervises bank regulations

Source: Wikipedia

Banks are regulated on:
- deposit insurance
- loan composition
- bonds that they are allowed to purchase
- minimum capital level
- locations they can operate in
- services offered

-how are banks regulated?

-how do regulators determine that a bank is weak?
Components:
C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk

Regulators ask bank supervisory authorities to rate the bank using an international bank-rating system - CAMELS

Bank supervisory authorities assign each bank a score on a scale of 1 (best) to 5 (worst) for each factor.
*If the score <2 - high-quality institution
*If the score >3 - less-than-satisfactory

Composite ratings and steps of intervention:

• 1 - exhibit the strongest performance
• 2 - stable and capable of withstanding business fluctuations; supervisory response is informal and limited
• 3 - weaknesses in one or more of the components; requires formal or informal enforcement actions
• 4 - unsafe practices or conditions; close supervisory attention and intervention is required; failure is possible
• 5 - exhibit a critically deficient performance; immediate intervention; failure is highly probable
Source: www.fdic.gov

During the financial crisis that started in 2007, the biggest bank failure in U.S. history occurred when Washington Mutual with $307 billion in assets closed its doors

The Bankers’ Panic of 1907 in the US also known as Knickerbocker Crisis

Should Regulators Intervene to Take Over Weak Banks?

FOR

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