Question

*Discuss the regulation of the financial sector. You may focus on one or more of the Basel banking accords. You may focus on significant present or past legislation of the financial sector, with particular emphasis on United States legislation. You may focus on the putative regulation or legislation of selected institutions or parts of the financial sector in a modern economy

Answer 1

BASEL ACCORDS

The Basel Accords are three series of banking regulations (Basel I, II and III) set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

Basel I

The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital adequacy of financial institutions. The capital adequacy risk (the risk that a financial institution will be hurt by an unexpected loss), categorizes the assets of financial institutions into five risk categories (0%, 10%, 20%, 50% and 100%). Under Basel I, banks that operate internationally are required to have a risk weight of 8% or less.

Basel II

The second Basel Accord, called Revised Capital Framework but better known as Basel II, served as an update of the original accord. It focuses on three main areas: minimum capital requirements, supervisory review of an institution's capital adequacy and internal assessment process, and effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices including supervisory review. Together, these areas of focus are known as the three pillars.

Basel III

In the wake of the Lehman Brothers collapse of 2008 and the ensuing financial crisis, the BCBS decided to update and strengthen the Accords. It saw poor governance and risk management, inappropriate incentive structures and an overleveraged banking industry as reasons for the collapse. In July 2010, an agreement was reached regarding the overall design of the capital and liquidity reform package. This agreement is now known as Basel III.

Basel III is a continuation of the three pillars, along with additional requirements and safeguards, including requiring banks to have minimum amount of common equity and a minimum liquidity ratio. Basel III also includes additional requirements for what the Accord calls "systemically important banks," or those financial institutions that are colloquially called "too big to fail."

The implementation of Basel III has been gradual and began in January 2013. It is expected to be completed by Jan. 1, 2019.

PRESENT LEGISLATION OF FINANCIAL SECTOR (U.S.)

Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level.

Federal financial regulation encompasses vastly diverse markets, participants, and regulators.

PAST LEGISLATION OF FINANCIAL SECTOR (U.S.)

Historically, financial regulation in the United States has coevolved with a changing financial system, in which major changes are made in response to crises. For example, in response to the financial turmoil beginning in 2007, the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank Act; P.L. 111-203) was the last act to make significant changes to the financial regulatory structure

Federal Financial Regulators and Who They Supervise

REGULATORY AGENCY	INSTITUTIONS REGULATED
Federal Reserve	Bank holding companies and certain subsidiaries (e.g., foreign subsidiaries), financial holding companies, securities holding companies, and savings and loan holding companies
Office of the Comptroller of the Currency (OCC)	National banks, U.S. federal branches of foreign banks, and federally chartered thrift institutions
Federal Deposit Insurance Corporation (FDIC)	Federally insured depository institutions Primary regulator of state banks that are not members of the Federal Reserve System and state-chartered thrift institutions
National Credit Union Administration (NCUA)	Federally chartered or federally insured credit unions
Securities and Exchange Commission (SEC)	Securities exchanges, broker-dealers; clearing and settlement agencies; investment funds, including mutual funds; investment advisers, including hedge funds with assets over $150 million; and investment companies Nationally recognized statistical rating organizations Security-based swap (SBS) dealers, major SBS participants, and SBS execution facilities Corporations selling securities to the public
Commodity Futures Trading Commission (CFTC)	Futures exchanges, futures commission merchants, commodity pool operators, commodity trading advisors, derivatives, clearing organizations, and designated contract markets Swap dealers, major swap participants, swap execution facilities, and swap data repositories
Federal Housing Finance Agency (FHFA)	Fannie Mae, Freddie Mac, and Federal Home Loan Banks
Farm Credit Administration (FCA)	Farm Credit System