【正文】 2020 Pearson AddisonWesley. All rights reserved. 1151 Structure of . Banking Overseas ? Shell operation ? Edge Act corporation ? International banking facilities (IBFs) – Not subject to regulation and taxes – May not make loans to domestic residents Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1143 Separation of the Banking and Other Financial Service Industries ? Erosion of GlassSteagall Act – Prohibited mercial banks from underwriting corporate securities or engaging in brokerage activities – Section 20 loophole was allowed by the Federal Reserve enabling affiliates of approved mercial banks to underwrite securities as long as the revenue did not exceed a specified amount –. Supreme Court validated the Fed?s action in 1988 Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1135 Financial Innovation and the Decline of Traditional Banking ? Decline in cost advantages in acquiring funds (liabilities) – Rising inflation led to rise in interest rates and disintermediation – Lowcost source of funds, checkable deposits, declined in importance ? Decline in ine advantages on uses of funds (assets) – Information technology has decreased need for banks to finance shortterm credit needs or to issue loans – Information technology has lowered transaction costs for other financial institutions, increasing petition Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1128 Financial Innovation and the Growth of the “Shadow Banking System” ? Financial innovation is driven by the desire to earn profits ? A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable – Financial engineering Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1120 Whither Financial Regulation After the Subprime Financial Crisis? (cont’d) ? Fewer subprime mortgage products. ? Regulation of pensation ? Higher capital requirements Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1115 The 1980s Samp。 2020 Pearson AddisonWesley. All rights reserved. 117 Financial Supervision: Chartering and Examination ? Chartering (screening of proposals to open new financial institutions) to prevent adverse selection ? Examinations (scheduled and unscheduled) to monitor capital requirements and restrictions on asset holding to prevent moral hazard – Capital adequacy – Asset quality – Management – Earnings – Liquidity – Sensitivity to market risk ? Filing periodic ?call reports? Copyright 169。Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 118 Assessment of Risk Management ? Greater emphasis on evaluating soundness of management processes for controlling risk ? Trading Activities Manual of 1994 for risk management rating based on – Quality of oversight provided – Adequacy of policies and limits for all risky activities – Quality of the risk measurement and monitoring systems – Adequacy of internal controls ? Interestrate risk limits – Internal policies and procedures – Internal management and monitoring – Implementation of stress testing and Valueat risk (VAR) Copyright 169。L and Banking Crisis ? Financial innovation and new financial instruments increased risk taking ? Increased deposit insurance led to increased moral hazard ? Deregulation – Depository Institutions Deregulation and Moary Control Act of 1980 – Depository Institutions Act of 1982 Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1121 Whither Financial Regulation After the Subpr