Check Out These Pages

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Check Out These Pages

• www.nacha.org
• www.federalreserve.gov
• www.afponline.org

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The U.S. Financial EnvironmentReferenceETM
Chapter 3
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Chapter 3 Financial Environment Outline

• Financial Markets
• Financial Institutions Functions and Services
• Regulatory Agencies
• Federal Legislation
• Legislation Governing
• Regulation and Supervision
• Types of Financial Services Offered
• Geographic Boundaries
• Consumer Protection
• Federal Reserve Regulations
• Uniform Commercial Code (UCC)

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Security and Exchanges Markets

• Primary markets debt and equity offered for
  first time to investors
• Secondary markets previously issued debt and
  equity are traded by brokers and bankers

• NYSE
• AMEX
• NASD
• NASDAQ (national over-the-counter exchange)
• Regional exchanges

• Continuous market with frequent fast trading
  reducing price volatility
• Prices subject to changing supply and demand
• Companies raise capital
• Regulated environment

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Financial Institutions

• Commercial Banks
• Investment Banks and Brokerage Firm
• Thrift Institutions
• Credit Unions
• Mutual Funds
• Factors
• Insurance Companies
• Consumer Credit Companies

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Commercial Banks Products and Services

• Deposit accounts
• Credit services
• Investment banking services
• Payment and collection services
• Trade services
• Foreign exchange (FX) services

• Agent or fiduciary services
• Risk management services
• Consulting services
• Broker/dealer services
• Insurance company affiliation

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Deposit Accounts
Demand deposit accounts (DDAs)
Time deposit accounts (TDAs)

• Checking account
• Interest bearing for individuals, sole
  proprietorships, government entities and
  nonprofits
• Not interest bearing for sub chapter S and C
  corporations
• Purposes for holding balances
• Transaction balances
• Compensating balances
• Correspondent balances

• Must be held for specified period
• CDs (under 100K)
• Jumbo CDs (over 100K)
• Fully negotiable CDs (1 mil. blocks)
• Savings accounts
• MMDAs
• NOW accounts

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Guarantor Services

• Letters of Credit
• Standby L/Cs
• Credit Enhancement Standby L/Cs
• L/Cs Confirmations

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Agent or Fiduciary Services

• Trustee Services
• Investment Management
• Corporate Pension Plans
• Qualified Employees Benefit Plans
• Corporate Trustee
• Transfer and Paying Agent
• Registrar
• Custody Services

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Investment Banks

• Underwriting
• Distribution
• Advising

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Investment Banking and Brokerage Firms Services

• Bond and Stock Underwriting
• CP Dealers and Underwriters
• Institutional and Retail Brokerage
• Investment Advisory and Portfolio Management
• Risk Management
• Insurance Services

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Regulatory Environment

• Federal Level
• State Level

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Federal Regulatory Agencies

• Federal Reserve
• Federal Deposit Insurance Corporation (FDIC)
• Office of the Comptroller of the Currency (OCC)
• Securities and Exchange Commission (SEC)
• Department of Justice

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The Federal Reserve System (the Fed)

• Organization
• Board of Governors
• Federal Open Market Committee (FOMC)
• 12 banks and 25 branches of the Federal Reserve
• Roles
• Supervision and regulation
• Monetary policy
• Banking services wholesaler
• Fiscal agency of the U.S. Treasury
• Consumer protection

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Federal Reserve Supervision

• Member commercial banks
• Bank holding companies
• Edge Act banks
• U.S. banking activities of foreign banks
• Foreign activities of U.S. member banks

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Federal Reserve Monetary Policy

• Reserve Requirements
• Discount Window Rate
• Open Market Operations

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Federal ReserveBanking Services

• Check clearing
• Wire transfer through Fedwire
• Automated Clearing House System (ACH)

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Federal Reserve Fiscal Agent

• Banker for the federal government.
• Accepts payment for federal taxes on behalf of
  the IRS.
• Fiscal agent for the Treasury when issuing,
  redeeming, and transferring ownership of
  government securities.

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Federal Deposit Insurance Corporation (FDIC)

• Description
• An independent agency of the federal government
• Primary role is to protect depositors from losses
  caused by bank insolvency

• Responsibilities
• Deposit insurance
• Supervision
• Acting as a trustee in event of bank failures

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FDIC Insurance

• Administers the BAIF and SAIF
• FDICA of 1991 mandates risk-based deposit
  insurance premiums

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Office of the Comptroller of the Currency (OCC)

• Regulates the national banking system
• Administers nationally-chartered banks
• Oversees the execution of laws relating to
  national banks
• Promulgates rules and regulations governing the
  operations of national banks
• Supervises a nationwide staff of bank examiners

• Approves/denies national bank charters, branches,
  capital other banking structure changes
• Examines national banks for asset (loan) quality,
  capital adequacy, and key regulations

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The Securities and Exchange Commission (SEC)

• Registers public offerings of debt and equity
  securities by banks or bank holding companies and
  corporations
• Sets financial disclosure standards for
  corporations that sell securities to the public
• Requires filing of quarterly and annual financial
  statements by companies with publicly owned
  securities

• Regulates mutual funds and investment advisors
• Monitoring insider trading

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Federal Legislation

• Federal Reserve Act (1913)
• McFadden Act (1927)
• Glass Steagall Act (1933)
• Depository Institutions Deregulation and Monetary
  Control Act (1980)

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Financial Legislation

• Federal Deposit Insurance Corporation Improvement
  Act (1991)
• Interstate Banking and Branching Efficiency Act
  (1994)
• Gramm-Leach-Bliley Act (1999)
• Sarbanes-Oxley Act (2002)
• Check clearing for the 21st Century Act (2003)

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Federal Reserve Act1913

• Provided for the formation of FRS and the
  foundation for the current banking system
• Gave the Fed supervisory powers over member banks
• Member banks subjected to reserve requirements
  (RR)
• Allowed the Fed to create a payment and
  collection system through member banks

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McFadden Act1927

• Governs geographical expansion for banks.
• Prohibited branching across state lines unless
  otherwise allowed by state laws.
• Gave states jurisdiction over bank. Expansion
  within and across state lines.
• Restrictions apply to state and national banks.

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Glass-Steagall Act

• Prohibited commercial banks from securities
  underwriting except for government issues
• Prohibited securities firms from engaging in
  bank-like activities (e.g., deposit gathering)
• Required the Fed to establish interest rate
  ceilings on all types of accounts prohibited the
  payment of interest on demand accounts
• Created the FDIC to guarantee deposits up
• to a stipulated maximum amount

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Depository Institutions Deregulation and Monetary
Control Act (DIDMCA)1980

• Imposed RR on all depository institutions
  regardless of FRS membership status.
• Extended fed services to all deposit-taking
  institutions.
• Mandated the fed to reduce or price payment
  system float.

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DIDMCA (Continued)

• Mandated the pricing of previously free fed
  services according to standards of a tax-paying
  vendor.
• Reduce banking float.
• Allowed interest on consumer checking accounts.

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Federal Deposit Insurance Corporation Improvement
Act (FDICA)

• Established higher standards for safety and
  soundness for financial institutions.
• Requires early closure of banks and thrifts when
  net worth falls below 2.
• Requires the establishment of risk-based deposit
  insurance premiums.

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Interstate Banking and Branching and Efficiency
Act1994

• Permits BHCs to acquire banks located in any
  state after September 1995.
• Allows banks to merge operations with banks in
  another state so long as states have not
  opted-out of bill.
• Allows banks to establish new branches provided
  state laws expressly permit it.

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Gramm-Leach-Bliley Act (1999)

• Placed CRA rating stipulations on mergers of bank
  holding companies with insurance or securities
  firms
• Required financial institutions to establish and
  regularly disclose privacy policies prohibited
  credit card and account numbers from being shared
  with third-party marketers

• Eliminated many barriers among banking, insurance
  and securities businesses
• Permitted the creation of financial holding
  companies (FHCs)
• Established the Fed as the primary regulator of
  FHCs
• Allowed for easier entry by foreign banks

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Sarbanes-Oxley Act (2002)

• Improve disclosure and financial reporting
• SEC rule changes require companies to
• Disclose code of ethics for senior management
  (and any waivers)
• Indicate if audit committee has a financial
  expert
• Audit committees must pre-approve auditors audit
  and non-audit services be briefed on companys
  accounting (including preferable alternatives)
• Regulation G
• Must reconcile pro-forma financial information to
  financial statements
• Issue earnings releases on form 8-K
• Must include material off-balance sheet
  arrangements in MDA

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Check Clearing for the 21st Century Act (2003)
(Check 21)

• Facilitates check truncation
• Foster check-payment innovation without mandating
  receipt of electronic checks
• Improve payment system overall
• Creates IRD or substitute check that is legal
  equivalent of original check (no legal
  equivalence for check images)
• MICR-encoded paper reproduction with image of
  front/back
• Conforms to industry standards