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2020 | Book

Overview of the US Banking System Read chapter Read first chapter

The U.S. Banking System

Laws, Regulations, and Risk Management

Author: Prof. Dr. Felix I. Lessambo

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

The U.S. banking system differs from many countries both in the range of services supplied and the complexity of operations. Meanwhile, the U.S. financial markets have become the attraction of worldwide investors. This book explains the three key aspects of the industry: the laws governing the banking institutions, the regulations thereof, and their economics and financial statements in a manner not covered by any competitive publications, of interest to both professionals and scholars who want to better grasp this industry. Auditing a bank and/or liquidating a bank require a set of rules not always well understood. The book provides such an overview.

Table of Contents

Frontmatter
Chapter 1. Overview of the US Banking System
Abstract
The American bank regulatory system is based upon the concept of dual oversight by federal and state agencies, and the primary regulators differ based upon a specific bank’s charter. The total assets held by the US banks reached a peak of $17.5 trillion. Most Americans use depository financial institutions—such as commercial banks, savings, and loan associations, and credit unions—to conduct their financial transactions.
Felix I. Lessambo

The Legal Background

Frontmatter
Chapter 2. Banking Laws
Abstract
Federal banking regulations often supersede state and local regulations. In total, there are thousands of regulations, large and small, that banks need to understand and comply with. The Bank Secrecy Act (BSA), for instance, establishes program, recordkeeping, and reporting requirements for national banks, federal savings associations, federal branches, and agencies of foreign banks.
Felix I. Lessambo
Chapter 3. The Crypto-currency Regulations
Abstract
Crypto-currency is a disruptive concept that is an alternative to fiat currency used in the present monetary system. The online ecosystem surrounding crypto-currency opens new cyber and insider threat vulnerabilities, while the iterative nature of the DLT underlying crypto-currencies prevents reversibility when a fraudulent or unlawful transaction has occurred. While several regulators have each consider regulating crypto-currency, they seem not to agree as to the holistic approach, as each looks solely from the lenses of its mission.
Felix I. Lessambo
Chapter 4. Anti-Money Laundering Laws
Abstract
Money laundering consists of masking the source of criminally derived proceeds so that the proceeds appear legitimate, or masquerading the source of monies used to promote illegal conduct. Money laundering generally involves three steps: placing illicit proceeds into the financial system; layering, or the separation of the criminal proceeds from their origin; and integration, or the use of apparently legitimate transactions to disguise the illicit proceeds. US regulators (i.e., FinCEN) in coordination with several international organizations are tracking the influx of all illegal activities.
Felix I. Lessambo

Actors: Regulators and Banks

Frontmatter
Chapter 5. The Regulators
Abstract
The eight major US federal financial regulators can be categorized into those focused on prudential banking regulation promoting safety and soundness, including the Federal Reserve, FDIC, OCC, and NCUA; those focused on financial markets, including the SEC and the CFTC; one focused on housing finance, the FHFA; and one focused on consumer financial protection, the CFPB.
Felix I. Lessambo
Chapter 6. Commercial Banks and Savings Banks
Abstract
Both commercial banks and savings & loans provide banking and loan products to consumers. Commercial banks are classified as: retail banks and wholesale banks. Commercial banks are intermediaries between the central bank (FED) and the ultimate money borrowers. However, savings banks are financial institution whose primary purpose consists of accepting savings deposits and paying interest on those deposits.
Felix I. Lessambo
Chapter 7. Investment Banks
Abstract
Historically, investment banks helped raise capital for business and other endeavors by helping to design, finance, and sell financial products like stocks or bonds. Investment banks typically play a variety of significant roles when dealing with their clients, including that of market maker, underwriter, placement agent, and broker–dealer. The firms engaged in the investment banking industry are commonly classified into three categories: bulge bracket banks, middle-market banks, and boutique banks.
Felix I. Lessambo
Chapter 8. Merchant Banks
Abstract
Merchant banks conduct underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals. They do not provide regular banking services such as checking accounts and do not take deposits. However, merchant banks operate trust and investment services. Assets of the trust and investment departments, other than trust cash on deposit at the Bank, are not included in these consolidated financial statements because they are not assets of the Company.
Felix I. Lessambo
Chapter 9. Credit Union
Abstract
The primary role of the credit unions is to satisfy the depository and borrowing needs of their members. They are not-for-profit cooperative financial institutions, and since 1935, the credit unions have been exempt from federal income tax which allows them to offer higher rates on deposits and lower interest rates on loans to all members. Credit unions in the United States serve 100 million members, comprising 43.7% of the economically active population. US credit unions are not-for-profit, cooperative, tax-exempt organizations.
Felix I. Lessambo
Chapter 10. Public Bank—Bank of North Dakota
Abstract
BND is a unique institution combining elements of banking, fiduciary, investment management services, and other financial services, and state government with a primary role in financing economic development. The bank offers commercial financing programs for farming, ranching, small business, start-up enterprises, community development, and other areas. The Bank of North Dakota rarely makes direct loans; instead, when a community bank wants to give a sizable loan but lacks the capital, the state bank will partner on the loan and provide a backstop.
Felix I. Lessambo

Risks and Banking Regulation

Frontmatter
Chapter 11. Risks in the Banking Industry
Abstract
Banks incur substantial risk, such as using a high amount of leverage, investing in assets riskier than the liability positions funding them and maintaining minimal liquidity positions. The following are the most common types of risks banks are exposed to: (i) credit risk, (ii) liquidity risk, (iii) interest rate risk, (iv) market risk, (v) off-balance sheet risk, (vi) foreign exchange risk, (vii) country or sovereign risk, (viii) technology risk, (ix) operational risk, and (x) insolvency risk.
Felix I. Lessambo
Chapter 12. Banking Regulation Principles
Abstract
US banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. The five elements of banking regulation include: (i) safety and soundness; (ii) capital requirements; (iii) asset management; (iv) consumer protection compliance; and (v) community reinvestment.
Felix I. Lessambo
Chapter 13. Banks’ Capital Adequacy
Abstract
The primary function of capital is to support the bank’s operations, act as a cushion to absorb unanticipated losses and declines in asset values that could otherwise cause a bank to fail, and provide protection to uninsured depositors and debt holders in the event of liquidation. Capital regulation is particularly important because deposit insurance and other elements of the federal safety net provide banks with an incentive to increase their leverage beyond what the market—in the absence of depositor protection—would permit.
Felix I. Lessambo
Chapter 14. Comprehensive Capital Analysis and Review (CCAR) and the Dodd–Frank Stress Testing
Abstract
The CCAR evaluates a BHC’s capital adequacy, capital planning process, and planned capital distributions, such as any common stock repurchases and dividend payments, whereas the Dodd-Frank Act stress testing on the other hand is a forward-looking quantitative evaluation of the impact of stressful and economic financial market conditions on BHC’s capital. The Dodd–Frank test also requires that BHCs conduct their own stress tests twice per year and report the result to the Federal Reserve.
Felix I. Lessambo

Financial Statements and Statement Analysis

Frontmatter
Chapter 15. Commercial Banks’ Financial Statements
Abstract
Financial statements for banks present a different analytical problem than manufacturing and service companies. As a result, analysis of a bank’s financial statements requires a distinct approach that recognizes a bank’s somewhat unique risks. Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets (loans) and their cost of funds (customer deposits).
Felix I. Lessambo
Chapter 16. Commercial Bank’s Financial Ratios Analysis
Abstract
The overall structure of an income statement for a bank is not that much different from a manufacturing or service income statements. The top of the income statement is revenue and the bottom is net income. However, revenue is derived differently from that of regular companies (i.e., manufacturing and services). The three fundamental elements in all analyses that pertain to banks include: (i) liquidity or ability to meet the obligations of liquid funds; (ii) solvency or credit quality and adequacy of the bank’s own resources; and (iii) profitability: ability to generate income/profit from allocated capital.
Felix I. Lessambo

Auditing and Bankruptcy

Frontmatter
Chapter 17. Bank Audit Systems
Abstract
The majority of banks and financial institutions find the bank auditing procedure a strenuous experience; nonetheless, it is one of the most important procedures that must be completed periodically. Banks should have an internal audit function with sufficient authority, stature, independence, resources and access to the board of directors. The audit Committee should have the primary responsibility for approving, or recommending to the board of directors for approval, the appointment, reappointment, removal and remuneration of the external auditor. The external auditor of a bank should respond appropriately to the significant risks of material misstatement in the bank’s financial statements.
Felix I. Lessambo
Chapter 18. Bank Bankruptcy
Abstract
Banks typically do not go bankrupt but may be declared insolvent at which point another bank will buy their assets and liabilities and take over the bank and it’s branches. In addition to Chapter 11 of the Bankruptcy Act, The United States has a number of specialized insolvency regimes, including the Federal Deposit Insurance Act of 1950 (“FDIA”) and the Securities Investor Protection Act (“SIPA”). The FDIC has the authority, under the FDIC Improvement Act of 1991, to close any bank that it considers to be critically undercapitalized, and that does not have a plan to restore capital to an adequate level. In the event of a bank failure, the FDIC acts as a receiver and is in charge of the failure resolution. Title II of the Dodd–Frank Act defines the framework for orderly resolution proceedings and establishes the powers and duties of the FDIC when acting as receiver for a covered financial company.
Felix I. Lessambo
Backmatter
Metadata
Title
The U.S. Banking System
Author
Prof. Dr. Felix I. Lessambo
Copyright Year
2020
Electronic ISBN
978-3-030-34792-5
Print ISBN
978-3-030-34791-8
DOI
https://doi.org/10.1007/978-3-030-34792-5