27-09-2013, 03:31 PM
A brief overview of the Banking regulations in the United State of America
INTRODUCTION
Regulations of the banking sector in the United States in totality are made up of a very
complex system that includes state and federal regulations (Dwight M. Jaffee 2011).
However the rules and regulations in the US are more liberalised when compared to India.
For instance, the rules of Prompt Corrective Action (PCA) that were adopted as a result of the Savings and Loan (S&L) crisis of the 1980s. PCA was formulated as part of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA). The main reason for the
formulation of the PCA was to avoid regulatory forbearance that arouse out of the policy of
the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation
(FSLIC) to allow distressed S&Ls to continue to operate in the market with the underlying
hope that the market conditions will improve and the firm would return to its solvent state.
Thus the PCA when faced with a distressed S&L had three main options in front of it. (i)
Request the institution to raise new equity capital or (ii) find a sound merger plan or (iii)
Close the bank or S&L (Dwight M. Jaffee 2011). This safety net was fine as long as the
volume of banks and S&Ls that failed was small. However during the Subprime crisis there
was failure of many banks and S&Ls, which led to utter chaos. Thus from the above we infer
that, yes, there were regulation in place however these regulation did not plan for a huge
increase in un accounted debt or in other words, the drastic fall in the real estate prices. The
US treasury has proposed the winding down of Fannie Mae and Freddie Mac, the two large
government sponsored enterprises (GSEs) indicating that big changes are taking place in the
US state and federal regulatory systems. These changes are coming in at the right time, as a
much needed break for the system. For instance the idea of allowing subprime mortgage
loans to contribute to a pool of assets for the purpose of securitization was clearly a disaster
in the making.