Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
Banking law presentation.pptx
1. Overview of Banking Regulation
Chapter 1
1
Overview of Banking Regulations
21 August 2023 KHY PRACHNHAR and Ban Lim
2. Overview of Banking Regulation
Content
1- Early Banking System
2- Development of Banking System
3- Great Depression and 1930s Reform
4- Crisis in South Korea, 1997-1998
2
21 August 2023 KHY PRACHNHAR
3. Overview of Banking Regulation
1- Early Banking System
Bank is an organization which provides facilities for
acceptance of deposits and provision of loans.
Banks were the merchants of the world, who made
grain loans to farmers and traders who carried goods
between cities. This began around 2000 BC
in Assyria and Sumeria.
Later, in ancient Greece and during the Roman Empire,
lenders based in temples made loans, while
accepting deposits and performing the change of money.
Ancient China and India also shows evidence of money
lending activity.
3
21 August 2023 KHY PRACHNHAR
4. Overview of Banking Regulation
1- Early Banking System
Ancient India
Evidences of loans from the Vedic period (beginning 1750 BC).
Later during the Maurya dynasty (321 to 185 BC), an instrument
called Adesha was in use, which was an order on a banker
desiring him to pay the money of the note to a third person,
which corresponds to the definition of a bill of exchange as we
understand it today.
During the Buddhist period, there was considerable use of these
instruments. Merchants in large towns gave letters of credit to
one another.
4
21 August 2023 KHY PRACHNHAR
5. Overview of Banking Regulation
1- Early Banking System
Ancient China
In the Qin Dynasty (221 to 206 BC), Chinese
currency developed with the introduction of standardized
coins that allowed easier trade across China, and led to
development of letters of credit.
5
21 August 2023 KHY PRACHNHAR
6. Overview of Banking Regulation
1- Early Banking System
15th to 17th Centuries
Italy between 1527 and 1572, banking family group, such as
Genoese people, Grimaldi, Spinola and Pallavicino families.
Germany, two great banking families such as Fuggers and
Welsers.
England, the Bank of England was established in 1694, and
issued the banknote in the following year.
6
21 August 2023 KHY PRACHNHAR
7. Overview of Banking Regulation
2- Development of Banking System
People’s Bank of China
- established in December, 1948.
- acted as China’s sole mono-bank, undertaking both
commercial banking and central banking roles.
- was the pattern of banking in most socialist regimes, since
private banks were prohibited from operating in these
economic systems.
- in 1980 did the State Council of China divide the
commercial banking activities into four state-owned banks.
7
21 August 2023 KHY PRACHNHAR
8. Overview of Banking Regulation
2- Development of Banking System
People’s Bank of China
- in 1985, the PBC legally started its functions as a full-
fledged central bank with its headquarters in Beijing and
nine other regional offices.
- Since that date, gradual reforms have been introduced to
grant the PBC control over the banking sector and the
authority to implement monetary policy.
8
21 August 2023 KHY PRACHNHAR
9. Overview of Banking Regulation
2- Development of Banking System
People’s Bank of China
- In 1997, the UK ceded Hong Kong back to China.
- However, economically speaking, Hong Kong remains
autonomous and independent of China, which is solely
responsible for ensuring its military defense and
conducting foreign relations on its behalf.
- Hence, Hong Kong remains as a free trade zone and
maintains its own currency, the Hong Kong Dollar.
9
21 August 2023 KHY PRACHNHAR
10. Overview of Banking Regulation
2- Development of Banking System
People’s Bank of China
- in this context, the PBC is not responsible for the banking
sector in Hong Kong, which is the responsibility of the
Hong Kong Monetary Authority (central bank).
- was established in April 1993.
- has four main functions: regulating and supervising banks
and depository institutions; maintaining stability of the
currency at the rate of HK$7.80 to one US dollar;
managing Hong Kong’s official reserves; and overseeing a
robust and diverse financial infrastructure.
10
21 August 2023 KHY PRACHNHAR
11. Overview of Banking Regulation
2- Development of Banking System
People’s Bank of China
- however, the HKMA issues only the 10 dollar bank notes
and authorizes three commercial banks, The Hong Kong
and Shanghai Banking Corporation Limited, the Standard
Chartered Bank (Hong Kong) Limited, and the Bank of
China (Hong Kong) Limited, to issue all other bank notes
in Hong Kong.
11
21 August 2023 KHY PRACHNHAR
12. Overview of Banking Regulation
2- Development of Banking System
Australia’s Banking System
- Bank of New South Wales is the Australia’s first bank.
- Established in Sydney in 1817.
- Expanded to all other states in Australia, New Zealand, Fiji
and Papua New Guinea.
- In 1849, first life insurance company was created.
- Banks, life insurance companies, investment banks and
other private financial companies flourished in an
unregulated environment till Great Depression of the 1930s.
12
21 August 2023 KHY PRACHNHAR
13. Overview of Banking Regulation
2- Development of Banking System
Australia’s Banking System
- The Commonwealth Bank of Australia was established in
1911.
- Its functions include both commercial and saving banking.
- It was the only bank to have an Australian government
guarantee.
- In 1935, Napier Inquiry recommended the establishment of
a private bank system, regulated by central bank-also
responsible for monetary policy.
13
21 August 2023 KHY PRACHNHAR
14. Overview of Banking Regulation
2- Development of Banking System
Australia’s Banking System
- Then, the Banking Act 1945 was set up by including the
Napier recommendations.
- The Act heralded the modern banking regulation.
- Reserve Bank Act 1959, Reserve Bank of Australis in 1960.
- Financial sector reform from 1970s to 2000s, today system
14
21 August 2023 KHY PRACHNHAR
15. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
- Bank of North America was chartered in Philadelphia in
1782.
- Opened for business.
- Bank of the United State was chartered in 1791 as private
bank and central bank.
- The Bank’s charter was lapsed in 1811 due to political
pressure from distrust of moneyed interests in big cities.
- 1812, need to raise fund for war.
15
21 August 2023 KHY PRACHNHAR
16. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
- Second Bank of the United State was chartered in 1812.
- Tensions between advocates and opponents of centralized
banking power.
- After election in 1832, Jackson rechartered the Second
Bank of United States as national banks.
- Its charter was lapsed in 1836.
16
21 August 2023 KHY PRACHNHAR
17. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
17
21 August 2023 KHY PRACHNHAR
18. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
18
21 August 2023 KHY PRACHNHAR
19. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
19
21 August 2023 KHY PRACHNHAR
20. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
20
21 August 2023 KHY PRACHNHAR
21. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
21
21 August 2023 KHY PRACHNHAR
22. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
22
21 August 2023 KHY PRACHNHAR
23. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
23
21 August 2023 KHY PRACHNHAR
24. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
24
21 August 2023 KHY PRACHNHAR
25. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
25
21 August 2023 KHY PRACHNHAR
26. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
26
21 August 2023 KHY PRACHNHAR
27. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
27
21 August 2023 KHY PRACHNHAR
28. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
28
21 August 2023 KHY PRACHNHAR
29. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
29
21 August 2023 KHY PRACHNHAR
30. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
30
21 August 2023 KHY PRACHNHAR
31. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
31
21 August 2023 KHY PRACHNHAR
32. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
32
21 August 2023 KHY PRACHNHAR
33. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
33
21 August 2023 KHY PRACHNHAR
34. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
34
21 August 2023 KHY PRACHNHAR
35. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
35
21 August 2023 KHY PRACHNHAR
36. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
36
21 August 2023 KHY PRACHNHAR
37. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
37
21 August 2023 KHY PRACHNHAR
38. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
38
21 August 2023 KHY PRACHNHAR
39. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
39
21 August 2023 KHY PRACHNHAR
40. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
40
21 August 2023 KHY PRACHNHAR
41. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
41
21 August 2023 KHY PRACHNHAR
42. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
42
21 August 2023 KHY PRACHNHAR
43. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
43
21 August 2023 KHY PRACHNHAR
44. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
44
21 August 2023 KHY PRACHNHAR
45. Overview of Banking Regulation
2- Development of Banking System
U.S Banking System and Reforms
2007-2009 Global financial crisis, to undertake far-reaching
changes to financial regulation and the regulatory
agencies.
2010 The Dodd-Frank Wall Street Reform and Consumer
Protection Act, adopted known as Dodd-Frank Act.
Provisions intended to end the too-big-to-fail policy by
allowing the Fed, FDIC, and Treasury to seize and
wind down large financial firms, which means that the
firms’ assets are to be sold off in a way that will not
destabilize financial markets.
45
21 August 2023 KHY PRACHNHAR
46. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Stock Market Crash
In 1928 and 1929, prices doubled in the U.S. stock
market. Federal Reserve officials viewed the stock
market boom as caused by excessive speculation.
To curb it, they pursued a tightening of monetary
policy to raise interest rates in an effort to limit the
rise in stock prices. The Fed got more than it
bargained for when the stock market crashed in
October 1929, falling by 40% by the end of 1929.
46
21 August 2023 KHY PRACHNHAR
47. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Stock Market Crash
The falling in stock price reduced the household
wealth, make the firm more difficult to raise funds
by issuing stock, and increase uncertainty of
households and firms about future profits.
This increase in uncertainty may account for the
sharp fall in household spending on consumer
durables and firm spending on factories, office
buildings and other physical capitals.
47
21 August 2023 KHY PRACHNHAR
48. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
48
21 August 2023 KHY PRACHNHAR
49. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Bank Panics
By the middle of 1930, stocks had recovered almost half
of their losses and credit market conditions had stabilized.
What might have been a normal recession turned into
something far worse, however, when severe droughts in
the Midwest led to a sharp decline in agricultural
production, with the result that farmers could not pay back
their bank loans. The resulting defaults on farm mortgages
led to large loan losses on bank balance sheets in
agricultural regions.
49
21 August 2023 KHY PRACHNHAR
50. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Bank Panics
The general weakness of the economy, and of the banks
in agricultural regions in particular, prompted substantial
withdrawals from banks, building to a full-fledged panic in
November and December of 1930, with the stock market
falling sharply. For more than two years, the Fed sat idly
by through one bank panic after another, the most severe
spate of panics in U.S. history. After what would be the
era’s final panic in March 1933, President Franklin Delano
Roosevelt declared a bank holiday, a temporary closing of
all banks.
50
21 August 2023 KHY PRACHNHAR
51. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Bank Panics
“The only thing we have to fear is fear itself,” Roosevelt
told the nation. The damage was done, however, and more
than one-third of U.S. commercial banks had failed.
51
21 August 2023 KHY PRACHNHAR
52. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Continuing Decline in Stock Prices
Stock prices kept falling. By mid-1932, stocks had
declined to 10% of their value at the 1929 peak, and the
increase in uncertainty from the unsettled business
conditions created by the economic contraction worsened
adverse selection and moral hazard problems in financial
markets. With a greatly reduced number of financial
intermediaries still in business, adverse selection and
moral hazard problems intensified even further.
52
21 August 2023 KHY PRACHNHAR
53. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Continuing Decline in Stock Prices
Financial markets struggled to channel funds to borrower-
spenders with productive investment opportunities. The
amount of outstanding commercial loans fell by half from
1929 to 1933, and investment spending collapsed,
declining by 90% from its 1929 level. A manifestation of the
rise in financial frictions is that lenders began charging
businesses much higher interest rates to protect
themselves from credit losses.
53
21 August 2023 KHY PRACHNHAR
54. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Continuing Decline in Stock Prices
The resulting rise in the credit spread—the difference
between the interest rate on loans to households and
businesses and the interest rate on completely safe assets
that are sure to be paid back, such as U.S. Treasury.
54
21 August 2023 KHY PRACHNHAR
55. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
55
21 August 2023 KHY PRACHNHAR
56. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Debt Deflation
The ongoing deflation that accompanied declining
economic activity eventually led to a 25% decline in the
price level. This deflation short-circuited the normal
recovery process that occurs in most recessions. The huge
decline in prices triggered a debt deflation in which net
worth fell because of the increased burden of
indebtedness borne by firms and households.
56
21 August 2023 KHY PRACHNHAR
57. Overview of Banking Regulation
3- Great Depression and 1930s Reforms
Debt Deflation
The decline in net worth and the resulting increase in
adverse selection and moral hazard problems in the
credit markets led to a prolonged economic contraction
in which unemployment rose to 25% of the labor force.
The financial crisis of the Great Depression was the
worst ever experienced in the United States, which
explains why the economic contraction was also the
most severe ever experienced by the nation.
57
21 August 2023 KHY PRACHNHAR
58. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Stylized facts of South Korea
- Prior to its financial crisis in 1997, South Korea was one
of the great economic success stories.
- In 1960, seven years after the Korean War ended, the
country was still extremely poor, with an annual income
per person of less than $2,000 (in today’s dollars),
putting South Korea on par with Somalia.
- During the postwar period, South Korea pursued an
export-oriented strategy that helped it become one of
the world’s major economies.
58
21 August 2023 KHY PRACHNHAR
59. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Stylized facts of South Korea
- With an annual growth rate of nearly 8% from 1960 to
1997, it was one of the leaders in the “Asian miracle,” a
term used to refer to formerly poor Asian countries that
had subsequently experienced rapid economic growth.
- By 1997, South Korea’s income per person had risen by
more than a factor of ten.
59
21 August 2023 KHY PRACHNHAR
60. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
60
21 August 2023 KHY PRACHNHAR
61. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
61
21 August 2023 KHY PRACHNHAR
62. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
62
21 August 2023 KHY PRACHNHAR
63. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Chaebols and the South Korean Crisis
- Chaebols—large family-owned conglomerates dominated
the economy, with sales amounting to nearly 50% of the
country’s GDP.
- The chaebols were politically very powerful and deemed
“too big to fail” by the government.
- Chaebols borrowed like crazy and became highly
leveraged.
- From 1993 to 1996, the return on assets for the top 30
chaebols was never much more than 3% (a comparable
figure for U.S. corporations is 15%–20%) 63
21 August 2023 KHY PRACHNHAR
64. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Chaebols and the South Korean Crisis
- In 1996, right before the crisis hit, the rate of return on
assets had fallen to 0.2%. Furthermore, only the top five
most profitable chaebols had any profits, while the
chaebols in places 6 to 30 (in terms of profitability) never
had a rate of return on assets much above 1%, and in
many years had negative rates of return.
- The chaebols encouraged the South Korean government
to accelerate the process of opening up South Korean
financial markets to foreign capital as part of the
liberalization process.
64
21 August 2023 KHY PRACHNHAR
65. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Chaebols and the South Korean Crisis
- In 1993, the government expanded the ability of domestic
banks to make loans denominated in foreign currency.
- Moreover, the South Korean government effectively
allowed unlimited short-term foreign borrowing by
financial institutions but maintained quantity restrictions
on long-term borrowing, as a means of managing capital
inflows into the country.
- Short-term capital flows make an emerging market
economy financially fragile: it can fly out of the country
extremely rapidly if there is any whiff of a crisis.
65
21 August 2023 KHY PRACHNHAR
66. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Chaebols and the South Korean Crisis
- In the aftermath of the government’s new banking
policies, South Korean banks opened 28 branches in
foreign countries that gave them access to foreign funds.
- On January 23, 1997, a second major shock to the
financial system: Hanbo, the 14th largest chaebol,
declared bankruptcy.
- Five more of the 30 largest chaebols declared bankruptcy
before the year was over.
- The stock market to decline sharply, by more than 50%
from its peak. 66
21 August 2023 KHY PRACHNHAR
67. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
67
21 August 2023 KHY PRACHNHAR
68. Overview of Banking Regulation
4- Crisis in South Korea, 1997-1998
Currency Crisis ==> Financial Crisis
68
21 August 2023 KHY PRACHNHAR
Editor's Notes
Loss of net worth due to the depreciation of Won currency.