Bank Investing

CHAPTER 6Regulation

“On January 18, 1972, the Corporation announced that a financial assistance program designed to rehabilitate the Bank of the Commonwealth, Detroit, Michigan, had been developed jointly by the Corporation, the Board of Governors of the Federal Reserve System, and the Michigan State Bank Commissioner, and concurred in by the board of directors of the bank.”

– Annual Report of the FDIC, 1972

The quote that we have used comes from the FDIC's annual report of 1972 and refers to the assistance provided to Bank of the Commonwealth. This bank has the dubious distinction of being the first “Too Big to Fail” bank.

We would like to re-stress here that nothing stated in this chapter or elsewhere in this book should be used as a legal reference document. We are providing a rough sketch of the regulatory framework under which banks operate. Needless to say, it does not purport to constitute legal advice.

As discussed previously in Chapter 3, banks benefit from access to low cost deposits which are insured by the FDIC for amounts under $250,000. However, this access comes with a set of handcuffs which imposes restrictions on bank activities. Banks are regulated not just by the FDIC, but the Federal Reserve, the OCC, state regulators, and an alphabet soup of regulators.

The pendulum of regulation has been shifted back and forth driven by various crises and concerns. As investors we believe that there needs to be a delicate balance. Having sensible regulations is important ...