Bank regulation in the United States

Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency).[1] Bank examiners are generally employed to supervise banks and to ensure compliance with regulations.

U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation laws (for example, defining what constitutes usurious lending).

Regulatory authority

A bank's primary federal regulator could be the Federal Deposit Insurance Corporation, the Federal Reserve Board, or the Office of the Comptroller of the Currency. Within the Federal Reserve System are 12 districts centered around 12 regional Federal Reserve Banks, each of which carries out the Federal Reserve Board's regulatory responsibilities in its respective district. Credit unions are subject to most bank regulations and are supervised by the National Credit Union Administration. The Federal Financial Institutions Examination Council (FFIEC) establishes uniform principles, standards, and report forms for the other agencies.

State regulation of state-chartered banks and certain non-bank affiliates of federally chartered banks applies in addition to federal regulation. State-chartered banks are subject to the regulation of the state regulatory agency of the state in which they were chartered. For example, a California state bank that is not a member of the Federal Reserve System would be regulated by both the California Department of Financial Institutions and the FDIC. Likewise, a Nevada state bank that is a member of the Federal Reserve System would be jointly regulated by the Nevada Division of Financial Institutions and the Federal Reserve.

By statute, and in accordance with judicial interpretation of statutes and the United States Constitution, federal banking statutes (and the regulations and other guidance issued by federal banking regulatory agencies) often preempt state laws regulating certain activities of nationally chartered banking institutions and their subsidiaries. Specific exceptions to the general rule of federal preemption exist such as some contract law, escheat law, and insurance law.

One example is the Office of Thrift Supervision preempting federal savings associations from certain state laws.[2] 12 U.S.C. § 1464(n) authorizes fiduciary activities for federal savings associations, and specifies certain state law requirements that are applicable to federal savings associations. 12 C.F.R. §550.136(c) lists six types of state laws that, in certain specified circumstances, are not preempted with respect to federal savings associations.

Privacy

Regulation P governs the use of a customer's private data. Banks and other financial institutions must inform a consumer of their policy regarding personal information, and must provide an "opt-out" before disclosing data to a non-affiliated third party.[3] The regulation was enacted in 1999.

Concerning know your customer rules and Bank Secrecy Act regulations, financial institutions are encouraged to keep track of customers employment status and other business dealings, including whether or not the financial activity of customers are consistent with their business activities, and report on customers' suspect activities to the government.[4][5]

Anti-money laundering and anti-terrorism

At its core, financial transparency requires financial institutions to implement certain basic controls:[6]

  • they must know who their customers are (so-called know your customer rules);
  • they must understand their customers' normal and expected transactions;
  • and they must keep the necessary records and make the necessary reports on their customers.

The Bank Secrecy Act (BSA) requires financial institutions to assist government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion or other criminal activities.

Section 326 of the USA PATRIOT Act allows financial institutions to place limits on new accounts until the account holder's identity has been verified.

Office of Foreign Assets Control (OFAC) sanctions apply to all U.S. entities including banks. The FFIEC provides guidelines to financial regulators for verifying compliance with the sanctions.[7]

Community reinvestment

The Community Reinvestment Act of 1977 requires insured depository institutions to reinvest in the communities they serve. There should be an emphasis on low-income and moderate-income (LMI) census tracts and individuals. Insured depository institutions must display a CRA notice, and each branch must have a current CRA public file or access to it via the company's intranet, and must provide the information in person or by mail.

Deposit account regulation

Deposit insurance

The United States was the second country (after Czechoslovakia)[8] to officially enact deposit insurance to protect depositors from losses by insolvent banks. In 1933 the Glass–Steagall Act established the Federal Deposit Insurance Corporation (FDIC) to insure deposits at commercial banks.

In 1970 Congress established a separate fund for credit unions, the National Credit Union Share Insurance Fund. The NCUSIF insures all federally chartered credit unions and many state-chartered credit unions (98% as of 2009).[9] Some others are insured by the private guaranty corporation American Share Insurance (156 as of 2009).[9] In 1978 foreign banks operating in the United States were required to hold the same level of reserves under the specifications of the International Banking Act.[10][11]

In 1934, Congress created the Federal Savings and Loan Insurance Corporation to insure savings and loan deposits. In the 1980s, during the savings and loan crisis, the FSLIC became insolvent and was abolished; its responsibility was transferred to the FDIC.

Some financial institutions offer insurance in excess of FDIC or NCUA limits. For example, the Depositors Insurance Fund insures excess deposits at Massachusetts-chartered savings banks. American Share Insurance provides excess share insurance at participating credit unions.

Consumer protection

The Truth in Savings Act (TISA), implemented by Regulation DD, established uniformity in disclosing terms and conditions regarding interest and fees when giving out information and when opening a new savings account. On passing the law in 1991, Congress noted it would help promote economic stability, competition between depository institutions, and allow the consumer to make informed decisions.

The Expedited Funds Availability Act (EFAA) of 1987, implemented by Regulation CC, defines when standard holds and exception holds can be placed on checks deposited to checking accounts, and the maximum length of time the money can be held. A bank's hold policy can be less stringent than the guidelines provided, but it cannot exceed the guidelines.

The Electronic Fund Transfer Act of 1978, implemented by Regulation E, established the rights and liabilities of consumers as well as the responsibilities of all participants in electronic funds transfer activities.

Withdrawal limits and reserve requirements

  • Establishes reserve requirement guidelines
  • Regulates certain early withdrawals from certificate of deposit accounts
  • Defines what qualifies as DDA/NOW accounts. See Regulation Q for eligibility rules for interest-bearing checking accounts
  • Defines limitations on certain withdrawals on savings and money market accounts
    • Unlimited transfers or withdrawals if made in person, by ATM, by mail, or by messenger
    • In all other instances, there is a limit of six transfers or withdrawals. No more than three of these transactions may be made payable to a third party (by check, draft, point-of-sale, etc.)
    • Some banks will charge a fee with each excess transaction
    • Bank must close accounts where this transaction limit is constantly exceeded

Interest on demand deposits

Until 2011, Regulation Q prohibited banks from paying interest on demand deposit accounts. A "demand deposit" account includes many, but not all checking accounts, and does not include Negotiable Order of Withdrawal accounts (NOW accounts).[12]

Lending regulation

Consumer protection

The Home Mortgage Disclosure Act (HMDA) of 1975, implemented by Regulation C, requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving one- to four-unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster.

The Equal Credit Opportunity Act (ECOA) of 1974, implemented by Regulation B, requires creditors which regularly extend credit to customers—including banks, retailers, finance companies, and bank-card companies—to evaluate candidates on creditworthiness alone, rather than other factors such as race, color, religion, national origin, or sex. Discrimination based on marital status, receipt of public assistance, and age is generally prohibited (with exceptions), as is discrimination based on a consumer's good-faith exercise of his or her credit-protection rights.

The Truth in Lending Act (TILA) of 1968, implemented by Regulation Z, promotes the informed use of consumer credit by standardizing the disclosure of interest rates and other costs associated with borrowing. TILA also gives consumers the right to cancel certain credit transactions involving a lien on the consumer's principal dwelling, regulates certain credit-card practices, and provides a means of resolving credit-billing disputes.

Debt collection

The Fair Credit Reporting Act (FCRA) of 1970 regulates the collection, sharing, and use of customer-credit information. The act allows consumers to obtain a copy of their credit report from credit bureaus that hold information on them, provides for consumers to dispute negative information held and sets time limits, after which negative information is suppressed. It requires that consumers be informed when negative information is added to their credit records, and when adverse action is taken based on a credit report.

Credit cards

Provisions addressing credit-card practices aim to enhance protections for consumers who use credit cards and improve credit-card disclosure under the Truth in Lending Act:

  • Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time
  • Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges
  • Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible
  • Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle
  • Banks would be required to provide consumers a reasonable amount of time to make payments[13]

Lending limits

Lending-limit regulations restrict the total amount of loans and credits that a bank may extend to a single borrower. This restriction is usually stated as a percentage of the bank's capital or assets. For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus.[14] Some state banking regulations also contain similar lending limits applicable to state-chartered banks.[15] Both federal and state laws generally allow for a higher lending limit (up to 25% of capital and surplus for national banks) when the portion of the credit that exceeds the initial lending limit is fully secured.

Loans to Insiders (Regulation O) establishes various quantitative and qualitative limits and reporting requirements on extensions of credit made by a bank to its "insiders" or the insiders of the bank's affiliates. The term "insiders" includes executive officers, directors, principal shareholders and the related interests of such parties.[16][17]

Central banking regulation

Extensions of Credit by Federal Reserve Banks (Regulation A) establishes rules regarding discount window lending, the extension of credit by the Federal Reserve Bank to banks and other institutions. The Federal Reserve Board made significant amendments to Regulation A in 2003, including amendments to price certain discount-window lending at above-market rates and to restrict borrowing to banks in generally sound condition. In amending the regulation, the Federal Reserve Board noted that many banks had expressed their unwillingness to use discount-window borrowing because their use of such a funding source was interpreted as sign of the bank's financial weakness or distress. The Federal Reserve Board indicated its hope that the 2003 amendments would make discount window lending a more attractive funding option to banks.[18][19][20]

Regulation of bank affiliates and holding companies

Transactions Between Member Banks and Their Affiliates (Regulation W) regulates transactions, such as loans and asset purchases between banks and their affiliates. The term "affiliate" is broadly defined and includes parent companies, companies that share a parent company with the bank, companies that are under other types of common control with the bank (e.g. by a trust), companies with interlocking directors (a majority of directors, trustees, etc. are the same as a majority of the bank's), subsidiaries, and certain other types of companies. When passed September 18, 1950 Regulation W included a prohibition on installment purchases exceeding 21 months, which was shortened to 15 months on October 16 of the same year.

2018 deregulation announcement

In January 2018, a spokesperson for the Federal Reserve Board chief of supervision said that existing banking sector regulations were too tough and standardized, and could be relaxed and customized in order to promote commercial bank lending, investment, and stock market trading.[21] Randal Quarles, the Vice Chairman for Bank Supervision, said he was planning several imminent changes that Wall Street has wanted involving capital rules, proprietary trading and a process known as “living wills” that aims to prevent taxpayer bailouts.[22]

See also

Notes

  • Board of Governors of the Federal Reserve System.[23]

References

  1. ^ "Financial Services Agency". The Japanese Government. Retrieved November 30, 2012.
  2. ^ Office of Thrift Supervision regulations, Section 550.136(a) "...OTS occupies the field of the regulation of the fiduciary activities of Federal savings associations...Accordingly, Federal savings associations may exercise fiduciary powers as authorized under Federal law, including this part, without regard to State laws that purport to regulate or otherwise affect their fiduciary activities, except to the extent provided in 12 U.S.C. § 1464(n)...or in paragraph (c) of this section."
  3. ^ "Federal Reserve Bank: Regulation P compliance guide". Federalreserve.gov. Retrieved November 30, 2012.
  4. ^ "Bank Secrecy Act Examination Manual" (PDF). Federal Reserve Board of Governors. September 1999. pp. 190–193.
  5. ^ Garver, Rob (May 19, 2014). "Porn, Pot and Payday Lenders Unwelcome in Banks". The Fiscal Times.
  6. ^ "Remarks From Under Secretary of Terrorism and Financial Intelligence David S. Cohen on 'Addressing the Illicit Finance Risks of Virtual Currency'". United States Department of the Treasury. March 18, 2014.
  7. ^ [1] Archived May 27, 2010, at the Wayback Machine
  8. ^ Padoan, Brenton, Boyd: "The Structural Foundations of International Finance: Problems of Growth and Stability", Edward Elgar Publishing, 2003, p. 117
  9. ^ a b [2] Archived March 23, 2010, at the Wayback Machine
  10. ^ Ahorny, Joseph; Saunders, Anthony; Swary, Itzhak (1985). "The Effects of the International Banking Act on Domestic Bank Profitiability and Risk". Journal of Money, Credit, and Banking. doi:10.2307/1992444. JSTOR 1992444.
  11. ^ "International Banking Act of 1978". Banking Law 101.
  12. ^ "eCFR — Code of Federal Regulations". Ecfr.gpoaccess.gov. October 9, 2012. Retrieved November 30, 2012.
  13. ^ Board of Governors of the Federal Reserve System: "Press Release--Federal Reserve proposes rules to prohibit unfair practices regarding credit cards and overdraft services--May 2, 2008"
  14. ^ "eCFR — Code of Federal Regulations". Ecfr.gpoaccess.gov. October 9, 2012. Retrieved November 30, 2012.
  15. ^ [3]
  16. ^ "eCFR — Code of Federal Regulations". Ecfr.gpoaccess.gov. Retrieved November 30, 2012.
  17. ^ "Federal Reserve Board: Regulations". Federalreserve.gov. Retrieved November 30, 2012.
  18. ^ "eCFR — Code of Federal Regulations". Ecfr.gpoaccess.gov. October 9, 2012. Retrieved November 30, 2012.
  19. ^ "FRB: Press Release - Final amendments to Regulation A (Extensions of Credit by Federal Reserve Banks) - October 31, 2002". Federalreserve.gov. Retrieved November 30, 2012.
  20. ^ "Federal Reserve System: 12 CFR Part 201" (PDF). Federalreserve.gov. Retrieved November 30, 2012.
  21. ^ "Federal Reserve to Deregulate Banking Sector Via Tailored Approach". Sputnik. Retrieved January 20, 2018.
  22. ^ "Fed's Quarles details steps to ease rules from Volcker to stress tests". Reuters. Retrieved January 20, 2018.
  23. ^ "FRB: Press Release-Federal Reserve proposes rules to prohibit unfair practices regarding credit cards and overdraft services-May 2, 2008". Federalreserve.gov. May 2, 2008. Retrieved November 30, 2012.

External links

Bank holding company

A bank holding company is a company that controls one or more banks, but does not necessarily engage in banking itself. The compound bancorp (banc/bank + corp[oration]) is often used to refer to these companies as well.

California Department of Business Oversight

The California Department of Business Oversight (DBO) is a department of the Business, Consumer Services and Housing Agency (BCSH) that regulates a variety of financial services, products and professionals.

Colorado Department of Regulatory Agencies

The Colorado Department of Regulatory Agencies (DORA) is the principal department of the Colorado state government responsible for professional licensing and consumer protection.As the consumer protection agency for the State of Colorado, DORA's nine Divisions and more than 40 boards, commissions, and advisory committees license and regulate more than 700,000 people and 24,000 businesses in the state. DORA serves as a resource for objective information about licensed Colorado industries, professions and occupations, takes consumer complaints and works to educate consumers about their rights.

Fair debt collection

Fair debt collection broadly refers to regulation of the United States debt collection industry at both the federal and state level. At the Federal level, it is primarily governed by the Fair Debt Collection Practices Act (FDCPA). In addition, many U.S. states also have debt collection laws that regulate the credit and collection industry and give consumer debtors protection from abusive and deceptive practices. Many state laws track the language of the FDCPA, so that they are sometimes referred to as mini-FDCPAs.Laws regulating telemarketing and phone solicitation can also apply to debt collection practices, including the Federal Telephone Consumer Protection Act of 1991 (TCPA).

Federal Financial Institutions Examination Council

The Federal Financial Institutions Examination Council (FFIEC) is a formal U.S. government interagency body composed of five banking regulators that is "empowered to prescribe uniform principles, standards, and report forms to promote uniformity in the supervision of financial institutions". It also oversees real estate appraisal in the United States. Its regulations are contained in title 12 of the Code of Federal Regulations.

Florida Department of Financial Services

Florida Department of Financial Services (FLDFS) is a state agency of Florida. Its headquarters are in Tallahassee. In 2002 the Florida Legislature merged the Department of Insurance, Treasury and State Fire Marshal and the Department of Banking and Finance into one department, the Florida Department of Financial Services.

Illinois Department of Financial and Professional Regulation

The Illinois Department of Financial and Professional Regulation (IDFPR) is the Illinois state government code department that through its operational components, the Division of Banking, Division of Financial Institutions, Division of Professional Regulation, and Division of Real Estate, oversees the regulation and licensure of banks and financial institutions, real estate businesses and professionals, and various licensed professions, and are charged with enforcing standards of professional practice and protecting the rights of Illinois residents in their transactions with regulated industries.

Michigan Department of Insurance and Financial Services

Michigan Department of Insurance and Financial Services (DIFS), formerly the Office of Financial and Insurance Regulation, is a principal department in the Michigan executive branch with responsibility for insurance and financial institutions.

New Jersey Department of Banking and Insurance

The New Jersey Department of Banking and Insurance (DOBI) is one of 15 principal departments in New Jersey government. The department’s mission is to regulate the banking, insurance and real estate industries in a professional and timely manner that protects and educates consumers and promotes the growth, financial stability and efficiency of these industries. The current Commissioner of DOBI is Marlene Caride.

New York State Department of Financial Services

The New York State Department of Financial Services (DFS or NYSDFS) is the department of the New York state government responsible for regulating financial services and products, including those subject to the New York insurance, banking and financial services laws.

Ohio Department of Commerce

The Ohio Department of Commerce is the administrative department of the Ohio state government responsible for regulating banks and savings institutions, credit unions, mortgage lenders and consumer finance businesses; securities professionals and products; real estate professionals and cable television; and the building industry; and also collects and holds unclaimed funds. The Division of Liquor Control and Division of the State Fire Marshal are also part of the department.

Oklahoma State Banking Department

The Oklahoma State Banking Department (OSBD) is an agency of the state of Oklahoma. The Banking Department is responsible for regulating Oklahoma's banking system, including state-chartered banks, credit unions, savings and loan associations, and trust companies, as well as [(money transmitters)] and money order companies. The department also handles consumer complaints involving state-regulated financial institutions.

The Banking Department is led by a State Banking Commissioner who is appointed by the Governor of Oklahoma with the consent of the Oklahoma Senate to serve a four-year term. Assisting the commissioner is the State Banking Board, which consists of six members appointed by the governor and the commissioner as chair.

The current State Banking Commissioner is Mick Thompson, a former Oklahoma State Representative who has served in that position since September 1, 1992, when he was appointed by Governor David Walters. He has since been reappointed by Governors Frank Keating, Brad Henry and Mary Fallin in 1996, 2000, 2004, 2008 and 2012.

With the granting of statehood on November 11, 1907, Article XIV of the Oklahoma Constitution created the Banking Department. Governor Dewey F. Bartlett was chairman of the board, and Herbert H. Smock was the department's first banking commissioner.

Oregon Department of Consumer and Business Services

The Oregon Department of Consumer and Business Services (DCBS) is the agency of the government of the U.S. state of Oregon, which has wide-ranging regulatory and consumer-protection authority in Oregon. It administers laws and rules governing workers' compensation benefits, workplace safety and health, building codes, and the operation of both insurance companies and financial institutions.

The department provides services to both citizens and businesses, and as of 2006, had a budget of US$560 million, and employed a staff of 1,088.

Pennsylvania Department of Banking

The Pennsylvania Department of Banking and Securities is a cabinet-level agency in Pennsylvania.

Regulation D (FRB)

Reserve Requirements for Depository Institutions (12 C.F.R. 204, Regulation D) is a Federal Reserve regulation which sets out reserve requirements for banks in the United States. It is more familiar to the public as the regulation that limits monthly withdrawals from savings accounts.

Regulation Q

Regulation Q (12 CFR 217) is a Federal Reserve regulation which sets out capital requirements for banks in the United States. The current version of Regulation Q was enacted in 2013.

From 1933 until 2011, an earlier version of Regulation Q imposed various restrictions on the payment of interest on deposit accounts. During that entire period, it prohibited banks from paying interest on demand deposits. From 1933 until 1986 it also imposed maximum rates of interest on various other types of bank deposits, such as savings accounts and NOW accounts. That version of Regulation Q no longer exists; all its remaining aspects, such as the type of entities that may own or maintain interest-bearing NOW accounts, were incorporated into Regulation D.

State Corporation Commission (Virginia)

The State Corporation Commission, or SCC, is a Virginia (USA) regulatory agency whose authority encompasses utilities, insurance, state-chartered financial institutions, securities, retail franchising, and railroads. It is the state's central filing office for corporations, limited partnerships, limited liability companies and Uniform Commercial Code liens.

Tennessee Department of Financial Institutions

The Tennessee Department of Financial Institutions is a Cabinet-level agency within Tennessee state government, currently led by Greg Gonzales, Commissioner of Financial Institutions. The Department is responsible for regulating Tennessee's banking system, including state-chartered banks and credit unions, and handling consumer complaints involving state regulated financial institutions. The Department is divided into the Administrative/Legal Division, Bank Division, Compliance Division, Consumer Resources Division, and the Credit Union Division - each of which is led by an Assistant Commissioner.

The Banking Department, created in 1913, was headed by the Superintendent of Banks when it was first established, ten years later credit unions were added to its responsibilities. Over the next eighty-five years, the Department made a final name change and increased regulatory responsibilities to cover trust companies, licensed business and industrial development corporations (BIDCOs), industrial loan and thrift offices, insurance premium finance companies, mortgage companies, check cashers, deferred presentment services companies, money transmitters, and title loan companies.

Unfair or Deceptive Acts or Practices

Unfair or Deceptive Acts or Practices is a proposal for bank regulation in the United States under Federal Reserve Regulation AA. The Board of Governors of the Federal Reserve System announced in a press release on Saturday, May 2, 2008 that the proposed rules, "prohibit unfair practices regarding credit cards and overdraft services that would, among other provisions, protect consumers from unexpected increases in the rate charged on pre-existing credit card balances." Provisions addressing credit card practices aim to enhance protections for consumers who use credit cards and improve the credit card disclosures under the Truth in Lending Act:

Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period.

Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.

Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.

Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.

Banks would be required to provide consumers a reasonable amount of time to make payments.The proposal would also address subprime credit cards by limiting the fees that reduce the available credit. In addition, banks that make firm offers of credit advertising multiple rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest rate and highest credit limit.

The proposal has been placed in the Federal Register.

Bank regulation in the United States
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Major federal legislation
Federal Reserve Board
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Types of bank charter
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