Megan Brooks
Banks are subject to various regulations and supervisory requirements that aim to ensure their safety and soundness, foster market transparency, and reduce the likelihood of failures that could trigger systemic risk. While the specific regulations may vary depending on the country and the type of bank, there are some common themes and frameworks that apply internationally. In the United States, for example, banks are regulated by both state and federal agencies, with the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Company (FDIC) being key regulators. These agencies enforce laws and regulations such as the Securities Act of 1933, the Glass-Steagall Act, and the Community Reinvestment Act. Internationally, the Basel Committee on Banking Supervision has developed a global framework with three pillars: regulation, supervisory discretion, and market discipline enabled by appropriate disclosure requirements.
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What You'll Learn
Federal Deposit Insurance Act
Almost all banks are subject to the regulatory authority of more than one bank regulatory agency. If a bank obtains deposit insurance, which almost always happens, it is subject to certain statutes of the Federal Deposit Insurance Act (FDIA). The FDIA is administered by the Federal Deposit Insurance Company (FDIC).
The FDIC was established in 1933 by the Glass-Steagall Act to insure deposits at commercial banks. The FDIC is also responsible for supervising state non-member banks. If a state bank becomes a member of the Federal Reserve System, the Federal Reserve becomes its primary federal supervisor.
The FDIA includes sections on:
- Prompt Corrective Action
- Standards for Safety and Soundness
- The FDIC Affordable Housing Program
- Payments on Foreign Deposits Prohibited
- Notice of Branch Closure
- Depository Institutions Lacking Federal Deposit Insurance
- Interstate Bank Mergers
- Continuation of insurance and termination of insurance
- Cease-and-desist proceedings
- Examinations of insured depository institutions
- Flood insurance compliance by insured depository institutions
- The FDIC Affordable Housing Program
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Federal Savings and Loan Insurance Corporation
In the United States, almost all banks are subject to the regulatory authority of more than one bank regulatory agency. These agencies include the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Company (FDIC).
One notable regulatory body that was responsible for insuring savings and loan deposits was the Federal Savings and Loan Insurance Corporation (FSLIC). The FSLIC was established by Congress in 1934 as part of the National Housing Act, which was signed into law by President Franklin D. Roosevelt. The FSLIC was created to provide a safety net for the savings and loan industry, which had essentially collapsed during the Great Depression. The FSLIC was administered by the Federal Home Loan Bank Board (FHLBB) and was given regulatory powers over insured institutions. It required these institutions to accumulate reserves over several years and assessed an annual insurance premium of 0.25% of the total amount of all accounts of insured shareholders or members, plus any creditor obligations.
However, in the 1980s, during the savings and loan crisis, the FSLIC faced significant financial challenges. Despite recapitalization efforts with taxpayer money, the FSLIC became insolvent and was ultimately abolished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Its responsibility for insuring savings and loan deposits was transferred to the FDIC, and the FSLIC Resolution Fund (FRF) was established to assume its assets and liabilities, funded by the Financing Corporation (FICO).
The dissolution of the FSLIC marked a significant shift in the regulation of savings and loan institutions, and the FDIC now plays a crucial role in ensuring the safety and security of deposits in commercial banks and savings and loan accounts.
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Foreign banks in the US
Banks in the United States are subject to the regulatory authority of more than one bank regulatory agency. They are governed by their chartering authority at either the state or federal level. Federal regulatory agencies responsible for supervising commercial banks and administering state and federal banking laws include the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Company (FDIC).
Foreign banks operating in the US are subject to the same regulations as domestic banks. The Federal Deposit Insurance Act, for example, applies to all banks with deposit insurance, which is almost all banks. The International Banking Act of 1978 requires foreign banks to hold the same level of reserves as domestic banks.
The Code of Federal Regulations (CFR) is the official legal publication containing the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government. The Electronic Code of Federal Regulations (eCFR) is a continuously updated online version of the CFR. The eCFR covers all Federal branches and agencies of foreign banks.
The Office of the Comptroller of the Currency (OCC) reviews whether a foreign bank is subject to comprehensive supervision or regulation on a consolidated basis. The OCC may impose conditions on its approval, including permitting future termination of activities based on the inability of the foreign bank to provide information on its activities or those of its affiliates.
The authority to operate a Federal branch or agency of a foreign bank terminates when the parent foreign bank voluntarily relinquishes it or is dissolved or otherwise terminated in its country of organization. The Comptroller may revoke a foreign bank's authority to operate a Federal branch or agency if the bank violates or fails to comply with any provisions of the National Bank Act or the Comptroller's rules or orders.
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Bank licensing
In most legal jurisdictions, a financial institution must obtain a banking licence to operate. The requirements for obtaining a banking licence vary depending on the jurisdiction and the type of licence being sought. For example, in the United States, the process of obtaining a state banking charter involves the following steps:
- Develop a comprehensive business plan: This should include details about the proposed bank's management, capital structure, market analysis, products and services, and financial projections.
- Organise a board of directors: Assemble a board with experience in banking, finance, and business management.
- Raise capital: Demonstrate that your bank has sufficient capital to meet regulatory requirements and operate effectively. The minimum capital requirement for a banking licence in the United States is typically $11 million, including $10 million in Tier 1 capital and $1 million in startup expenses. However, larger states like California and New York may have much higher initial capital requirements.
- Incorporate the bank: File articles of incorporation with the Secretary of State.
- Apply for a state banking charter: Submit an application to the State Board of Financial Institutions, including detailed information about the bank's proposed management, directors, capital structure, and business plan.
- Obtain approval for deposit insurance: The proposed bank must obtain approval for deposit insurance from the Federal Deposit Insurance Corporation (FDIC).
- Obtain additional approvals: If a company will control the new bank and/or a state-chartered bank will become a member of the Federal Reserve, additional approvals from the Federal Reserve are required.
- Comply with capital adequacy guidelines: All insured banks must comply with the capital adequacy guidelines of their primary federal regulator (Federal Reserve, FDIC, or Office of the Comptroller of the Currency (OCC)).
It is important to note that the process of obtaining a banking licence can be complex and time-consuming, requiring extensive information about the organiser(s), senior management team, finances, risk management infrastructure, and other relevant factors. The specific requirements may vary depending on the jurisdiction and the type of banking licence being sought, such as a full banking licence, an international banking licence, or a limited banking licence.
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Financial disclosures
Banks are required to disclose certain information to the public and their customers. The Federal Deposit Insurance Corporation (FDIC) adopted Part 350 in 1987, which requires FDIC-insured banks and state-licensed branches of foreign banks to prepare and make available annual disclosure statements. These statements include financial data, such as balance sheets and income statements, as well as information on enforcement actions. The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB) have also adopted similar disclosure regulations.
The Gramm-Leach-Bliley Act of 1999 prohibits financial institutions from disclosing consumers' nonpublic personal information, such as Social Security numbers and income, to unrelated companies. However, banks often share customer information with third-party vendors, such as financial companies and retailers, for marketing purposes and to offer other products and services. Customers have the right to opt out of some information sharing under certain conditions.
The Privacy Rule Handbook outlines the requirements for disclosing information to consumers and customers. It defines consumers as individuals seeking or obtaining financial products or services from a bank for personal, family, or household purposes. Customers are a subset of consumers who have a continuing relationship with the bank. The Privacy Rule does not restrict information sharing with affiliates but requires the disclosure of such policies. Banks must also distinguish between publicly available information and personally identifiable financial information.
The Consumer Financial Protection Bureau outlines specific account disclosure requirements for financial institutions. These include disclosing covered fees, such as maintenance fees and special service fees, while excluding certain fees like those for travellers' cheques and wire transfers. Institutions must also state the amount and conditions under which fees may be imposed. Additionally, they should provide notice of the availability of disclosures to consumers with existing accounts. If a consumer requests disclosures electronically, institutions may provide them electronically with the consumer's consent or in paper form.
The Securities and Exchange Commission (SEC) has also overhauled bank disclosure requirements to improve investor understanding of bank operations and facilitate comparisons between banking institutions. These requirements apply to domestic and foreign bank holding companies, banks, and savings and loan associations. The final rule updates certain parts of Guide 3, which was issued in 1976 and seeks disclosures in areas such as asset distribution, interest rates, investment portfolios, and loan portfolios.
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Frequently asked questions
No, banks are subject to the regulatory authority of more than one bank regulatory agency. Regulations vary depending on the bank's location and the type of bank it is.
Some regulatory agencies that banks in the US fall under include the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Company (FDIC), the Consumer Financial Protection Bureau (CFPB), the Federal Financial Institutions Examination Council (FFIEC), the Department of Justice, the Securities and Exchange Commission (SEC), and the Federal Trade Commission.
Some examples of regulations that banks have to follow include the Home Mortgage Disclosure Act (HMDA), the Equal Credit Opportunity Act (ECOA), the Expedited Funds Availability Act (EFAA), the Electronic Fund Transfer Act, and the Truth in Savings Act (TISA).
Some regulatory requirements that banks have to follow include maintaining adequate capital, liquidity requirements, concentration risk limits, and reporting and disclosure requirements.
