Bank regulation in the United States
Encyclopedia
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. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.
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).
, the Federal Reserve Board, the Office of the Comptroller of the Currency
, or the Office of Thrift Supervision
. Within the Federal Reserve Board 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
establishes uniform principles, standards, and report forms for the other agencies.
State-chartered banks are also subject to the regulation and supervision of the state regulatory agency of the state in which they were chartered. State regulation of state-chartered banks applies, in addition to federal regulation. 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.
State banking laws apply to state-chartered banks and certain non-bank affiliates of federally-chartered banks.
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 of Office of Thrift Supervision
preemption begins with Section 550.136(a) of the OTS Regulations, providing that “...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.” 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. Section 550.136(c) lists six types of state laws that, in certain specified circumstances, are not preempted with respect to federal savings associations.
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.
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). Some others are insured by the private guaranty corporation American Share Insurance
(156 as of 2009).
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.
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.
s (NOW accounts) offered to consumers and certain entities, but not to commercial enterprises other than sole proprietors.
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.
s 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.
:
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.
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.
Group of Ten (economic)
The Group of Ten or G-10 refers to the group of countries that have agreed to participate in the General Arrangements to Borrow...
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. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.
U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
laws (for example, defining what constitutes usurious lending).
Regulatory authority
A bank's primary federal regulator could be the Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
, the Federal Reserve Board, the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
, or the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
. Within the Federal Reserve Board 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
Credit unions in the United States
Credit unions in the United States served 89 million members as of 2008, comprising 43.7% of the economically active population. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations....
are subject to most bank regulations and are supervised by the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
. The Federal Financial Institutions Examination Council
Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal...
establishes uniform principles, standards, and report forms for the other agencies.
State-chartered banks are also subject to the regulation and supervision of the state regulatory agency of the state in which they were chartered. State regulation of state-chartered banks applies, in addition to federal regulation. 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.
State banking laws apply to state-chartered banks and certain non-bank affiliates of federally-chartered banks.
By statute, and in accordance with judicial interpretation of statutes and the United States Constitution
United States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
, 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
Escheat
Escheat is a common law doctrine which transfers the property of a person who dies without heirs to the crown or state. It serves to ensure that property is not left in limbo without recognised ownership...
law, and insurance law
Insurance law
Insurance law is the name given to practices of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer...
.
One example of Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
preemption begins with Section 550.136(a) of the OTS Regulations, providing that “...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.” 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. Section 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. The regulation was enacted in 1999.Anti-money laundering and anti-terrorism
The Bank Secrecy Act (BSA) requires financial institutions to assist government agenciesGovernment agency
A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...
to detect and prevent money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
. 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
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
, tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
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.
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 insurance
The United States was the first country to officially enact deposit insuranceDeposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
to protect depositors from losses by insolvent banks. In 1933 the Glass–Steagall Act established the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) to insure deposits at commercial banks.
In 1970 Congress established a separate fund for credit unions
Credit unions in the United States
Credit unions in the United States served 89 million members as of 2008, comprising 43.7% of the economically active population. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations....
, the National Credit Union Share Insurance Fund
National Credit Union Share Insurance Fund
The National Credit Union Share Insurance Fund is administered by the National Credit Union Administration for the purpose of providing deposit insurance to protect deposits of credit union members at insured institutions in the United States. It was created in 1970 shortly after the creation of...
. The NCUSIF insures all federally-chartered credit unions and many state-chartered credit unions (98% as of 2009). Some others are insured by the private guaranty corporation American Share Insurance
American Share Insurance
American Share Insurance is a privately held deposit guaranty corporation that insures shares in some state chartered credit unions. ASI was established in 1974 as the National Guaranty Insurance Fund, changing its name to American Share Insurance in the early 1990s...
(156 as of 2009).
In 1934, Congress created the Federal Savings and Loan Insurance Corporation
Federal Savings and Loan Insurance Corporation
The Federal Savings and Loan Insurance Corporation was an institution that administered deposit insurance for savings and loan institutions in the United States...
to insure savings and loan
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
deposits. In the 1980s, during the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
, 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
American Share Insurance
American Share Insurance is a privately held deposit guaranty corporation that insures shares in some state chartered credit unions. ASI was established in 1974 as the National Guaranty Insurance Fund, changing its name to American Share Insurance in the early 1990s...
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
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
activities.
Withdrawal limits and reserve requirements
- Establishes reserve requirement guidelines
- Regulates certain early withdrawals from certificate of depositCertificate of depositA certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
accounts - Defines what qualifies as DDA/NOW accounts. See Reg. Q to see 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 (6) transfers or withdrawals. No more than three (3) 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
Regulation Q prohibits banks from paying interest on demand deposit accounts. A "demand deposit" account includes many, but not all checking accounts. Banks, however, may pay interest on Negotiable Order of Withdrawal accountNegotiable Order of Withdrawal account
In the United States, a Negotiable Order of Withdrawal account is a deposit account that pays interest, on which checks may be written....
s (NOW accounts) offered to consumers and certain entities, but not to commercial enterprises other than sole proprietors.
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 bureauCredit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
s 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 ActTruth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...
:
- 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
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. Some state banking regulations also contain similar lending limits applicable to state-chartered banks. 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.
Central banking regulation
Extensions of Credit by Federal Reserve Banks (Regulation A) establishes rules regarding discount windowDiscount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
lending, the extension of credit by the Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
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.