Banking regulation and supervision
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system.
United States
Bank regulation in the United States is highly fragmented compared to 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 a banking organization's charter-type and organizational structure, it may be subject to numerous federal and state banking regulators. Unlike Japan and the United Kingdom, where regulatory authority over the banking, securities and insurance industries is combined into one single financial services agency, the U.S. maintains separate securities, commodities, and insurance regulatory agencies (which are separate from the bank regulatory agencies) at the federal and state level as well. [[1]][[2]]
The U.S also has one of the most highly regulated banking environments in the world; however, many of the regulations are not safety and soundness related, but are instead focused on privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and promoting lending to lower-income segments. Even individual cities enact their own financial regulation laws (for example, for usury lending).
Federal Regulatory Agencies
A bank's primary federal regulator could be the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. And within the Federal Reserve Board, there are 12 districts centered around 12 regional Federal Reserve Banks, each of which carries out the Federal Reserve Board's bank regulatory responsibilities in its respective district. Credit Unions in the United States are subject to certain similar bank-like regulations and are supervised by the National Credit Union Administration.
State Regulatory 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.
Federal Laws and Regulations
This portion of the article focuses on federal banking laws and regulations. State banking laws also apply to state-chartered banks and certain nonbank affiliates of federally-chartered banks.
Bank Secrecy Act
The Bank Secrecy Act (or 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.
Fair Credit Reporting Act (FCRA)
More coming later.
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 oustanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus. [3] Some state banking regulations also contain similar lending limits applicable to state-chartered banks. [4] 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 exceed the initial lending limit is fully secured.
Pass Through Insurance (PTI)
More coming later.
Right to Financial Privacy Act
More coming later.
Sarbanes-Oxley Act of 2002
More coming later.
USA PATRIOT Act
More coming later.
Federal Reserve regulations
Regulation A - Extensions of Credit by Federal Reserve Banks
This regulation establishes rules regarding extensions of credit made by a Federal Reserve Bank to banks and other institutions (i.e., "discount window lending"). 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. [5][6][7]
Regulation B - Equal Credit Opporunity
More coming later.
Regulation C - Home Mortgage Disclosure Act (HMDA)
The HMDA requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display an HMDA poster.
Regulation D - Reserve Requirements for Depository Institutions
- Establishes reserve requirement guidelines.
- Regulates certain early withdrawals from certificate of deposit 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
Regulation E - Electronic Funds Transfer Act
Regulation F - Limitations on Interbank Liabilities
More coming later.
Regulation O - Loans to Insiders
Regulation O establishes varying qualitative 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. [8][9]
Regulation P - Privacy of Consumer Financial Information
More coming later
Regulation Q - Prohibition Against Payment of Interest on Certain Deposit Account Types
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 on withdrawal"-type checking accounts ("NOW accounts") offered to consumers and certain entities (but not commercial enterprises other than sole-proprietors). [10]
Regulation AA - Unfair or Deceptive Acts or Practices
More coming later.
Regulation BB - Community Reinvestment Act (CRA)
- Insured depository institutions are required to reinvest in the communities they serve. There should be an emphasis on low to moderate income (LMI) neighborhoods.
- Insured depository institutions must display a CRA notice
- Each branch must have a current CRA public file. It must be shown upon request.
Regulation CC - Expedited Funds Availability Act
- Defines when standard holds and exception holds can be placed on check deposits, and defines the maximum length of time the money can be held.
- Deposits made in person and meeting certain requirements must be made available by the next business day.
- $100 from each deposit on hold is immediately available
- Standard holds
- The first $4,900: 2 business days
- The remaining amount over $5,000: 7 business days
- Exception Holds
- The first $4,900: 5 business days
- The remaining amount over $5,000: 11 business days
- Special Check Deposits, including guaranteed items such as cashiers checks
- The first $5,000 must be made available immediately
- A bank's hold policy can be less stringent than the guidelines outlined in Reg. CC, but it cannot exceed the guidelines.
Regulation DD - Truth in Savings Act
The purpose of this part is to enable consumers to make informed decisions about accounts at depository institutions. This part requires depository institutions to provide disclosures so that consumers can make meaningful comparisons among depository institutions. This regulation is not applicable to credit unions.
Reserve requirement
The reserve requirement sets the minimum reserves each bank must hold to customer deposits and notes. This type of regulation has perhaps lost the role it once had in places like the United States. In 2004 deposits in United States banks were roughly $8 trillion while central bank "reserves of depository institutions" were less than $50 billion. This is because reserve requirements apply to just transaction deposits today.
The reason for these reserves are both to put a limit on how much the supply of deposits (money and credit) can grow. They also work as a cushion in case of a severe recession that leads to a "bank run." See the description of "Regulation D" above for more specific information on regulatory reserve requriements for banks.
Capital requirement
The capital requirement sets a framework on how banks and depository institutions must handle their capital in relation to their assets. Internationally, the Bank for International Settlements's Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II.
In the United States, "depository institutions" are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB).
See also
- Anti-money laundering
- Financial regulation
- ISO 19092
- ISO 4217
- ISO 6166
- ISO 8109
- ISO 9362
- ISO 10962
- ISO/IEC 15944
- Know your customer
- Monetary policy
- Money market
- Risk adjusted assets (risk weighted assets)
External links
Reserve requirements
Capital requirements
- Basel II: Revised international capital framework
- FDIC: Risk - Based Assessment System
- Risk-weighted assets
