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[IWS] CRS: WHO REGULATES WHOM? AN OVERVIEW OF U.S. FINANCIAL SUPERVISION [14 December 2009]

IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor----------------------
Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________

 

Congressional Research Service (CRS)

 

Who Regulates Whom? An Overview of U.S. Financial Supervision

Mark Jickling, Specialist in Financial Economics

Edward V. Murphy, Specialist in Financial Economics

December 14, 2009

http://opencrs.com/document/R40249/2009-12-14/download/1013/
[full-text, 40 pages]

 

Summary

Federal financial regulation in the United States has evolved through a series of piecemeal

responses to developments and crises in financial markets. This report provides an overview of

current U.S. financial regulation: which agencies are responsible for which institutions and

markets, and what kinds of authority they have.

 

There are two traditional components to U.S. banking regulation: deposit insurance and adequate

capital. Commercial banks accept a quid pro quo that was adopted in response to widespread

bank failures during the 1930s. Through deposit insurance, the federal government provides a

safety net for some banking operations and in return the banks that are exposed to depositor runs

accept federal regulation of their operations, including the amount of risk they may incur. Since

the 1860s, federal banking regulation has sought to prevent excessive risk taking by banks that

might seek to make extra profit by reducing their capital reserves—at the time called “wildcat”

banks. There are five federal bank regulators, each supervising different (and often overlapping)

sets of depository institutions.

 

Federal securities regulation is based on the principle of disclosure, rather than direct regulation.

Firms that sell securities to the public must register with the Securities and Exchange

Commission (SEC), but the agency has no authority to prevent excessive risk taking. SEC

registration in no way implies that an investment is safe, only that the risks have been fully

disclosed. The SEC also registers several classes of securities market participants and firms, but

relies more on industry self-regulation than do the banking agencies. Derivatives trading is

supervised by the Commodity Futures Trading Commission (CFTC), which oversees trading on

the futures exchanges, which have self-regulatory responsibilities as well. There is also a large

over-the-counter (off-exchange) derivatives market that is largely unregulated.

 

The Federal Housing Finance Agency (FHFA) oversees a group of government-sponsored

enterprises (GSEs)—public/private hybrid firms that seek both to earn profits and to further the

policy objectives set out in their statutory charters. Two GSEs, Fannie Mae and Freddie Mac,

were placed in conservatorship by the FHFA in September 2008 after losses in mortgage asset

portfolios made them effectively insolvent. A number of financial markets are unregulated,

including some of the largest. No federal agency has jurisdiction over trading in foreign exchange

or U.S. Treasury securities; nonbank lenders fall outside the regulatory umbrella; and hedge

funds, private equity firms, and venture capital investors are largely unregulated (although their

transactions in securities and derivatives markets may be).

 

The United States has never attempted a wholesale reformation of the entire regulatory system

comparable to the 1986 “Big Bang” in the UK, which reorganized regulatory agencies across

industry lines and sought to implement a consistent philosophy of regulation. In the wake of the

current financial turmoil, however, such a reevaluation is possible, and a number of broad

restructuring proposals have already come forward.

 

In the 111th Congress, H.R. 4173 presents comprehensive reform of the banking agencies,

derivatives regulation, investor protection, systemic risk, and other concerns. In the Senate, a

committee print by Senator Dodd containing comprehensive reform was issued on November 16,

2009. This report will be updated as conditions warrant.

 

Contents

Introduction ...............................................................................................................................1

Financial Crises, Regulatory Jurisdiction, and Systemic Risk ......................................................2

Processes Within the Financial Sector ...................................................................................3

Honoring Claims of Depositors and Investors........................................................................4

Performance of Loans from Banks to the Economy ...............................................................5

Capital Requirements ..................................................................................................................7

Non-Bank Capital Requirements .........................................................................................10

The SEC’s Net Capital Rule ..........................................................................................10

CFTC Capital Requirements .........................................................................................10

Federal Housing Finance Agency .................................................................................. 11

The Federal Financial Regulators .............................................................................................. 11

Banking Regulators............................................................................................................. 11

Office of the Comptroller of the Currency .....................................................................13

Federal Deposit Insurance Corporation..........................................................................13

The Federal Reserve......................................................................................................14

Office of Thrift Supervision ..........................................................................................14

National Credit Union Administration ...........................................................................15

Non-Bank Financial Regulators...........................................................................................15

Securities and Exchange Commission ...........................................................................15

Commodity Futures Trading Commission .....................................................................17

Federal Housing Finance Agency ..................................................................................18

Regulatory Umbrella Groups...............................................................................................19

Federal Financial Institution Examinations Council.......................................................19

President’s Working Group on Financial Markets ..........................................................19

Unregulated Markets and Institutions ........................................................................................20

Foreign Exchange Markets..................................................................................................20

U.S. Treasury Securities ......................................................................................................20

OTC Derivatives .................................................................................................................21

Private Securities Markets...................................................................................................21

Nonbank Lenders................................................................................................................22

Hedge Funds .......................................................................................................................22

Comprehensive Reform Legislation in the 111th Congress ...................................................23

 

Figures

Figure 1. Where Financial Disruptions Arise ...............................................................................3

Figure A-1. National Bank ........................................................................................................24

Figure A-2. National Bank and Subsidiaries ..............................................................................24

Figure A-3. Bank Holding Company .........................................................................................25

Figure A-4. Financial Holding Company ...................................................................................25

 

Tables

Table 1. Systemic Crises and the Creation of Financial Regulators ..............................................4

Table 2. Federal Financial Regulators and Who They Supervise ..................................................6

Table 3. The Basel Accords: Risk Weightings for Selected Financial Assets Under the Standardized Approach........8

Table 4. Capital Standards for Federally Regulated Depository Institutions..................................9

 

Appendixes

Appendix A. Forms of Banking Organizations...........................................................................24

Appendix B. Bank Ratings: UFIRS and CAMELS ....................................................................26

Appendix C. Acronyms .............................................................................................................28

Appendix D. Glossary of Terms ................................................................................................29

 

Contacts

Author Contact Information ......................................................................................................36

Acknowledgments ....................................................................................................................36



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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

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Stuart Basefsky                   
Director, IWS News Bureau                
Institute for Workplace Studies 
Cornell/ILR School                        
16 E. 34th Street, 4th Floor             
New York, NY 10016                        
                                   
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