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