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Tweet[IWS] CRS: WHO REGULATES WHOM AND HOW? AN OVERVIEW OF U.S. FINANCIAL REGULATORY POLICY FOR BANKING AND SECURITIES MARKETS [28 May 2013]
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 and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets
Edward V. Murphy, Specialist in Financial Economics
May 28, 2013
[full-text, 56 pages]
Summary
Financial regulatory policies are of interest to Congress because firms, consumers, and
governments fund many of their activities through banks and securities markets. Furthermore,
financial instability can damage the broader economy. Financial regulation is intended to protect
borrowers and investors that participate in financial markets and mitigate financial instability.
This report provides an overview of the regulatory policies of the agencies that oversee banking
and securities markets and explains which agencies are responsible for which institutions,
activities, and markets. Some agencies regulate particular types of institutions for risky behavior
or conflicts of interest, some agencies promulgate rules for certain financial transactions no
matter what kind of institution engages in them, and other agencies enforce existing rules for
some institutions, but not for others. These regulatory activities are not necessarily mutually
exclusive.
Banking
U.S. banking regulation traditionally focuses on prudence. Banks’ business decisions are
regulated for safety and soundness and adequate capital. In addition, banks are given access to a
lender of last resort, and some bank creditors are provided guarantees (deposit insurance).
Regulating the risks that banks take is believed to help smooth the credit cycle. The credit cycle
refers to periodic booms and busts in lending. Prudential safety and soundness regulation and
capital requirements date back to the 1860s when bank credit formed the money supply. The
Federal Reserve (Fed) as lender of last resort was created following the Panic of 1907. Deposit
insurance was established in the 1930s to reduce the incentive of depositors to withdraw funds
from banks during a financial panic.
Securities, Derivatives, and Similar Contract Markets
Federal securities regulation has traditionally focused on disclosure and conflicts of interest,
rather than on prudence. Securities regulation is typically designed to ensure that market
participants have access to enough information to make informed decisions, rather than to limit
the riskiness of the business models of publicly traded firms. Firms that sell securities to the
public must register with the Securities and Exchange Commission (SEC). SEC registration in no
way implies that an investment is safe, only that material risks have been disclosed. The SEC also
registers several classes of securities market participants and firms. It has enforcement powers for
certain types of industry misstatements or omissions and for certain types of conflicts of interest.
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.
The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, P.L. 111-203) required
more disclosures in the over-the-counter (off-exchange) derivatives market than prior to the
financial crisis and has granted the CFTC and SEC authority over large derivatives traders.
Government Sponsored Enterprises
The Federal Housing Finance Agency (FHFA) oversees a group of government-sponsored
enterprises (GSEs). Two of the GSEs, Fannie Mae and Freddie Mac, securitize residential
mortgages, and they were placed in conservatorship following mortgage losses in 2008. In the
conservatorship, the Treasury provides financial support to the GSEs and FHFA and Treasury
have managerial control over the enterprises. FHFA also regulates the Federal Home Loan Bank
(FHLB) system, a GSE composed of 12 regional banks owned by the 8,000 financial institutions
that they serve.
Changes Following the 2008 Financial Crisis
The Dodd-Frank Act created the interagency Financial Stability Oversight Council (FSOC) and
authorized a permanent staff to monitor systemic risk and consolidated bank regulation from five
agencies to four. The DFA granted the Federal Reserve oversight authority and the Federal
Deposit Insurance Corporation (FDIC) resolution authority over the largest financial firms. The
Dodd-Frank Act consolidated consumer protection rulemaking, which had been dispersed among
several federal agencies, in the new Consumer Financial Protection Bureau.
Special Topics
The appendices in this report include additional information on topics, such as the regulatory
structure prior to the Dodd-Frank Act (DFA), organizational differences among financial firms,
and the rating system that regulators use to evaluate the health of banks. A list of common
acronyms and a glossary of common financial terms are also included as appendices.
CONTENTS
Introduction ...................................................................................................................................... 1
Policy Problems in Banking and Securities Markets ....................................................................... 5
Banks ......................................................................................................................................... 5
Markets to Trade Securities, Futures, and Other Contracts ....................................................... 7
The Shadow Banking System .................................................................................................... 9
What Financial Regulators Do ......................................................................................................... 9
Regulatory Architecture and Categories of Regulation ........................................................... 10
Regulating Banks, Thrifts, and Credit Unions ............................................................................... 15
Safety and Soundness .............................................................................................................. 16
Capital Requirements .............................................................................................................. 17
Asset Management .................................................................................................................. 19
Consumer Protection Compliance ........................................................................................... 20
Regulators of Firms with Bank Charters ................................................................................. 20
Office of the Comptroller of the Currency ........................................................................ 21
Federal Deposit Insurance Corporation ............................................................................. 21
The Federal Reserve .......................................................................................................... 23
National Credit Union Administration .............................................................................. 23
Regulating Securities, Derivatives, and Other Contract Markets .................................................. 23
Non-Bank Financial Regulators .............................................................................................. 24
Securities and Exchange Commission .............................................................................. 24
Commodity Futures Trading Commission ........................................................................ 26
Federal Housing Finance Agency ..................................................................................... 27
Consumer Financial Protection Bureau ............................................................................. 28
Regulatory Umbrella Groups .................................................................................................. 28
Financial Stability Oversight Council ............................................................................... 28
Federal Financial Institution Examinations Council ......................................................... 29
President’s Working Group on Financial Markets ............................................................ 30
Non-Bank Capital Requirements ............................................................................................. 30
Federal Housing Finance Agency ..................................................................................... 30
The SEC’s Net Capital Rule .............................................................................................. 31
CFTC Capital Requirements ............................................................................................. 32
Foreign Exchange Markets ...................................................................................................... 32
U.S. Treasury Securities .......................................................................................................... 33
Private Securities Markets ....................................................................................................... 34
Figures
Figure 1. An Example of Regulation of JPMorgan Derivatives Trades ........................................... 3
Figure B-1. National Bank ............................................................................................................. 37
Figure B-2. National Bank and Subsidiaries.................................................................................. 37
Figure B-3. Bank Holding Company ............................................................................................. 38
Figure B-4. Financial Holding Company....................................................................................... 38
Tables
Table 1. Federal Financial Regulators and Organizations ............................................................... 2
Table 2. Policies for Banking Regulation and Securities Regulation .............................................. 4
Table 3. Federal Financial Regulators and Who They Supervise .................................................. 13
Table A-1. Capital Standards for Federally Regulated Depository Institutions ............................. 36
Appendixes
Appendix A. Capital Requirements: Provisions in Dodd-Frank .................................................... 35
Appendix B. Forms of Banking Organizations .............................................................................. 37
Appendix C. Bank Ratings: UFIRS and CAMELS ....................................................................... 39
Appendix D. Regulatory Structure Before the Dodd-Frank Act .................................................... 41
Appendix D: Acronyms ................................................................................................................. 42
Appendix E. Glossary of Terms ..................................................................................................... 43
Contacts
Author Contact Information........................................................................................................... 51
Acknowledgments ......................................................................................................................... 51
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