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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

January 30, 2015

http://www.fas.org/sgp/crs/misc/R43087.pdf

[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 mitigating conflicts of

interest, fraud, and attempted market manipulation, 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 regional banks to bankers 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 E. Acronyms .................................................................................................................. 42

Appendix F. Glossary of Terms ..................................................................................................... 43

 

Contacts

Author Contact Information........................................................................................................... 51

Acknowledgments ......................................................................................................................... 51

 

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