Chapter Two
The Impact of Government Policy and
Regulation on Banking and the
Financial-Services Industry
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Reasons for the Regulation of Banks
• Protection of the Safety of the Public’s Savings
• Control of the Supply of Money and Credit
• Ensure Equal Opportunity and Fairness in
Access to Credit
• Promote Public Confidence in the Financial
System
• Avoid Concentration of Power
• Support of Government Activities
• Help for Special Segments of the Economy
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Principal Regulatory Agencies
• Federal Reserve System
• Comptroller of the Currency
• Federal Deposit Insurance Corporation
• Department of Justice
• Securities and Exchange Commission
• State Banking Boards or Commissions
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Laws Limiting Bank Lending and
Risk
• National Banking Act
• Federal Reserve Act
• Glass Steagall Act – Banking Act of 1933
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Laws Restricting Services Banks and
Other Depository Institutions Can
Offer
• National Banking Act
• Glass-Steagall Act – Banking Act of 1933
• Competitive Equality in Banking Act
• FDIC Improvement Act
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Laws Expanding the Services Banks
and Other Depository Institutions
Can Offer
• Depository Institution Deregulation and
Monetary Control Act (DIDMCA)
• Garn-St. Germain Act
• Gramm-Leach-Bliley Act
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Laws Prohibiting Discrimination in
Offering Services
• Equal Credit Opportunity Act
• Community Reinvestment Act
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Laws Mandating Increased
Information to Consumers
• Consumer Credit Protection Act
• Competitive Equality in Banking Act
• Truth in Savings Act
• Gramm-Leach-Bliley Act
• Fair and Accurate Transaction Act
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Laws Requiring More Accurate
Financial Reporting
• Sarbanes-Oxley Act
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Laws Regulating Branch Banking
• Glass-Steagall Act – Banking Act of 1933
• Riegle-Neal Interstate Banking and
Branching Efficiency Act
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Laws Regulating Holding Company
Activity
• Bank Holding Company Act
• Riegle-Neal Interstate Banking and
Branching Efficiency Act
• Gramm-Leach-Bliley Act
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Laws Regulating Bank Mergers
• Bank Merger Act
• Riegle-Neal Interstate Banking and
Branching Efficiency Act
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Laws Assisting Federal Agencies in
Dealing with Failing Depository
Institutions
• Garn-St. Germain Depository Institutions
Act
• Competitive Equality in Banking Act
• Financial Institutions reform, Recovery
and Enforcement Act
• FDIC Improvement Act
• Federal Deposit Insurance Reform Act
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Laws Requiring Sharing of Customer
Information with the Government
• Bank Secrecy Act
• USA Patriot Act
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National Banking Act (1863,1864)
• Passed During the Civil War to Help Fund
the War
• Created A New Division of the Treasury,
the Comptroller of the Currency
• Created National Banks with a Federal
Charter
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Federal Reserve Act of 1913
• Passed After a Series of Financial Panics at
the Beginning of the Century
• Created the Federal Reserve System
• Gave the Fed the Authority to Act as the
Lender of Last Resort
• Created to Provide a Number of Services
to Member Banks
• Today the Fed Controls the Money Supply
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Glass-Steagall Act 1933
• Passed During the Great Depression
• Separated Investment and Commercial
Banking
• Created the FDIC
• Fed Given the Power to Set Margin
Requirements
• Prohibited Interest to be Paid on Checking
Accounts
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FDIC Act 1935
• Addressed the Issues Left Out of the
Glass-Steagall Act
• Gave the FDIC the Power to Examine
Banks and Take Necessary Action
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Social Responsibility Acts
• 1968 – Full Information on Terms of Loans
Must be Given
• 1974 – Cannot Be Denied a Loan Based on
Age, Sex, Race, National Origin or
Religion
• 1977 – Cannot Discriminate Based on the
Neighborhood in Which Borrower Resides
• 1987 and 1991 – Banks Must Disclose Full
Terms on Deposit and Savings Accounts
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Depository Institution Deregulation
and Monetary Control Act
(DIDMCA) 1980
• First of Deregulation Acts
• Phased Out Interest Rate Ceilings
• Allowed Interest to be Paid on Checking
Accounts (NOW Accounts)
• Term Transaction Account Created – All
Institutions with These Accounts Subject
to Reserve Requirements
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Garn-St. Germain Act 1982
• Continued the Deregulation of DIDMCA
• Created Money Market Deposit Account
• FDIC Could Arrange Mergers Across State
Lines if Needed
• Loan Limits were Liberalized
• Banks in Need of Capital Could Get It
From the FDIC
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Competitive Equality in Banking Act
1987
• Allowed Creation of Special Bridge Banks
for Failed Institutions
• Bridge Banks Are Special National Banks
Operated by the FDIC
• Bridge Banks Created When Bank is
Essential to the Community
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Financial Institutions Reform, Recovery
and Enforcement Act (FIRREA) 1989
• Created in Response to Large Number of Bank and
S&L Failures
• Combined FDIC and FSLIC into the FDIC and
Dismantled S&L Regulatory Body
• Created the RTC to Take on the Assets of Failed
S&Ls
• $50 Billion Authorized to Handle Failed Institutions
(Later Increased)
• Allowed Bank Holding Companies to Purchase
Savings Banks
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FDIC Improvement Act 1991
• Move Towards Re-regulating the Industry
• Requires Regulators to Take Prompt
Corrective Action When a Bank has
Problems
• Prompt Corrective Action Based on the
Capital Position of the Bank
• Requires Regulators to Develop New
Standards for the Banks They Regulate
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Riegle-Neal Acts 1994
• Bank Holding Company Can Acquire Banks
Nationwide
• Consolidation of Interstate BHCs into Branches
• Smaller Well Managed Banks Only Examined
Every 18 Months
• Community Development Fund Created to
Promote Development of Depressed Local
Communities
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Gramm-Leach-Bliley Act 1999
• Permits Banking-Insurance-Securities Affiliations
• Consumer Protections for Consumers Purchasing
Insurance Through a Bank
• Must Disclose Policies Regarding the Sharing of
Customers’ Private Information
• Customers are Allowed to ‘Opt Out’ of Private
Information Sharing
• Fees for ATM Use Must be Clearly Disclosed
• Federal Crime to Use Fraud or Deception to Steal
Someone’s Account or Personal Information
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The USA Patriot Act 2001
• Requires Banks and Financial Service
Providers to Establish the Identity of their
Customers
• Requires Banks and Financial Service
Providers to Check the Customer’s ID Against
Government-Supplied Lists of Possible
Terrorists and Terrorist Organizations
• Report Suspicious Activity in Customer’s
Account to the US Treasury
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The Sarbanes–Oxley Accounting
Standards Act 2002
• Creates Panel to Promote Accurate and
Objective Audits of Public Companies
• Top Corporate Officers Must Vouch for
the Accuracy of their Companies’
Financial Statements
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Fair and Accurate Credit
Transactions (FACT) Act 2003
• Passed in Response to Increased Problem
of Identity Theft
• Federal Trade Commission Must Make it
Easier for Consumers Victimized to File
Theft Report
• Individuals and Families are Entitled to
One Free Credit Report Each Year
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Check 21 2004
• Reduces the Need for Banks to Transport
Paper Checks
• Can Provide a Customer with ‘Substitute’
Check Which Contains Image of Front and
Back of Original Check
• Allows for Electronic Transmission of
‘Substitute’ Checks for Clearing of Checks
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Federal Deposit Insurance Reform
Act 2006
• First Significant Increase FDIC Coverage in 25
years
• Raises FDIC Insurance Limits from $100,000 to
$250,000 for Certain Retirement Deposits
• FDIC and NCUA are Empowered to Adjust
Deposit Insurance Limits Every 5 years for
Inflation
• Merges Bank Insurance Fund and Savings
Association Insurance Funds
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Regulating Nonbank FinancialService
• Credit Unions
• Finance Companies
– National Credit Union
Administration
– State Governments
• Mutual Funds
• Savings Associations
– Office of Thrift Supervision
• Money Market Funds
– Securities and Exchange
Commission
• Insurance Companies
– State Insurance
Commissions
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– Securities and Exchange
Commission
• Securities Brokers and
Dealers
– Securities and Exchange
Commission
• Financial Conglomerates
– Functional Regulation
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Organizational Structure of the
Federal Reserve System
• Board of Governors
• Federal Open Market Committee
• 12 Federal Reserve Banks
• Member Banks
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European Central Bank
• Central Policy is to Maintain Price
Stability
• Structure is Similar to the Federal Reserve
• Eleven Member Nations
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