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Though the effectiveness and efficiency with which these regulatory entities manage financial institutions are sometimes questioned, each was formed to help achieve the overall goal of providing sensible regulation of markets and protection for investors and consumers. Probably the most well-known of all the regulatory agencies is the FRB.
The Fed is responsible for influencing liquidity and overall credit conditions. Its primary monetary policy tool is open market operations that control the buying and selling of U. Treasury and federal agency securities. Such purchases and sales determine the federal funds rates and alter the level of reserves available. The FRB is also responsible for regulating and supervising the U. This agency is also responsible for analyzing and supervising the safety and stability of financial institutions, performing consumer protection functions, and managing failed banks.
The FDIC is funded by the premiums paid by banks and thrift institutions for deposit insurance coverage and by the earnings generated from investments in U. Treasury debt securities. The OCC primarily functions to regulate, supervise, and offer charters to banks that operate in the U. In contrast to some proposals to create a systemic risk regulator, the Dodd-Frank Act did not give the council authority beyond the existing authority of its individual members to respond to emerging threats or close regulatory gaps it identifies.
In many cases, the council can only make regulatory recommendations to member agencies or Congress—it cannot impose change. Although the FSOC does not have direct supervisory authority over any financial institution, it plays an important role in regulation because it designates firms and financial market utilities as systemically important. Designated firms come under a consolidated supervisory safety and soundness regime administered by the Fed that may be more stringent than the standards that apply to nonsystemic firms.
FSOC is also tasked with making recommendations to the Fed on standards for that regime. In a limited number of other cases, regulators must seek FSOC advice or approval before exercising new powers under the Dodd-Frank Act. Through the FFIEC, the federal banking regulators issue a single set of reporting forms for covered institutions. Federal financial institution examiners evaluate the risks of covered institutions.
The specific safety and soundness concerns common to the FFIEC agencies can be found in the handbooks employed by examiners to monitor depositories. Examples of safety and soundness subject areas include important indicators of risk, such as capital adequacy, asset quality, liquidity, and sensitivity to market risk.
Insurance companies, unlike banks and securities firms, have been chartered and regulated solely by the states for the past years. The limited federal role stems from both Supreme Court decisions and congressional action. In the case Paul v. Virginia , the Court found that insurance was not considered interstate commerce, and thus not subject to federal regulation.
This decision was effectively reversed in the decision U. South-Eastern Underwriters Association. Each state government has a department or other entity charged with licensing and regulating insurance companies and those individuals and companies selling insurance products. States regulate the solvency of the companies and the content of insurance products as well as the market conduct of companies.
Although each state sets its own laws and regulations for insurance, the National Association of Insurance Commissioners NAIC acts as a coordinating body that sets national standards through model laws and regulations.
Models adopted by the NAIC, however, must be enacted by the states before having legal effect, which can be a lengthy and uncertain process. The states have also developed a coordinated system of guaranty funds, designed to protect policyholders in the event of insurer insolvency. Although the federal government's role in regulating insurance is relatively limited compared with its role in banking and securities, its role has increased over time.
Various court cases interpreting McCarran-Ferguson's antitrust exemption have narrowed the definition of the business of insurance , whereas Congress has expanded the federal role in GLBA and the Dodd-Frank Act through federal oversight. For example, the Federal Reserve has regulatory authority over bank holding companies with insurance operations as well as insurers designated as systemically important by FSOC. In addition, the Dodd-Frank Act created the FIO to monitor the insurance industry and represent the United States in international fora relating to insurance.
Various federal laws have also exempted aspects of state insurance regulation, such as state insurer licensing laws for a small category of insurers in the Liability Risk Retention Act of 15 U. In addition to insurance, there are state regulators for banking and securities markets. State regulation also plays a role in nonbank consumer financial protection, although that role has diminished as the federal role has expanded.
As noted above, banking is a dual system in which institutions choose to charter at the state or federal level. A majority of community banks and thrifts are state chartered. But a greater share of industry assets is held by national banks and thrifts. Although state-chartered banks have state regulators as their primary regulators, federal regulators still play a regulatory role. Most depositories have FDIC deposit insurance; to qualify, they must meet federal safety and soundness standards, such as prompt corrective action ratios.
In addition, many state banks and a few state thrifts are members of the Fed, which gives the Fed supervisory authority over them. However, even nonmember Fed banks must meet the Fed's reserve requirements. In securities markets, "The federal securities acts expressly allow for concurrent state regulation under blue sky laws.
The state securities acts have traditionally been limited to disclosure and qualification with regard to securities distributions. Typically, the state securities acts have general antifraud provisions to further these ends. Registration is another area where states play a role.
In general, investment advisers who are granted exemptions from SEC registration based on size are overseen by state regulators. Broker-dealers, by contrast, are typically subject to both state and federal regulation. States also play a role in enforcement by taking enforcement actions against financial institutions and market participants. This role is large in states with a large financial industry, such as New York.
Federal regulation plays a central role in determining the scope of state regulation because of federal preemption laws that apply federal statute to state-chartered institutions and state "wild card" laws that allow state-chartered institutions to automatically receive powers granted to federal-chartered institutions. Financial regulation must also take into account the global nature of financial markets.
More specifically, U. Sometimes regulators grant each other equivalency i. If financial activity migrates to jurisdictions with laxer regulatory standards, it could undermine the effectiveness of regulation in jurisdictions with higher standards. To ensure consensus and consistency across jurisdictions, U.
Given the size and significance of the U. Although these standards are not legally binding, U. In addition, the G, an international body consisting of the United States, the European Union, and 18 other economies, spearheaded international coordination of regulatory reform after the financial crisis.
It created the Financial Stability Board FSB , consisting of the finance ministers and financial regulators from the G countries, four official international financial institutions, and six international standard-setting bodies including those listed above , to formulate agreements to implement regulatory reform.
The relationship between these various entities is diagrammed in Figure 4. Figure 4. International Financial Architecture. Appendix A. Changes to Regulatory Structure Since With the exception of the OTS, the agencies shown in the figure retained all authority unrelated to consumer protection, as well as some authority related to consumer protection.
Figure A Appendix B. Experts List. Table B CRS Contact Information. A multitude of diverse financial services are either directly provided or supported through guarantees by state or federal government. Examples include flood insurance through the Federal Emergency Management Agency , mortgage insurance through the Federal Housing Administration and the Department of Veterans Affairs , student loans through the Department of Education , trade financing through the Export-Import Bank , and wholesale payment systems through the Federal Reserve.
This report focuses only on the regulation of private financial activities. Regulators are also tasked with promoting certain social goals, such as community reinvestment or affordable housing. Because this report focuses on regulation, it will not discuss social goals. For example, financial agents may have incentives to make decisions that are not in the best interests of their clients, and clients may not be able to adequately monitor their behavior.
For example, firms issuing securities know more about their financial prospects than investors purchasing those securities, which can result in a "lemons" problem in which low-quality firms drive high-quality firms out of the marketplace. By contrast, some states have also conducted qualification-based securities regulation, in which securities are vetted based on whether they are perceived to offer investors a minimum level of quality.
Michael Barr et al. Paul: Foundation Press, , p. However, banks are not allowed to affiliate with commercial firms, although exceptions are made for industrial loan companies and unitary thrift holding companies. Bank holding companies with nonbank subsidiaries are also referred to as financial holding companies.
The Office of Thrift Supervision was the primary thrift regulator until the Dodd-Frank Act abolished it and reassigned its duties to the bank regulators.
Thrifts are a good example of how the regulatory system evolved over time to the point where it no longer bears much resemblance to its original purpose. With a charter originally designed to be quite distinct from the bank charter e. Because of this convergence and because of safety and soundness problems during the financial crisis and before that during thes savings and loan crisis, policymakers deemed thrifts to no longer need their own regulator although they maintained their separate charter.
The charter dictates the activities the institution can participate in and the regulations it must adhere to. Any institution that accepts deposits must be chartered as one of these institutions; however, not all institutions chartered with these regulators accept deposits. Ultimately, if the premiums or income are insufficient, the programs could affect taxpayers by reducing the general revenues of the federal government. Treasury if the Deposit Insurance Fund is insufficient to meet deposit insurance claims.
In the case of the Fed, any losses at the Fed's discount window reduce the Fed's profits, which are remitted quarterly to Treasury where they are added to general revenues. Insurers are regulated for safety and soundness at the state level.
Cooper and David H. Since , the SEC has enforced a net capital rule applicable to all registered brokers and dealers. The rule requires brokers and dealers to maintain an excess of capital above mere solvency, to ensure that a failing firm stops trading while it still has assets to meet customer claims.
Net capital levels are calculated in a manner similar to the risk-based capital requirements under the Basel Accords, but the SEC has its own set of risk weightings, which it calls haircuts; the riskier the asset, the greater the haircut.
Although the net capital rule appears to be very close in its effects to the banking agencies' risk-based capital requirements, there are significant differences.
The SEC has no authority to intervene in a broker's or dealer's business if it takes excessive risks that might cause net capital to drop below the required level.
Rather, the net capital rule is often described as a liquidation rule—not meant to prevent failures but to minimize the impact on customers. Moreover, the SEC has no authority comparable to the banking regulators' prompt corrective action powers: it cannot preemptively seize a troubled broker or dealer or compel it to merge with a sound firm.
Department of Treasury et al. Miller and Kathleen Ann Ruane. Eric Weiss and Darryl E. Paul: Foundation Press, , Chapter 2.
As noted above, the insurance industry is primarily regulated at the state level. Topic Areas About Donate.
Who Regulates Whom? An Overview of the U. Financial Regulatory Framework August 17, — March 10, R The financial regulatory system has been described as fragmented, with multiple overlapping regulators and a dual state-federal regulatory system.
Download PDF. Download EPUB. Jurisdiction Among Depository Regulators Figure 4. International Financial Architecture Figure A Tables Table 1. Appendixes Appendix A. Summary The financial regulatory system has been described as fragmented, with multiple overlapping regulators and a dual state-federal regulatory system.
Introduction Federal financial regulation encompasses varied and diverse markets, participants, and regulators. The Financial System The financial system matches the available funds of savers and investors with borrowers and others seeking to raise funds in exchange for future payouts. To help understand how the financial regulators have been organized, financial activities can be separated into distinct markets: 2 Banking —accepting deposits and making loans to businesses and households; Insurance —collecting premiums from and making payouts to policyholders triggered by a predetermined event; Securities —issuing financial instruments that represent financial claims on companies or assets.
Securities, which are often traded in financial markets, take the form of debt a borrower and creditor relationship and equity an ownership relationship. One special class of securities is derivatives, which are financial instruments whose value is based on an underlying commodity, financial indicator, or financial instrument; and Financial Market Infrastructure —the "plumbing" of the financial system, such as trade data dissemination, payment, clearing, and settlement systems, that underlies transactions.
The Role of Financial Regulators Financial regulation has evolved over time, with new authority usually added in response to failures or breakdowns in financial markets and authority trimmed back during financial booms.
The following provides a brief overview of what financial regulators do, specifically answering four questions: 1. What powers do regulators have? What policy goals are regulators trying to accomplish? Through what means are those goals accomplished? Who or what is being regulated? Regulatory Powers Regulators implement policy using their powers, which vary by agency.
Powers can be grouped into a few broad categories: Licensing , Chartering , or Registration. A starting point for understanding the regulatory system is that most activities cannot be undertaken unless a firm, individual, or market has received the proper credentials from the appropriate state or federal regulator.
Each type of charter, license, or registration granted by the respective regulator governs the sets of financial activities that the holder is permitted to engage in. For example, a firm cannot accept federally insured deposits unless it is chartered as a bank, thrift, or credit union by a depository institution regulator. Likewise, an individual generally cannot buy and sell securities to others unless licensed as a broker-dealer.
Depending on the type, those conditions could include regulatory oversight, training requirements, and a requirement to act according to a set of standards or code of ethics. Failure to meet the terms and conditions could result in fines, penalties, remedial actions, license or charter revocation, or criminal charges.
Regulators issue rules regulations through the rulemaking process to implement statutory mandates. Rules lay out the guidelines for how market participants may or may not act to comply with the mandate. Oversight and Supervision. Regulators ensure that their rules are adhered to through oversight and supervision. This allows regulators to observe market participants' behavior and instruct them to modify or cease improper behavior. Supervision may entail active, ongoing monitoring as for banks or investigating complaints and allegations ex post as is common in securities markets.
In some cases, such as banking, supervision includes periodic examinations and inspections, whereas in other cases, regulators rely more heavily on self-reporting. Regulators explain supervisory priorities and points of emphasis by issuing supervisory letters and guidance. Regulators can compel firms to modify their behavior through enforcement powers. Enforcement powers include the ability to issue fines, penalties, and cease and desist orders; to undertake criminal or civil actions in court, or administrative proceedings or arbitrations; and to revoke licenses and charters.
In some cases, regulators initiate legal action at their own bequest or in response to consumer or investor complaints. In other cases, regulators explicitly allow consumers and investors to sue for damages when firms do not comply with regulations, or provide legal protection to firms that do comply.
Some regulators have the power to resolve a failing firm by taking control of the firm and initiating conservatorship i. Other types of failing financial firms are resolved through bankruptcy, a judicial process. Goals of Regulation Financial regulation is primarily intended to achieve the following underlying policy outcomes: 6 Market Efficiency and Integrity. Regulators are to ensure that markets operate efficiently and that market participants have confidence in the market's integrity.
Federal Reserve Bank of New York Banking Institutions and Their Regulators. Furlong, Fred. Harshman, Ellen, Fred C.
Yeager, and Timothy J. Louis, October Skip to content Readability Tools. Reader View. Dark Mode. High Contrast.
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