 |  Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 8/e Peter Rose,
Texas A & M University
The Regulation of the Financial Institutions Sector
Chapter SummaryBecause financial institutions provide essential services to the public and can have a potent
impact on the economy, regulation of the financial sector is extensive over much of the
globe. Government rules encompass nearly every aspect of the behavior and performance
of financial institutions, including the services they offer, their management policies, financial
condition, and their ability to expand geographically.
- Regulation involves governments setting rules that bind financial institutions to obey
laws and to protect the public interest. These rules are enforced by agencies and commissions
that operate at state and federal levels.
- Deregulation is becoming a reality for many financial institutions as more and more
governments eliminate some rules or ease some regulations to allow the behavior and
performance of financial-service institutions to be governed more by the private marketplace
and less by government dictation.
- Among the key bank regulatory agencies active in the United States are the Federal
Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the 50 state banking commissions. The Federal Reserve
oversees the performance and regulatory compliance of member banks of the Federal
Reserve System and financial holding companies. The Comptroller of the Currency is
responsible for the oversight of national (i.e., federally chartered) banks. The Federal
Deposit Insurance Corporation supervises nonmember banks and insures the deposits of
more than 98 percent of all banks selling deposits to the public in the United States. The
50 state banking commissions supervise banks that have state charters of incorporation
and often are assigned regulatory responsibility for other types of financial institutions,
such as state-chartered credit unions or savings institutions.
- Recent laws have dramatically changed the shape of the banking industry and other financial-
service industries. Examples include the Depository Institutions Deregulation
and Monetary Control Act (1980), the Riegle-Neal Interstate Banking Act (1994), and
the Financial Services Modernization (Gramm-Leach-Bliley) Act (1999). These laws
have brought about such changes as giving more service powers to banks and thrift institutions
so they can compete more freely with each other, permitting banks to branch
across state lines, and allowing banking firms to affiliate with insurance companies, security
firms, and other financial-service businesses just as banks have done in Europe
for decades.
- Key regulatory agencies for nonbank financial institutions include the Office of Thrift
Supervision which supervises savings and loan associations; the National Credit Union
Administration which oversees federally chartered credit unions and supervises the
credit union deposit insurance fund (NCUSIF); the Securities and Exchange Commission
which focuses principally on the behavior of security brokers and dealers and on
the activities of corporations borrowing money in the open market; and the state insurance
and financial-services commissions present in each of the 50 U.S. states.
- The nature of government regulation of the financial sector is changing today with the
private marketplace gradually substituting for government rules. Today regulators are
paying less attention to making and enforcing new rules and are pulling back to permit
the discipline of the financial marketplace to play a greater role in controlling risk taking
by financial-service firms. Regulators are also insisting that the owners of financial
institutions (principally their stockholders) supply more of the capital these firms need
to operate and serve the public. The result is some shifting of financial institutions’ risk
from the public to the private owners of these businesses.
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2003 McGraw-Hill Higher Education