Because financial institutions provide essential services to the public and can have a potent impact on the economy, regulation of the financial sector is extensive around 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, their 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 often operate at local or regional 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 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 member banks of the Federal Reserve System and financial holding companies (FHCs). 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 inside the United States. The 50 state banking commissions supervise banks that have state charters of incorporation and often have regulatory responsibility for other types of financial institutions, such as state-chartered credit unions or savings and loan associations.



• Recent laws have dramatically changed the shape of 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 businesses just as financial firms 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 boards or commissions present in each of the 50 U.S. states, which regulate insurance firms, finance and small-loan companies, and certain security firms and trust companies.



• 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 often find themselves 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 serve the public. The result is some shifting of financial institutions’ risk from the public to the private owners of these businesses.