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Over the years, legislation has changed what banks can or cannot do. For example, the Gramm-Leach-Bliley Act of 1999 abolished the core provisions of the Banking Act of 1933, also known as the Glass-Steagall Act, which restricted banks from selling insurance and securities. As the impact of the law takes hold, consumers will be able to purchase a variety of services, such as car insurance or a checking account, and trade stocks, all at one place. The Federal Reserve has been given responsibility for regulating these multiple-service providers. Legislation also regulates both the international activities of U.S. banks in foreign locations and the activities of foreign banks in U.S locations. For example, the International Banking Act of 1978 provided equal powers for foreign banks operating in the United States to promote equal competition between them and U.S. banks. In addition, the International Lending Supervision Act of 1983 requires the Federal Reserve and other U.S. banking agencies to consult with bank regulators in other countries to adopt consistent supervisory policies to facilitate international banking. The Federal Reserve is responsible for regulating branches of foreign banks operating in the United States.
The dual banking supervision system
The National Bank Act of 1863 created a system of banks throughout the United States that were chartered by the federal government. In 1865, an amendment to the act placed a tax on state bank notes, bringing all banks in the United States under federal supervision. However, a number of banks were exempt from the tax and continued under their state charters until the Federal Reserve Act of 1913 . This was known as the "dual banking system."
The Federal Reserve System, also the Federal Reserve, informally The Fed, is the central banking system of the United States. The Federal Reserve System is a quasi-governmental banking system composed of (1) a presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation; and (4) numerous private member banks , which own varying amounts of stock in the regional Federal Reserve Banks .
The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the federal government, creating the twelve regional Federal Reserve Banks which are supervised by the Federal Reserve Board. Notwithstanding the Glass-Steagall Act of 1932 and the Banking Acts of 1933 and 1935, which were attempting to reform various banking abuses, the Federal Reserve System has remained more or less unchanged through to the present day. The Glass-Steagall Act was repealed in 1999, whereas the Banking Act of 1933 simply strengthened the supervisory powers of federal authorities and created the Federal Deposit Insurance Corporation.
The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Fed works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.
Roger Ferguson Jr, a Governor of the Federal Reserve Board, once clearly made the case for the Federal Reserve maintaining a significant role in banking supervision. He argued that ,
‘ In the last analysis, there simply is no substitute for understanding the links among supervision, regulation market behavior, risk taking, prudential standards, and- let us not lose sight-macro stability. The intelligence and know-how that come from our examination and regulatory responsibilities play an important, at times, critical-role in our monetary policy making. No less relevant, our economic stabilization responsibilities contribute to our supervisory policies. Observers and supervisors from single-purpose agencies often lose sight of how too rigorous or too lenient a supervisory stance-or a change in stance-can have serious and significant macro-economic implications, the consideration of which is likely to modify the supervisory policy. In short, I think the Fed’s monetary policy is better because of its supervisory responsibilities, and its supervision and regulation are better because of its stabilization responsibilities.’
Since 1863, commercial banks in the United States have been able to choose to organize as national banks with a charter issued by the Office of the Comptroller of the Currency (OCC) or as state banks with a charter issued by a state government. The choice of charter determines which agency will supervise the bank: the primary supervisor of nationally chartered banks is the OCC, whereas state-chartered banks are supervised jointly by their state chartering authority and either the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve System (Federal Reserve). In their supervisory capacity, the FDIC and the Federal Reserve generally alternate examinations with the states.
Several federal and state agencies regulate banks along with the Federal Reserve. The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS) and state banking authorities also regulate financial institutions. The OCC charters, regulates and supervises nationally chartered banks. The FDIC, the Federal Reserve and state banking authorities regulate state-chartered banks. Bank holding companies and financial services holding companies, which own or have controlling interest in one or more banks, are also regulated by the Federal Reserve. The OTS examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.
Umbrella supervision mode
1. Federal Reserve as Umbrella supervisor
Gramm-Leach-Bliley , namely GLB, offers exciting opportunities for banking organizations to expand their lines of business and their range of customer services. It permits certain bank holding companies to affiliate with securities firms and insurance companies. Expanded permissible activities for these holding companies include securities underwriting and dealing, insurance agency activities and insurance underwriting, acting as a futures commission merchant, and merchant banking. The Federal Reserve Board and the Secretary of the Treasury have the authority to determine whether other activities are financial in nature or incidental to financial activities and hence permissible for these holding companies to engage in. To take advantage of the new powers, a bank holding company must become a financial holding company (FHC) , which requires that each of its subsidiary banks is well-capitalized and well-managed and that all of its insured subsidiary banks maintain a Consumer Reinvestment Act (CRA) rating of at least satisfactory.
The rationale for umbrella supervision is that most large and sophisticated financial services companies take an umbrella or consolidated approach to managing their risk. As a practical matter, the Federal Reserve expects all FHCs to evolve toward comprehensive, consolidated risk management in order to measure and assess the range of their exposures and the way those exposures interrelate.
Umbrella supervision seeks to balance the objective of protecting the depository subsidiaries of increasingly complex organizations engaged in a greater number of interrelated activities and incurring different risk with the objective of not imposing an unduly duplicative or onerous burden on the nonbank entities that are part of the organization. The legislation clearly intends that functional regulators, primary bank and thrift supervisors, and the umbrella supervisor will respect each other's responsibilities and will acknowledge and make use of each other's expertise.
Moreover, umbrella supervision requires strengthened relationships between primary bank and thrift supervisors and the umbrella supervisor and enhanced relationships with functional regulators and foreign nonbank supervisors. Finally, the Federal Reserve needs to place greater reliance on recent initiatives that promote a more risk-focused supervision process and market discipline.
The activities of the Federal Reserve as the umbrella supervisor fall into three broad categories: information gathering and assessment, ongoing supervision, and promotion of sound practices and improved disclosure. The Federal Reserve will interact closely with, and obtain information from, the primary bank and thrift supervisors and the functional regulators as well as from FHC senior management and boards of directors.
Examiners may conduct targeted transaction testing, to verify that risk-management systems are adequately and appropriately measuring and managing areas of risk for the organization and to confirm that laws and regulations within the jurisdiction of the Federal Reserve are being followed. There will also be periodic discussions with FHC senior management and boards of directors and with personnel responsible for centralized management and control functions such as heads of business lines, risk management, internal audit and internal control.
2. Mutual coordination of different supervisors
The Federal Reserve Board, FDIC, Department of Justice, SEC , CFTC , OTS, NCUA and FT , even FBI regulate and supervise commercial banks from their respective responsibilities, among which The Fed and FDIC are the main supervisory institutions.
All the national banks are members of Federal Reserve System, whereas state banks have the options to be the member or not and those who choose to join are called state member banks. The Fed is responsible directly and basically for all the member banks. Meanwhile, the Fed acts as the supervisor for bank holding companies and financial holding companies, granting business charters. Up to now, more than 1,500 financial holding banks have been set up in US. Because of the vastness of objects to be supervised, in actual practice, the Fed focuses its supervision mainly on big commercial banks and institutions, for instance, Citigroup has routine meeting with the Federal Reserve examiners every other week. However, the supervision on small banks is mostly from the perspective of liquidation and capital circulation and on-site test of their detailed activities.
The vast number of bank failures in the Great Depression spurred the Congress into creating into an institution which would guarantee banks. The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor. In order to absorb deposits, the banks in U.S. should firstly join the federal deposit insurance, therefore all the commercial banks are insurant of the FDIC. For the safety and soundness of the whole financial system, except insuring the deposits, FDIC is also responsible for financial surveillance and early warning, as well implementing strict and direct supervision on insured banks. Insured banks should report forms to FDIC periodically, receive examinations unconditionally.
There were two separate FDIC funds; one was the Bank Insurance Fund (BIF), and the other was the Savings Association Insurance Fund (SAIF). The latter was established after the savings & loans crisis of the 1980s. The existence of two separate funds for the same purpose led to banks attempting to shift from one fund to another, depending on the benefits each could provide.
In order to receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in 5 groups according to their risk-based capital ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, critically undercapitalized. When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent.
The Federal Reserve need to coordinate its activities with those of other regulators and to work with them to understand the risk profiles of the individual regulated entities and their relation and importance to the FHC's overall risk profile. The Federal Reserve shall review and discuss the examination findings of primary bank, thrift, and functional regulators, together with other relevant information, to arrive at a consolidated assessment of an FHC's financial condition and risk profile, the effectiveness of its risk management, and the implications of its activities for affiliated depository institutions. The Federal Reserve will also make available to other supervisors pertinent information regarding the financial condition, risk-management policies, and operations of an FHC that will have a direct effect on individual regulated subsidiaries within the organization. In addition, the Federal Reserve will participate in the sharing of information among international supervisors to ensure the consolidated supervision of an FHC's global activities and to minimize material gaps in supervision.
General limitations similar to those on the Federal Reserve's ability to obtain reports also apply to defining when the Federal Reserve may or may not directly examine a functionally regulated subsidiary. Federal Reserve will first seek to obtain the needed information from the appropriate functional regulator. If the information is not provided or an examination is still determined to be necessary, Federal Reserve will coordinate such actions with the functional regulator. It may also be appropriate, when working with a functional regulator or with another associated supervisor, to participate in joint examinations so as to minimize regulatory burden. Information flows and effective communication will be critical for all these relationships.
OCC mission is to ensure a safe and sound and competitive national banking system, OCC charters and is the primary federal regulator of national banks. It is responsible for examining the financial records of banks and for maintaining the integrity of FDIC deposit insurance. It is not unique in that other agencies, including OTS, FDIC, NCUA and Federal Reserve Bank, perform similar types of regulatory functions in the banking industry.
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