Federal Banking Agencies example essay topic

Banks and the Economy Banks and bank-like financial institutions operating within the United States and within most other countries must deal with extensive regulation in the form of rules and laws enforced by federal and state agencies. These regulations cover and monitor all areas of their operations, service offerings, credit quality and quantity, and the manner in which they grow and expand their facilities. This is primarily designed to protect the public interest, to encourage savings and investment by establishing an environment of economic soundness and stability, and to provide the public adequate financial information and credit without discrimination. In the United States, banks are regulated through a dual banking system; they are governed at both the state and federal level. This was designed to give the states significant control over banks, and also to ensure that banks would be treated fairly as they expanded their operations across state lines.

Regulatory agencies are responsible for gathering and evaluating the information necessary to assess the true financial condition of banks to protect the public against loss due to mismanagement, embezzlement or fraud through periodic examinations and / or audits. The main regulatory agencies at the federal level are the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation. The Federal Reserve Board is responsible for regulating the activities of state banks that are members of the Federal Reserve System, bank holding companies, the U.S. operations of foreign banks, and Edge Act and Agreement corporations. The Board approves or denies applications for merger, acquisitions and changes in control by state member banks and bank holding companies and approves or denies applications for foreign operation of member banks. In addition, Congress selected the Federal Reserve to write regulations implementing a number of consumer protection laws such as truth in lending and equal credit opportunity.

Significant regulatory constraints were also placed on the banks in consequence of the era of 'social responsibility' in the 1960's through the 1980's. In 1968, Congress passed the Consumer Credit Protection Act, known as 'Truth in Lending', requiring banks and lenders clearly spell out consumers rights and obligations in loan agreements. In 1974, Congress passed the Equal Credit Opportunity act which would ensure that bank services be provided to the public without discrimination due to a customer's age, sex, national origin or religion, or because they were welfare recipients. In 1977, the Community Reinvestment Act prohibited U.S. banks from discrimination against a customer based on their location of residence. The Competitive Equality in Banking Act (1987) and the Truth in Savings Act (1991), required banks to more fully disclose information on their deposit policies and true rates of return.

Economic Development initiatives assist communities in creating sustained approaches to economic viability. Regulations also require a bank be evaluated on its record of community development services. In 1999, Bank Boston was cited for corporate achievement in Employee and Community Relations and given the Ron Brown Award for Corporate Leadership, the only such presidential award. The social responsibility laws did much toward ensuring the rights of bank customers and the public, but each law passed had the effect of increasing bank-operating costs.

On November 27, 1991, Congress passed a banking bill called the Federal Deposit Insurance Corporation Improvement Act. In this law, federal banking agencies were required to develop new standards for the banks regarding loan documentation, internal management controls, management information systems, growth in real estate loans, interest-rate risk exposure and salaries and benefits paid to bank employees; as well as make sure banks are not violating the new guidelines. No one knows exactly what the costs imposed by various banking regulations are, in dollar amounts. The size of the burden is estimated to be somewhere between seven and seventeen billion dollars annually, not just to the banks directly, but to the governments which maintain the regulatory agencies. There are also the costs of salaries and related overheads. Compliance costs are the costs most relevant to a bank and its customers.

Care must be taken to ensure marketing materials include full display of FDIC insurance information, as well as careful wording to comply with advertising requirements for any loan or product. Advertising requirements of the Fair Housing Act must appear in all marketing, including appropriate statements and / or symbols. The hiring of compliance officers and staff, the extensive paperwork and re-working of paperwork on loans and deposits; all must be passed on to shareholders and customers. Non-banking financial providers are not subject to the same regulations and this gives them a significant advantage.

There has since been a movement toward deregulation to help banks remain competitive with their less-regulated competitors in the financial services industry. Ever-expanding fields of membership for credit unions, deposit accounts, credit cards and other banking-type services offered by brokerage houses blur the lines between banks and non-banks. The fact that banks must carry a multi-billion dollar annual burden means that the cost structure can raise prices to a point at which a bank can no longer remain competitive. The cost of regulation combined with the tax advantages the competition enjoys is an issue currently affecting the financial management environment. An issue addressed recently in the ABA Banking Journal, is that the banks are not only being forced to reinvent themselves in the face of with new technology and threats from leaner, meaner competition, but that they must do so within the framework of a regulated institution..