The recent global economic meltdown dramatically impacted the worldwide banking system and many U.S.-based banks have struggled during these difficult times.
“We’ve seen an unprecedented number of banks need to raise capital, while many other banks have sought merger partners to survive and others were taken over by their regulators and sold to healthy banks,” says Sue Zazon, president and CEO of FirstMerit Bank’s Columbus region.
Zazon also points out that there are many banks across our country that are very healthy and not part of the widely publicized ‘banking crisis.’
Smart Business spoke with Zazon about the roles of the various U.S. regulatory agencies, while also gaining some insight into proposed changes to the regulatory system.
What regulatory agencies are responsible for regulating banks?
Among its many duties, the Federal Reserve supervises state-chartered, Federal Reserve-member banks. If your bank has the word ‘state’ in it, that’s a state-chartered bank, and, if it were a member of the Fed, the Federal Reserve would regulate it. There are about 900 Fed-regulated banks in the country out of approximately 6,700 state-chartered banks. The remaining 5,800 are regulated by the Federal Deposit Insurance Corporation (FDIC). I’ll get to the FDIC in a moment.
The Fed also regulates bank holding companies which own the stock of subsidiaries, including banks. Bank holding companies are of all sizes; they can hold or own just one bank, hold multiple banks in more than one state and can own insurance companies and have foreign subsidiaries. There are approximately 5,000 bank holding companies in the U.S.
The Federal Reserve also supervises the foreign activities of member banks as well as the U.S. activities of foreign banks.
In addition, the Federal Reserve also ensures compliance with consumer protection laws such as Truth in Lending, Equal Credit Opportunity and Home Mortgage Disclosure.
What about national banks, thrifts and credit unions? Are there regulatory agencies for these types of institutions?
The Office of the Comptroller of the Currency (OCC) supervises the nationally chartered banks. Any bank with the word ‘National’ or the initials N.A. (National Association) in its name is a national bank and is therefore regulated by the OCC.
We’ve heard much about the FDIC over the past year. The FDIC insures deposits at FDIC-insured banks. The FDIC also regulates the non-Federal Reserve-member, state-charted banks that the Fed does not regulate.
The Office of Thrift Supervision regulates federal savings banks and federal savings and loans and their respective holding companies.
Finally, the National Association of Credit Unions regulates federal credit unions and provides deposit insurance through the NCU Insurance Fund for most state and federally chartered credit unions.
What do these agencies focus on when examining a financial institution?
In the very broadest sense, they are looking for the practices, policies and procedures that promote the safety and soundness of the organization. Each bank, consequently, is a component of the safety and soundness of the entire banking system.
In the case of business lending, regulators look to the soundness of and adherence to the bank’s policies and procedures. The policies and procedures are designed to ensure that each bank makes good underwriting decisions including thorough risk assessments, has appropriate loan structures, relies upon verifiable and reliable sources of repayment and is supported with collateral and guarantees, as warranted.
What are Treasury Secretary Timothy Geithner’s proposed reforms?
The severe national economic challenges have forced the government to take extraordinary measures to revive our financial system and economy. In response, The Department of the Treasury has proposed changes to the regulation and supervision of the financial markets, nonbank financial institutions and the banking system to ensure more stability in the future.
The five broad areas of emphasis are designed to:
- Promote robust supervision and regulation of financial firms. This would include, among other things, an Oversight Council and new authority for the Fed.
- Establish comprehensive supervision of financial markets. The focus would include the securitization markets as well as over-the-counter derivatives, among other changes.
- Protect consumers and investors from financial abuse. The proposed changes would include a new Consumer Financial Protection Agency
- Provide the government with the tools it needs to manage financial crises. Proposed changes include a new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
- Raise international regulatory standards and improve international cooperation. Proposed measures include coordinating cross-border supervision of internationally active firms and enhancing international financial crisis management tools.
With all the different regulatory agencies discussed earlier, there is also some thought about the consolidation of agencies to provide more universally consistent oversight. Over time the financial markets have become very sophisticated and have created new products that bring new risks into the system. Regulatory agencies are all about regulating risk. Other proposed changes include the broadening of powers to regulate other, non-bank subsidiaries and authority to impose stiffer penalties on violations.