This document discusses bank legislation and regulation in the United States. It covers the goals of bank regulation including protecting banks, depositors, and communities from failure. Major laws that established the federal deposit insurance system and addressed the savings and loan crisis are summarized. The document also outlines consumer protection laws and the federal agencies that enforce compliance through examinations. Banking regulations cover areas like monetary policy, safety and soundness, international banking, and consumer protection.

1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
CHAPTER 8: BANK LEGISLATION AND REGULATION
Group 5
Pheng Chandara
Seam Kimhay
Keo Sombo
Paññāsāstra University of Cambodia

2. Group 5 15-2
Contents
I. Learning Objectives
II. Introduction
III. Regulatory Goals and the Banking System Structure
IV. Banking Legislation
V. Consumer Protection Legislation
VI. Compliance Examinations
VII. Banking Regulations
VIII. Summary
IX. References

3. Group 5 15-3
I. Learning Objectives
• Explain the major goals of bank regulation
• Differentiate between unit, dual, and correspondent banking systems
• Discuss examples of federal banking legislation enacted from the late
twentieth century to the present
• Identify the major consumer protection regulations
• Cite procedures examiners use to ensure compliance with the
community reinvestment act
• Define the key terms listed in this chapter

4. Group 5 15-4
II. Introduction
• In the United States banking system, federal government
agencies and state governments share regulation power.
• This chapter examines the dual bank regulatory structure and the
major principles, laws, and regulations that set the boundaries for
the banking business.
• The public policy goals of bank regulation are examined first,
then the significant banking laws enacted in the late twentieth
and early twenty-first centuries are introduced.

5. Group 5 15-5
III. Regulatory Goals and the
Banking System Structure
• Bank regulation is the
implementation of banking
laws through government-
issued rules, guidance, and
directives.
• Bank supervision involves
monitoring and examining
the condition of banks and
their compliance with laws
and regulations.

6. Group 5 15-6
III. Regulatory Goals and the
Banking System Structure
• The U.S. government’s major goal in regulating
banks is the protection of banks, their depositors, and
the communities in which they operated from bank
failures.
• The regulatory structure includes:
– dual banking,
– unit banking,
– and correspondent banking.

7. Group 5 15-7
1. Dual Banking
• Dual banking refers to the system
under which bank are chartered.
• A bank may choose to be chartered
either by the federal government
through the Office of the
Comptroller of the Currency (OCC)
or by the state in which it is
domiciled through the state banking
department.
• A bank operates under a number of
regulatory authorities depending on
its charter.

8. Group 5 15-8
2. Unit Banking
• Before to the 1980s the U.S. banking industry was characterized by
small single-office banks-a system known as Unit Banking.
• Unit banking refers to a single bank which renders services and
operates without any branches anywhere. This kind of banking
system is common in the USA.
• Unit banking operate one full banking services.
• Most states permitted branching only within a limited geographic
area surrounding a bank’s headquarter office or completely
prohibited branching within the state.

9. Group 5 15-9
3. Correspondent Banking
• A correspondent bank holds the account balance of other banks and provides or sell
services to these banks, know as respondent banks.
• Today correspondent banks typically provide respondent banks with a variety of
services including:
– Check collection
– Loan participation
– Dividend reinvestment program maintenance for respondent bank’s stockholders
– Investment advice and etc…
• Respondent banks pay for correspondent services either directly through a fee, or
indirectly by maintaining a required minimum account balance with the correspondent
bank.

10. Group 5 15-10
IV. Banking Legislation
• Banking Legislation is the law and regulation that governs bank operations and business
activities.
• To achieve all these laws and regulations, U.S. government have focused on preventive
measures as below:
 Control the terms and conditions under which banks obtain and use assets and liabilities
 Insure bank depositors against loss
 Set capital requirements
 Establish liquidity, solvency, and profitability guidelines
 Define a consumer code of rights
 Prohibit unfair or discriminatory practices
 Protect the nation and the economy from criminal and terrorist activity

11. Group 5 15-11
IV. Banking Legislation (Con’t)
• Federal legislation’s congress enacted laws to:
 Promote more competition between banks and other financial institutions
 Allow commercial and savings banks, savings associations, and credit unions to
offer new products
 Deal with the S&L industry crisis of the 1980s
 Protect the FDIC insurance fund
 Allow banks to establish branches across the country
 Enable banks, insurance companies, and securities firms to affiliate into single
FHCs
 Enlist the banking industry to help the U.S. government deter criminal activity and
protect the nation and the economy

12. Group 5 15-12
1. Monetary Control Act
• Monetary Control Act is the law and regulation that
enacted in 1980 in order to control, mange, and issue
related with money.
• Act:
 reduced the asset and liability powers for banks and
thrifts.
 reinforced many of the regulations that had been put in
place during the Great Depression.
 set uniform and universal reserve requirements for all
depositories and suspended usury ceilings.

13. Group 5 15-13
2. Garn-St Germain Act
• Garn-St Germain Act is established in 1982 and it
substantially expended thrifts’ lending powers.
• Act:
 Authorized banks and thrifts to offer money market deposit
accounts (MMDAs) to allow them to better compete with
existing money market funds.
 Provided support to the struggling S&L industry by
permitting banks to purchase failing thrifts across state
lines and receive financial assistance with their purchases.

14. Group 5 15-14
3. Competitive Equality
Banking Act
• Competitive Equality Banking Act is passed in 1987 on the activities
and growth of nonbank banks.
• Act:
 Closed the consumer bank, or nonbank, loophole in the Bank Holding
Company Act, which inadvertently allowed nonfinancial entities to
own and operate banks.
 The Expedited Funds Availability Act, a section of the Competitive
Equality Banking Act, established maximum check-hold periods for
depository institutions and required the Fed to change check-collection
procedures to speed the return of dishonored checks to a depositor’s
bank.

15. Group 5 15-15
4. Financial Institutions Reform,
Recovery, and Enforcement Act
• Financial Institutions Reform, Recovery, and Enforcement Act, passed
in 1989, was designed primarily to address problems that had emerged
during the 1980s in the S&L industry and the deposit insurance system.
• Act:
 Provided $50 billion in taxpayer funds to close failed S&Ls and
established the Resolution Trust Corporation (RTC) under the
management of the FDIC to administer the funds.
 Tightened restrictions on S&L activities by reversing some of the
legislation of 1980 and 1982 that broadened thrift lending powers, and
raised S&L capital requirements to increase the industry’s safety and
soundness.

16. Group 5 15-16
5. Federal Deposit Insurance
Corporation
• Federal Deposit Insurance Corporation was created in 1933
by the Federal Deposit Insurance Act and this legislation was
enacted in response to the failure of more than 9,100 banks
during the early years of the Great Depression between 1930 and
1933.
• Act:
 Protect depositors
 Prevent runs-mass customer withdrawals driven by fear of loss
against banks
 Insure deposits at saving associations

17. Group 5 15-17
6. Federal Deposit Insurance
Corporation Improvement Act
• Federal Deposit Insurance Corporation Improvement Act
was created in 1991 and greatly increased the powers and
authority of the FDIC. Major provisions recapitalized the Bank
Insurance Fund and allowed the FDIC to strengthen the fund by
borrowing from the Treasury.

18. Group 5 15-18
7. Deposit Insurance Coverage
• During the 1980s many savings and loan associations
relied on brokered certificates of deposit as a means of
acquiring large amounts of funds from outside their
markets.
• Many S&Ls used these funds for high-risk loans and
investments.
• To end this practice, FDICIA eliminated insurance
coverage on brokered deposits for all banks and S&Ls
except those with the highest capital ratings.

19. Group 5 15-19
8. Deposit Insurance Premiums
• Deposit Insurance Premium was based on a bank’s deposit balance
size.
• FDICIA changed the way the FDIC assesses banks for deposit
insurance by linking premiums to risk.
• Under risk-based premium system, each bank and thrift insurance rate
is dependent on the amount of capital it holds as a proxy for risk and
the FDIC’s assessment of its financial condition, known as a
supervisory rating.
• Beginning in 1993, banks paid a risked-based premium between 23 to
31 cents per $100 of insured deposits.
• The rate later was lowered to 0 to 27 cents.

20. Group 5 15-20
9. Federal Deposit Insurance
Reform Act
• FDIRA changes include:
 Increasing the deposit insurance limit from $100,000 to $250,000 per account holder for
many retirement accounts beginning April 2006 and establishing an inflation adjustment
that could result in higher insured limits as of 2011
 Maintaining the limit at $100,000 for nonretirement accounts, but establishing an inflation
adjustment beginning April 1, 2010 like the one established for retirement accounts
 Merging the BIF and SAIF into the Deposit Insurance Fund (DIF)
 Eliminating the 1.25% designated reserve ratio and allowing the FDIC to set the DRR
between 1.15% and 1.5%
 Giving banks rebates for premiums paid to BIF or SAIF in the 1990s and allowing these
funds to be used to offset future premiums

21. Group 5 15-21
10. FDIC Policies and Actions
• The FDIC can respond to a failed bank in one of five ways, including:
 Paying out insurance to the bank’s depositors in an outright payoff
 Allowing a sound bank to buy selected assets and assume the liabilities
of a failed bank
 Selling all of failed bank’s assets and insured liabilities to a sound
bank
 Taking over a failed bank and operating it in an attempt to restore it to
profitability
 Declaring insurance protection for all of the failed bank’s deposits,
regardless of amount, because the bank is “too big to fail”

22. Group 5 15-22
11. Interstate Banking and
Branching Efficiency Act
• The Interstate Banking and Branching Efficiency Act is the law of
relationship between banking and branching of a state to another banking and
branching of a state.
• The Interstate Banking and Branching Efficiency Act was established in 1994.
• In 1997, the Interstate Banking and Branching Efficiency Act authorized
companies that own controlling interest in one or more banks to buy banks in
any state and allowed these bank holding companies to consolidate their
interstate banks into branch networks.
• Individual banks also could establish interstate branches by merging with
other banks across state lines.

23. Group 5 15-23
12. Gramm-Leach-Bliley Act
• Gramm-Leach-Lliley Act was passed in 1999.
• It authorized banks and other financial institutions to
establish financial holding companies that can own both
banks and companies that provide insurance, securities,
and specialized financial service.

24. Group 5 15-24
13. Bank Secrecy Act and USA
PATRIOT Act
• In 1970, Bank Secrecy Act and USA PATRIOT Act
(BSA) was created.
• It requires banks and other financial institutions to
assist government agencies in efforts to curb federal
crime by imposing recordkeeping and reporting
requirements.

25. Group 5 15-25
V. Consumer Protection Legislation
• Consumer Protection was primarily a stat responsibility.
Most states, for example, prohibited to set higher interest
rates on consumer loans.
• Most financial transactions involving consumers are
covered by consumer protection laws. These include
transactions involving credit, charge, and debit cards.
• Lenders are required to provide consumer borrowers with
specific written information on the cost of credit,
especially the two most important measures of the cost-
the finance charge.

26. Group 5 15-26
V. Consumer Protection Legislation
• Fair Housing Act (1968)
Prohibits discrimination in the extension of housing credit on the basis of
race, color, religion, national origin, sex, handicap, or family status.
• Community Reinvestment Act (1977)
Encourages financial institutions to help meet the credit needs of their entire
communities, particularly low- and moderate-income neighborhoods.
• Federal Trade Commission Improvement Act (1980)
Authorizes the Feds to identify unfair or deceptive acts or practices by banks
and to issue regulation to prohibit them.

27. Group 5 15-27
VI. Compliance Examinations
• a review of consumer complaints about the bank’s operations and a review of
the operational areas generating the complaints
• an onsite review of the bank’s lending program, credit applications, and
disclosure statements
• a review of a statistical sample of the bank’s installment loan files to ensure
the bank is calculating APRs correctly and properly disclosing credit costs
• a review of a sample of the mortgage files and accepted and rejected mortgage
applications to determine whether a pattern of discrimination or deviation
from established lending policy exists
• a discuss with bank management about all matters of concern noted by the
examiner
• a written report of the examination sent to the bank with a request that
management respond to the report and comment on how violations will be
corrected

28. Group 5 15-28
VII. Banking Regulations
• There are five categories:
monetary policy
bank safety and soundness
international banking and the activities of bank
holding companies
Fed membership and Federal Reserve bank
procedures
consumer protection

29. Group 5 15-29
1. Monetary Policy Regulations
• A Extensions of credit by Federal Reserve banks
• D Reserve requirements for depository institutions
• T Credit by brokers and dealers
• U Credit by banks and persons other than brokers
or dealers for the purpose of purchasing or
carrying margin stocks
• X Borrowers of securities credit

30. Group 5 15-30
2. Bank Safety and Soundness
• F Limitations on interbank liabilities
• L Management of official interlocks
• O Loans to executive officers, directors, and principal
shareholders of member banks
• Q Prohibition against payment of interest on demand
deposits
• R Exceptions for banks from the definition of broker in
the Securities Exchange Act
• W Transactions between member banks and their affiliates

31. Group 5 15-31
3. International Banking and
Bank Holding Companies
• K International banking operations
• Y Banking holding companies and change
in bank control

32. Group 5 15-32
4. Federal Reserve Membership
and Reserve Bank Procedures
• EE Netting eligibility for financial institutions
• H Membership of state banking institutions in the Federal
Reserve System
• I Issue and Cancellation of Federal Reserve Bank capital stock
• J Collection of checks and other items by the Federal Reserve
banks and funds transfers through Fedwire
• N Relations with foreign banks and bankers
• S Reimbursement to financial institution for providing financial
records; recordkeeping requirements for certain financial
records

33. Group 5 15-33
5. Consumer Protection
• AA Unfair or deception acts or practices
• B Equal credit opportunity
• BB Community reinvestment
• C Home mortgage disclosure
• CC Availability of funds and collection of checks
• DD Truth in savings
• E Electronic fund transfers
• FF Obtaining and using medical information in connection with credit
• G Disclosure and reporting of Community Reinvestment Act related agreements
• GG Prohibition on funding of unlawful Internet gambling (proposed)
• M Consumer Leasing
• P Privacy of consumer financial information
• V Fair credit reporting
• Z Truth in lending

34. Group 5 15-34
VIII. Summary
• The U.S. bank legislation and regulation was created
in order to give power to the federal and state
governments control the terms and conditions under
which banks obtain and use assets and liabilities;
insure bank depositors against loss; set capital
requirements; establish liquidity, solvency, and
profitability guidelines; prohibit unfair or
discriminatory practices; and protect the nation and
the economy from crimial and terrorist activity.

35. Group 5 15-35
IX. References
• Jon A. Hooks, Ph.D., “Money & Banking”, 6th Edition.
• Source: www.swcollege.com/bef/burton/restricted/finsys3e/tb15.doc
• Source: http://www.law.cornell.edu/cfr/text/12/225.145

36. Thank for your attention!