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This article or section deals primarily with the United States and does not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page. |
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Please help improve this article or section by expanding it. Further information might be found on the talk page or at requests for expansion. (April 2007) |
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines.
The objectives of bank regulation, and the emphasis, varies between jurisdiction. The most common objectives are:
Banking regulations can vary widely across nations and jurisdictions. This section of the article describes general principles of bank regulation throughout the world.
Requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is minimum capital ratios.
Banks are required to be issued with a bank licence by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank\'s licence.
The regulator requires banks to publically disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank\'s financial health.
The capital requirement sets a framework on how banks must handle their capital in relation to their assets. Internationally, the Bank for International Settlements\' Basel Committee on Banking Supervision influences each country\'s capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II. This updated framework is intended to be more risk sensitive than the original one, but is also a lot more complex.
The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there are no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a contemporary minimum reserve ratio is Hong Kong, where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets.
Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency.
Corporate Governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. Requirements may include:
Banks may be required to:
Banks may be required to obtain and maintain a current credit rating from an approved credit rating agency, and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating.
Banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. This may be expressed as a proportion of the bank\'s assets or equity, and different limits may apply depending on the security held and/or the credit rating of the counterparty.
Banks may be restricted from incurring exposures to related parties such as the bank\'s parent company or directors. Typically the restrictions may include:
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Please help improve this article or section by expanding it. Further information might be found on the talk page or at requests for expansion. (April 2007) |
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Bank regulation in the United States is highly fragmented compared to other G10 countries where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on a banking organization\'s charter-type and organizational structure, it may be subject to numerous federal and state banking regulators. Unlike Japan and the United Kingdom, where regulatory authority over the banking, securities and insurance industries is combined into one single financial services agency, the U.S. maintains separate securities, commodities, and insurance regulatory agencies (which are separate from the bank regulatory agencies) at the federal and state level as well. [1][2]
The U.S also has one of the most highly regulated banking environments in the world; however, many of the regulations are not safety and soundness related, but are instead focused on privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and promoting lending to lower-income segments. Even individual cities enact their own financial regulation laws (for example, for usury lending).
A bank\'s primary federal regulator could be the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. And within the Federal Reserve Board, there are 12 districts centered around 12 regional Federal Reserve Banks, each of which carries out the Federal Reserve Board\'s bank regulatory responsibilities in its respective district. Credit Unions in the United States are subject to certain similar bank-like regulations and are supervised by the National Credit Union Administration.
State-chartered banks are also subject to the regulation and supervision of the state regulatory agency of the state in which they were chartered. State regulation of state-chartered banks applies in addition to federal regulation. For example, a California state bank that is not a member of the Federal Reserve System would be regulated by both the California Department of Financial Institutions and the FDIC. Likewise, a Nevada state bank that is a member of the Federal Reserve System would be jointly regulated by the Nevada Division of Financial Institutions and the Federal Reserve.
This portion of the article focuses on federal banking laws and regulations. State banking laws also apply to state-chartered banks and certain nonbank affiliates of federally-chartered banks.
The Bank Secrecy Act (or BSA) requires financial institutions to assist government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
The Bank Secrecy Act (or FCRA) regulates the collection, sharing, and use of customer credit information. The act allows consumers to obtain a copy of their credit report records from Credit bureaus that hold information on them, provides for consumers to dispute negative information held, and sets time limits after which negative information is suppressed. It requires that consumers be informed when negative information is added to their credit records, and when adverse action is taken based on a credit report.
Lending limit regulations restrict the total amount of loans and credits that a bank may extend to a single borrower. This restriction is usually stated as a percentage of the bank\'s capital or assets. For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank\'s total capital and surplus. [3] Some state banking regulations also contain similar lending limits applicable to state-chartered banks. [4] Both federal and state laws generally allow for a higher lending limit, up to 25% of capital and surplus for national banks, when the portion of the credit that exceed the initial lending limit is fully secured.
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This regulation establishes rules regarding extensions of credit made by a Federal Reserve Bank to banks and other institutions (i.e., "discount window lending"). The Federal Reserve Board made significant amendments to Regulation A in 2003 including amendments to price certain discount window lending at above-market rates and to restrict borrowing to banks in generally sound condition. In amending the regulation, the Federal Reserve Board noted that many banks had expressed their unwillingness to use discount window borrowing because their use of such a funding source was interpreted as sign of the bank\'s financial weakness or distress. The Federal Reserve Board indicated its hope that the 2003 amendments would make discount window lending a more attractive funding option to banks. [5][6][7]
The Equal Credit Opportunity Act (ECOA) states that creditors which regularly extend credit to customers, which includes banks, retailers, finance companies, and bankcard companies, should evaluate candidates on credit worthiness alone, rather than other factors- race, color, religion, national origin or sex. Discrimination on marital status, welfare recipience, and age is generally prohibited with exceptions, as is discrimination based on a consumer\'s good faith exercise of their credit protection rights.
The HMDA requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display an HMDA poster.
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Regulation O establishes varying quantitative and qualitative limits and reporting requirements on extensions of credit made by a bank to its "insiders" or the insiders of the bank\'s affiliates. The term "insiders" includes executive officers, directors, principal shareholders and the related interests of such parties. [8][9]
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Regulation Q prohibits banks from paying interest on demand deposit accounts. A "demand deposit" account includes many, but not all checking accounts. Banks, however, may pay interest on "negotiable on withdrawal"-type checking accounts ("NOW accounts") offered to consumers and certain entities (but not commercial enterprises other than sole-proprietors). [10]
Regulation W establishes quantitative and qualitative requirements for loans, purchases of assets, and other transactions between banks and their affiliates. The term "affiliate" is broadly defined and includes parent companies, companies that share a parent company with the bank, companies that are under other types of common control with the bank (e.g. by a trust), companies with interlocking directors (a majority of directors, trustees, etc. are the same as a majority of the bank\'s), subsidiaries, and certain other types of companies.
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The purpose of this part is to enable consumers to make informed decisions about accounts at depository institutions. This part requires depository institutions to provide disclosures so that consumers can make meaningful comparisons among depository institutions. This regulation is not applicable to credit unions.
By statute and judicial interpretation of statutes and the United States Constitution, federal banking statutes and the regulations and other guidance issued by federal banking regulatory agencies often preempt state laws that would regulate certain activities of nationally chartered banking institutions and their subsidiaries. Specific exceptions to the general rule of federal preemption exist, e.g. some contract law, escheat law, and insurance law.
One example of OTS Preemption begins with Section 550.136(a) of the OTS Regulations, providing that “. . . OTS occupies the field of the regulation of the fiduciary activities of Federal savings associations . . .. Accordingly, Federal savings associations may exercise fiduciary powers as authorized under Federal law, including this part, without regard to State laws that purport to regulate or otherwise affect their fiduciary activities, except to the extent provided in 12 U.S.C. § 1464(n) . . . or in paragraph (c) of this section.” 12 U.S.C. § 1464(n), authorizes fiduciary activities for federal savings associations, and specifies certain state law requirements that are applicable to federal savings associations. Section 550.136(c) lists six types of state laws that in certain specified circumstances are not preempted with respect to Federal savings associations
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