Commitment to Excellence

សាកលវទិ្យាលយ័បញ្ញា សាស្រ្តកម្ពជុា

Paññásástra University of Cambodia

Report on: “Bank Legislation and Regulation”

Course: Money, Banking, and Financial Market

Professor: Ou Phichhang

Submitted By

Group 5

Mr. PHENG Chandara Mr. KEO Sombo

Mr. SEAM Kimhay

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Contents

I). INTRODUCTION --------------------------------------------------------------------------------------- 3

II). REGULATORY GOALS AND THE BANKING SYSTEM STRUCTURE ---------------- 3

1) DUAL BANKING ------------------------------------------------------------------------------------------- 4

2) UNIT BANKING -------------------------------------------------------------------------------------------- 4

3) CORRESPONDENT BANKING ---------------------------------------------------------------------------- 4

III). BANKING LEGISLATION -------------------------------------------------------------------------- 5

1) MONETARY CONTROL ACT ----------------------------------------------------------------------------- 6

2) GARN-ST GERMAIN ACT -------------------------------------------------------------------------------- 6

3) COMPETITIVE EQUALITY BANKING ACT ------------------------------------------------------------- 6

4) FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT ------------------- 6

5) FEDERAL DEPOSIT INSURANCE CORPORATION ----------------------------------------------------- 7

6) FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT --------------------------- 7

7) DEPOSIT INSURANCE COVERAGE ---------------------------------------------------------------------- 7

8) DEPOSIT INSURANCE PREMIUMS ---------------------------------------------------------------------- 7

9) FEDERAL DEPOSIT INSURANCE REFORM ACT ------------------------------------------------------ 8

10) FDIC POLICIES AND ACTIONS ---------------------------------------------------------------------- 8

11) INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT ------------------------------------ 8

12) GRAMM-LEACH-BLILEY ACT ----------------------------------------------------------------------- 8

13) BANK SECRECY ACT AND USA PATRIOT ACT ------------------------------------------------- 9

IV). CONSUMER PROTECTION LEGISLATION -------------------------------------------------- 9

1) Fair Housing Act (1968) -------------------------------------------------------------------------------- 9

2) Community Reinvestment Act (1977) --------------------------------------------------------------- 9

3) Federal Trade Commission Improvement Act (1980) ------------------------------------------- 9

V). COMPLIANCE EXAMINATIONS ----------------------------------------------------------------- 9

VI). BANKING REGULATIONS ----------------------------------------------------------------------- 10

1) Monetary Policy Regulations ----------------------------------------------------------------------- 10

2) Bank Safety and Soundness ------------------------------------------------------------------------- 10

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3) International Banking and Bank Holding Companies ---------------------------------------- 11

4) Federal Reserve Membership and Reserve Bank Procedures ------------------------------- 11

5) Consumer Protections -------------------------------------------------------------------------------- 11

VII). SUMMARY ------------------------------------------------------------------------------------------ 12

VIII). REFERANCES -------------------------------------------------------------------------------------- 13

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I). INTRODUCTION

This study focuses on regulatory power federal government agencies and state governments on

banking system in the United States. Also, studying about the dual bank regulatory structure and the

major principles, laws, and regulations that regular the limitations for the banking business. The

banking law plays an important key of the public policy goals of bank regulation in the late

twentieth and early twenty-first centuries. In addition, our study covers the major Federal Reserve

(the Fed) banking regulations and overview the role of bank examinations in effecting regulatory

compliance.

There are some main objectives such as:

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.

II). REGULATORY GOALS AND THE BANKING SYSTEM STRUCTURE

The health of the economy and the effectiveness of monetary policy depend on a sound

financial system. Through supervising and regulating financial institutions, the Federal Reserve is

better able to make policy decisions. Bank supervision involves monitoring and examining the

condition of banks and their compliance with laws and regulations. If a bank under the Federal

Reserve’s jurisdiction is found to have problems or be noncompliant, the Federal Reserve may use

its authority to request that the bank correct the problems. Bank regulation includes issuing specific

regulations and guidelines to govern the operations, activities and acquisitions of banking

organizations.

The U.S. government, the major goal in regulation banking purposes to protection of banks,

their depositors, and the communities in which they work from bank failure. The banks comply

with Federal regulation such as operate carefully, preserve enough access to liquidity, manage

assets and liabilities profitably to minimize risk of failure and monetary loss for depositors, and

prevent a loss of public confidence in the safety and soundness of the banking system. However,

there are a lot of diverse government agencies banking activities. This regulatory structure includes

dual banking, unit banking, and correspondent banking.

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1) DUAL BANKING

In the United States, banking system

occurs in which state banks and national banks

are chartered and supervised at different levels.

Under the dual banking system, national banks

are chartered and regulated under federal law

and standards, and supervised by a federal

agency through the Office of the Comptroller

of the Currency (OCC). State banks are

chartered and regulated under state laws and

standards, which includes supervision by a

state supervisor.

2) UNIT BANKING

Unit banking refers to a single bank which extracts services and operates without any branches

anywhere. This kind of banking system is common in the USA. Prior to the 1980s the U.S. banking

industry was considered by small single-office banks-a system known as unit banking. Most of

states has permitted branching only within a narrow geographic area surrounding a bank’s

headquarter office or completely prohibited branching within the state. Mostly, unit banking operate

one full banking services.

3) CORRESPONDENT BANKING

Correspondent banks are used by domestic banks in order to service transactions originating in

foreign countries, and act as a domestic bank's agent abroad. This is completed because the

domestic bank may have limited access to foreign financial markets, and cannot service its client

accounts without opening up a branch in another country. In additional, correspondent banks holds

the account balance of other banks and provides or sell services to these banks, known as

respondent banks. Today correspondent banks typically provide respondent banks with a variety of

services including: Check collection, Loan participation, and Dividend reinvestment program

maintenance for respondent bank’s stockholders, Investment advice and so on. Respondent banks

pay for correspondent services either directly through a fee, or indirectly by maintaining a required

minimum account balance with the correspondent bank.

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III). BANKING LEGISLATION

In USA, there are many laws and regulations to control and mange U.S. banking systems, so

banking legislation plays an important role in U.S.’s laws and regulations that governs bank

operations and business activities.

To achieve all these laws and regulations, U.S. government has 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

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

Over past 30 years, 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

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1) MONETARY CONTROL ACT

In 1980, U.S. banking systems enacted Monetary Control Act which the laws and regulations

that control, manage, and issue related with money.

Functions of Monetary Control Act usually:

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.

2) GARN-ST GERMAIN ACT

In 1982, U.S. banking systems enacted Garn-St Germain Act. It substantially expended thrifts’

lending powers.

The act authorized banks and thrifts to offer money market deposit accounts (MMDAs) to allow

them to better compete with existing money market funds and 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.

3) COMPETITIVE EQUALITY BANKING ACT

Passed in 1987, Competitive Equality Banking Act was created in U.S. banking systems on the

activities and growth of nonbank banks.

Its activities are 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.

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. It 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.

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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.

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.

It focuses on:

Protect depositors

Prevent runs-mass customer withdrawals driven by fear of loss against banks

Insure deposits at saving associations

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.

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.

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.

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9) FEDERAL DEPOSIT INSURANCE REFORM ACT

Federal Deposit Insurance Reform Ac (FDIRA) changed 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

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”

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.

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.

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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.

IV). 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.

1) 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.

2) Community Reinvestment Act (1977)

Encourages financial institutions to help meet the credit needs of their entire communities,

particularly low- and moderate-income neighborhoods.

3) 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.

V). COMPLIANCE EXAMINATIONS

Bank examiners who are specially trained to review consumer protection law compliance.

A compliance examination typically involves:

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

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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

VI). BANKING REGULATIONS

Banking regulations are the rules, guidelines, procedures, and requirements that implement

banking law.

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

1) Monetary Policy Regulations

Monetary policy regulations enable the Fed to manage the nation’s money and credit supply in

line with economic objectives.

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

2) Bank Safety and Soundness

A number of banking regulations are designed to ensure the financial well-being and security of

banks.

These regulations address:

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

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R Exceptions for banks from the definition of broker in the Securities Exchange

Act

W Transactions between member banks and their affiliates

3) International Banking and Bank Holding Companies

K International banking operations

Y Banking holding companies and change in bank control

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

5) Consumer Protections

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

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P Privacy of consumer financial information

V Fair credit reporting

Z Truth in lending

VII). 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 criminal and terrorist activity.

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VIII). REFERANCES

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