United States Banking Law
The Dual Banking System
The United States operates a unique dual banking system in which banks may be chartered at either the federal or the state level. National banks receive their charter from the Office of the Comptroller of the Currency (OCC), an independent bureau within the Department of the Treasury established by the National Currency Act of 1863. State banks are chartered by the banking department of the state in which they operate. This dual structure allows banks to choose their primary regulator: national banks are supervised by the OCC, while state-chartered banks are supervised by state banking authorities and, if they are members of the Federal Reserve System, also by the Federal Reserve Board.
The Federal Reserve System
The Federal Reserve System (the Fed), established by the Federal Reserve Act of 1913, serves as the central bank of the United States. Its statutory mandate includes maximum employment, stable prices, and moderate long-term interest rates. The Fed conducts monetary policy through three principal tools. Open market operations involve the purchase and sale of government securities on the open market to influence the federal funds rate. The discount rate is the interest rate charged to depository institutions that borrow from the Fed’s discount window. Reserve requirements set the fraction of deposits that banks must hold as reserves, though the Federal Reserve reduced the reserve requirement ratios to zero effective March 2020.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC), created by the Banking Act of 1933 in response to the Great Depression bank runs, insures deposits in member banks up to $250,000 per depositor per insured bank for each account ownership category. The FDIC is funded by premiums paid by insured depository institutions and has a back-up line of credit from the Treasury. The FDIC also serves as the receiver for failed banks and is responsible for resolving failing institutions in an orderly manner.
The Dodd-Frank Act of 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 represents the most comprehensive financial regulatory reform since the New Deal. Enacted in response to the 2008 global financial crisis, Dodd-Frank established the Consumer Financial Protection Bureau (CFPB), an independent agency housed within the Federal Reserve System with authority to regulate consumer financial products and services, including mortgages, credit cards, and student loans. The CFPB has rulemaking, enforcement, and supervisory powers over large banks and non-bank financial companies.
The Volcker Rule, codified at Section 619 of the Dodd-Frank Act and named after former Federal Reserve Chairman Paul Volcker, restricts insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining an ownership interest in hedge funds or private equity funds, subject to certain exemptions for market-making, underwriting, and hedging activities.
The Bank Holding Company Act of 1956
The Bank Holding Company Act (BHCA) of 1956 regulates companies that control one or more banks. The BHCA requires any company that seeks to acquire control of a bank to register as a bank holding company and obtain prior approval from the Federal Reserve. The BHCA generally prohibits bank holding companies from engaging in non-banking activities unless the Federal Reserve determines that the activity is closely related to banking or managing or controlling banks. The Gramm-Leach-Bliley Act of 1999 modified the BHCA to permit financial holding companies to engage in a broader range of financial activities subject to certain conditions.
The Community Reinvestment Act
The Community Reinvestment Act (CRA) of 1977 encourages depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighbourhoods. The CRA requires federal banking regulators to assess each institution’s record of meeting these needs and to consider that record when evaluating applications for mergers, acquisitions, and branch openings. The CRA has been the subject of significant debate, with periodic revisions aimed at modernising the regulatory framework.
Anti-Money Laundering and the Bank Secrecy Act
The Bank Secrecy Act (BSA) of 1970, also known as the Currency and Foreign Transactions Reporting Act, establishes the legal framework for anti-money laundering (AML) compliance in the United States. The BSA requires financial institutions to maintain records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and report suspicious activity that may signal money laundering, tax evasion, or other criminal activity. The USA PATRIOT Act of 2001 significantly expanded the BSA requirements, mandating customer identification programmes and enhanced due diligence for foreign correspondent accounts and private banking accounts for non-US persons. The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury, administers the BSA and is responsible for collecting and analysing financial intelligence.