Over the past decades, the U.S. banking industry has been changed more than even in the preceding two centuries. The most notable trends are: the consolidation of the banking industry, innovations in the relationship with the customers of banks, and increased competition with other financial institutions, as to assets and liabilities. To analyze those trends, key legislation will be viewed in this regard.
Key acts: National banking act of 1863, Federal Reserve act of 1913, Banking act of 1933 to 1935, Federal deposit insurance act of 1950, Bank holding company act of 1956, Bank secrecy act of 1970, Home mortgage disclosure act of 1975, International banking act of 1978, Financial institutions regulatory and interest rate control act of 1978, Financial institutions reform, recovery and enforcement act of 1989, Economic growth and regulatory paperwork reduction act of 1996, Act of 2001 to 2012, Fair and accurate credit transactions act of 2003 to 2004, Bankruptcy abuse prevention and consumer protection act of 2005, Secure and fair enforcement for mortgage licensing act of 2008, Credit card accountability, responsibility and disclosure act of 2009 to 2010, The Dodd Frank wall street reform and consumer protection act of 2011 to 2012.
Major U.S. Banking Regulation 1863 to 2012
Banking is responsible for the phenomenon in many different fields, such as economics and finance, manufacturing, social movements, unemployment, etc. It is believed that the banking system is a cause of all the major economic ups and downs in the United States with the shortcomings in its legal basis as will be discussed in this paper.
For a better understanding of the history of the U.S. banking industry, all main legislation issued at different times from 1863 to 2012 will be considered. The paper is divided on two parts. The first one is an overview of acts issued a long time ago, and in the second part attention will be given to the newest ones.
National Banking Act of 1863
To better understand the aim of National Banking Act of 1863, the prehistory of that time should be shortly described. The United States Treasury system was created in 1846 to stabilize economy (Kaufman, 1974). Under James K. Polk and his Administration there is no national currency and Treasury System aimed to withdraw money from private banks to move them to the state’s banks. The Legal Tender Act of 1862 was the first attempt to create national currency, which stated the replacement of gold and silver coins with paper money (Barret, 1931). The congress authorized the printing of 150 million of new banknotes to pay for current military spending.
National Currency Act was the original name of the National Banking Act of 1863 (Andreano, 1961). This Act was an important consequence of the Civil War. In essence, the federal government prohibited issuing banknotes for banks of states and instead created a new nation-wide banking system that paved the way for a full return of the central bank, what was the Federal Reserve System (Griffin).
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Federal Reserve Act of 1913
The Federal Reserve Act of 1913 was issued by the Congress. The main goal of this Act was to create Federal Reserve System with a legal authority to issue national currency (Griffin). Federal Reserve System became the central banking system of the USA with 12 established regional banks (Anderson, 1949). Each private bank had its own board of directors, branches and boundaries of the region. All these banks were managed through the public representatives, who were members of Federal Reserve Board. Those seven persons were chosen by the President and the Senate. In addition, that Act allowed for banks to have branches abroad and be a fiscal agency for the government.
In relation to all chartered bank, Act of 1913 stated that they should become members of Federal Reserve System through purchasing a part of their stock, which was specified and not able to be transferred (Beckhard, 1931). In addition, they were required to transfer to federal bank part of their reserves. With becoming a member of the Federal Reserve System, chartered bank were able to use some services of it. For example, it can be discounted loans.
To Amend the National Banking Laws and the Federal Reserve Act
The National Banking Act of 1863 was amended the next year. The new Act of 1864 also made banks to be out of control of the government (Barret, 1931). Before this Act, there was a problem with political pressure and possibility of bribes by the legislatures of charters bank by state. This act stated free banking system, which solved this problem. In addition, this act transferred more than 1,050 state banks to national.
The Act of 1933 was amended several times. This Act was issued in times, when USA was suffered from the Great Depression; when the image of Federal Reserve System and banking system at all were under huge untrust from population (Anderson, 1949). Thus, the Act of 1933 was amended to establish the Federal Open Market Committee in 1930s. This Committee or FOMC was able to manage all open-market operations in which Federal banks were involved. In fact, for this purpose, Committee should have at least four meetings per year.
In total, the Federal Reserve Act was amended by around 200 laws of Congress. In 1970s, the Act was amended to oblige the Board of Directors and Committee to lead policy of employment, setting effective goals, be responsible to stability of prices on the market and manage long-term interest rates (Beckhard, 1931).
Banking Act of 1933 to 1935
The other important law, which reformed the banking system of United States of America, was The Banking Act of 1933. The main event promoted by it was a creation of the Federal Deposit Insurance Corporation (FDIC). This Act also known as Glass-Steagall Act by the names of its sponsors in Congress (Benstone, 1990). This act limits the operations conducted by the Bank in the field of investment and banking. Two politicians who sponsored the Act, Carter Glass and Henry D. Steagall, followed two main objectives: 1) the establishment deposit insurance, which will be managed by government; 2) to limit speculative trading in the commercial and investment field of banking activities. Those changes have been made under the administration of Roosevelt and have been criticized during a long period (Anderson, 1949).The 1935 Banking Act made the Federal Deposit Insurance Committee as a government’s constant agency and established constant deposit insurance supported at the $5,000 degree (Benstone, 1990). The Banking Act of 1935 made more powerful Federal Reserve Board of Governors in the field of credit management, set more stringent restrictions for banks that are involved in the activity of certain operations, and expanded the powers of FDIC as supervisory authority.
Federal Deposit Insurance Act of 1950
The Federal Deposit Insurance Act of 1950 created a complex system of insuring deposits, elimination of banks that are on the verge of falling or failed, verify and monitor the activities of banks that are not members of the Federal Reserve System (Knox, 1969). All these activities aimed to ensure publicity in the stability of national banking system. The Federal Deposit System was originally created by the Act of 1933, but in this Act FDIC confirmed its creation by denoting its broad powers (Anderson, 1949). This Act established the procedure for determining the contributions required to pay into the fund for insured banks and savings associations. Also, by this Act was established a fund of the deposit insurance, which has been fully developed and defined all aspects of a receipt, the gains and losses of the insured status of the organization, and establishing penalties for violations in the work of the insured and other banking and savings institutions. In addition, by this Act, FDIC received the power to determine allowed activities for insured state banks.
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Bank Holding Company Act of 1956
The Bank Holding Company Act of 1956 expands the opportunities for businesses and products, while at the same time allows the Federal Reserve Bank to control the situation and ensure the safety and stability of an existing banking system. This act established control of all procedures of mergers and acquisitions carried out in the corporate organization (Knox, 1969). Specifically, the federal bank consolidates all of the procedures, requirements, restrictions and permissions. With bringing activity of bank holding companies under the control of Federal Reserve System, it brought few consequences such as a limitation of activities of bank holding companies and, at the same time, it opened new opportunities for their business. The main point of the Act of 1956 is that regulation was provided by the Board of Governors, which also obligated to examine the activity of bank holding companies (Davidoff).
Bank Secrecy Act of 1970
The Bank Secrecy Act (BSA) of 1970 was adopted to prevent suspicious activity and help with its monitoring for law enforcement agencies. The most common problem was detecting and preventing of money laundering (Davidoff). The way this act was fighting with that problem was requirements for bank institutions to report about cash transactions by negotiable instrument on the amount of money more that $10,000 per one business day or one transaction on this amount during a number of days; to keep all records about purchases made with that kind of payment document and to inform the appropriate authorities of suspicious activity (Davidoff). Banks have the ability to detect suspicious activity such as tax evasion or money laundering, and a lot of other activities related to money transferring and transactions. Originally it was used to find persons involved in drug trafficking. The BSA is also known as the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970. This Act requires banks to keep records about transactions on the amount of money more than $10,000 not only made in the USA, but also made all around the globe (Davidoff). All records banks should keep for 5 years.
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Home Mortgage Disclosure Act of 1975
The Home Mortgage Disclosure Act was adopted in 1975 in order to record and report annually data about purchases and approvals for house purchase, reconstruction of the house or refinancing of one to four apartment units and multifamily housing. The adoption of this law was necessary because of the increased public concern about the credit shortage in housing, as well as to avoid credit discrimination based on factors such as race, gender, membership of a particular minority, etc. The other purpose of this law is informing the population about the possibility of housing credit for a particular area by certain bank. In addition, this Act was the planning of public investment to areas where they are needed from the private sector (Davidoff).
The main requirement for all companies under this Act was to have a Loan Application Register. Everytime a person goes to his/ her housing credit, company should keep a record in register with information about credit needs, type of housing, personal information about a person (such as gender, race, age etc.), location and other information. All those information in a Loan Application Register were referring every March to the Federal Financial Institutions Examination Council, and also company should give this information to public by the need (Davidoff). It allows to detect cases when there were offered worse terms of credit or refused in it at all by the reasons other than acceptable (for example, income or the collateral).
International Banking Act of 1978
International Banking Act of 1978 is not intended to preempt state law in connection with the establishment of branches of foreign banks and institutions (Davidoff). Rather, this is the Act that reflects the concept of the dual banking system: providing national alternative licensing for state licensing provisions without overriding individual state laws. This Act is intended to make foreing banks operate in the state’s law framework. It requires for foreign banks to be insured by the deposit in the Federal Reserve System (Davidoff). Foreign banks are allowed to operate as a federal bank with the approval of the Office of the Controller of the Currency and the Board of Governors of FRS. With approval of those agencies in one state, bank is allowed to open another branch in another state; even if was allowed to operate as federal bank, there are some restrictions for them; for instance, foreign bank that has a license from a state or federal is a subject of limitation on no less $100,000 for deposit unless this agency or branch is under the jurisdiction of the Section 3 of FDIA of 1950 (Davidoff).
Financial Institutions Regulatory and Interest Rate Control of 1978
Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRIRCA) is relevant and an important law in the banking industry (Davidoff). This Act has significant meaning because of adopted provisions. The Federal Financial Institutions Examination Council (FFIEC) was created by this act and it was stated that it should contain representatives from the four main federal agencies. Also, this act established reporting requirements and limits for insider transactions and stated the main law provisions for electronic money transfers.
In addition, this act included (Davidoff):
- the Change in Bank Control Act of 1978, which requires an individual or a group acting to provide the primary federal regulator 60 days before the date of acquisition of control, as defined, of the insurance depository institution;
- the Right to Financial Privacy Act of 1978, which stated that federal agencies should give a notice to person before depository institutions will transfer information for law enforcement agency or other government agency except cases when there are signs of an illegal terrorist activities.
Financial Institutions Reform, Recovery and Enforcement Act of 1989
Savings and loan crisis took a place in 1980s in the USA (Davidoff). To deal with appeared problems and disorders in the economy, The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was adopted. The Federal Home Loan Bank Board was abolished and replaced by The Federal Housing Finance Board (FHFB) as an autonomous institution, which meant that the transfer of control on 12 federal agencies was the biggest overall source of home mortgage and community loan in the USA (Davidoff).
The Federal Savings and Loan Insurance Corporation was replaced by The Savings Association Insurance Fund as a permanent insurance fund for savings institutions, which is controlled by the Federal Deposit Insurance Corporation. Two additional agencies were created such as The Resolution Trust Corporation and The Office of Thrift Supervision. First one was aimed to supervise failed savings companies by making available its insured deposits for their clients. The second one was created to regulate and supervise on savings companies.
In summary, the FIRREA drastically changed the federal regulation of savings institutions, deposit insurance and loan industry.
Economic Growth and Regulatory Paperwork Reduction Act of 1996
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 was adopted to reduce the regulatory oversight of financial institutions, and most importantly, ordered federal agencies to review at least once every ten years, the main points that have become obsolete in the accounts of depository institutions (Davidoff). Modernization of the federal agency regulatory policy designed to speed up the process of lending by credit agencies of consumers and business enterprises. Federal agencies such as the Federal Financial Institutions Examination Council and its member agencies were required to report to Congress on all the identified deficiencies in regulatory activities, which raised public commentary. For instance, the first revision of the regulatory policy was made by the FFIEC in 2007 where determined four areas for reduction were in regulatory paperwork, such as consumer disclosures, The Basel II capital framework, lending limits, and suspicious activity reports (Davidoff).
The U.S. banking industry 2001 to 2012
Act of 2001 to 2012
PATRIOT Act of 2001 was created in order to circumvent the banking secrecy in the fight against terrorism (Davidoff). Many of the new rules were created for American banks in order to keep records of bank business operations, and create a list of banks that forbidden to take transactions from them. This Act was issued by Congress and adopted by the Bush Administration. This Act was prolonged by the Obama Administration. In addition, all newly acquired customers for banks must specify whether they are the U.S. citizens. If the customer is a citizen of another country, he or she must indicate the kind of activities and the possibility of waiting a money transfer from another country (Davidoff).
Fair and Accurate Credit Transactions Act of 2003 to 2004
The Fair and Accurate Credit Transactions Act of 2003 was adopted to allow users of credit cards to request a free report from each of the three national wide consumer reporting companies such as TransUnion, Experian and Equifax via created website for this purpose. Consumers are able to request such report once per 12 months (Davidoff). Before, annual report was able for free only in a few states guaranteed by the state’s law and finally, it was adopted on the federal level. In addition, this act is aimed to deal with theft of personal information by providing users with ability to set alerts in their credit records. In addition, it allows to safely removing credit information. There are new rules for printing card number or card expiration date. It is allowed to print only five digit of it on receipt. In case of violation, damages must be compensated in size from $100 to $1000 (Davidoff).
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This act established new rules for regulation of private data by setting ‘fraud alerts’ and ‘active duty alerts’, by limitation of printing the credit card number on receipts, and stated new rules for some government institutions on procedure of detecting theft of personal data. ‘Fraud alert’, which may be placed by the request of cardholder, is valid for 90 days and consumer may prolong it for seven year period. In case, when ‘fraud alert’ was extended for a longer period, one of three reporting agency should exclude the person from any list where proposed to extend credit or insure. ‘Active duty alert’ is valid for 12 months after it was requested by consumer and requires from reporting agency to reveal such information with any report for the dated during 12 months and also to exclude the person from any list where proposed to extend credit or insure.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is one of the key laws in the recent history of the banking industry. This Act made considerable changes to prevent the bankruptcy of individuals and business companies. Previously, it was easier to file a petition for Chapter 7 action where most of the debts are simply written off. Now, this category of applicants in most cases is related to Chapter 13, where debt will be written off only after it will be paid partially (Davidoff). This Act made considerable changes in the Bankruptcy Code of USA.
The key point, which now allows one to record fewer people under Chapter 7 of the Bankruptcy Code is a method of comparing the average income of the debtor or a couple (since so many debtors are registered under the consumer credit), with an average income for a particular state in which the debtor resides (calculated by the Code). In result, if the debtor’s income is higher than this number, thus debtor should pass a ‘means test’ (Davidoff). Being the subject of this test means the possibility of the presumption of abuse under the $707(b). In addition, to claim for the status of bankruptcy, debtor should go through more paperwork and pay higher fees. Attorney representatives now have more responsibility by the new law, which makes attorney’s fees higher. Also, in some cases, attorney would not take some cases on bankruptcy. The amount of money, which debtor has to pay under the Chapter 13, also became higher.
Secure and Fair Enforcement for Mortgage Licensing Act of 2008
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 was adopted as a reply for the crisis of mortgage. The Act obliges every mortgage loan organizations (MLOs) to be licensed by the state or registered with the federal government. In addition, special program was created with the federal banking relation and the Farm Credit Administration for registration of MLOs, which operate for an insured deposit or is controlled or own branch, which is regulated by the federal banking institutions. The other MLOs could be only licensed by the state.
Licensing by the state contain the minimum requirements for MLOs.
The main requirements for MLOs during state licensing are the next (Davidoff):
- To complete education courses.
- To pass a written qualification test.
- To take annual permanent educational courses.
- To submit fingertips for checking by the FBI on criminal background.
- To be authorized for NMLS to get the independent credit report and to have their unique number for identification.
In addition to all requirements, MLOS should also create own net value, which reflects the cost of loans in the dollar, legal ways to follow the work and regularly report violations to ensure that all loan institution were registered, and create a procedure to estimate civil funds sanctions for person operating as mortgage lenders without a valid license or registration (Davidoff). As this Act was adopted with the reduction of consequences of the mortgage crisis, it should be considered that effective regulations of this industry are responsible for stability on others markets.
Credit Card Accountability, Responsibility and Disclosure Act of 2009 to 2010
The Credit Card Accountability Responsibility and Disclosure Act of 2009 was adopted to create fair and clear relationships between publicity and banking institution in the field of the consumer credit plan. The Act imitates ways to charge payments from credit card consumers (Davidoff). There are a lot of criticisms that this Act does not control other banking operations with credit cards such as rates, prices or fees. Thus, a lot of banking institutions raised those aspects of credit plans.
After a year of the operating of this Act, there were determined few flaws in the credit card market. The one of them is that banking institutions overlooked their rates and raised them up (Davidoff). One more flaw, which was amended, is that a lot of mothers who are not working and thus do not have any income have to ask permeation of their husbands (Davidoff). It is obvious that this Act requires more work on it to make credit card industry friendlier for publicity. For example, there are should be done some steps to make it easier for people to compare between credit card products of different banking institutions.
The Dodd Frank Wall Street Reform and Consumer Protection Act of 2011 to 2012
After a moderate decline in production and the pace of economic development in the 2000s, The Dodd–Frank Wall Street Reform and Consumer Protection Act was adopted by the Obama Administration and brought considerable changes in federal regulation of the economy of the USA (Barth). There were a lot of arguments, and criticism on the Act, and a lot changes have been made before its adoption. For instance, some people had concerns about the ability to avoid further crisis in the financial industry.
The main purpose is to strength the economy of the US via making reporting more clear, regulatory policy more simply, to protect taxpayers from possible collapse of depository financial system, and to protect customers from violence in financial practice of some organizations. By this Act, some federal regulatory agencies were abolished and replaced with more effective ones, creation regular protections of consumers and to develop improved standards for the registration of investment agents, hedge funds and direct investment fund, etc. This Act is divided into 60 titles, contains 243 rules with almost 70 researches made and has around 22 reports in periodical literature (Barth).
This paper analyzed the history of the U.S. banking industry. Key legislative acts were considered, that have had a significant impact on the image and operating of the U.S. banks. Some acts are also of great importance to the fight against terrorism and other violations. Many crimes were admitted and lawbreakers were found by the reporting of financial institutions and by regulation and keeping records of business transactions. Also, many acts are aimed to provide better standards for registration and licensing of financial institutions with essential point on banks, independent investment advisory, and investment funds.
The paper observed that the banking industry has incurred with many changes in the recent decade. During the last years, the U.S. and global economy has suffered from a lot of crises and passed an intensive path of development as more changes are required in the banking industry.