Banking law is the lifeline of any thriving economy. US legislators create these laws to govern banks and other financial institutions to protect consumers, prevent crime, and monitor risks.
We've compiled this legal guide for the banking lawyer seeking a comprehensive resource on banking law. Find everything you need, from banking requirements to consumer protection measures and anti-money laundering efforts, to navigate the ever-evolving financial landscape.
Banking laws are federal, state, and even local legislation or regulations that pronounce themselves on the conduct of banks and other financial institutions.
Banking law and regulation establish a robust legal framework to protect consumers, create a conducive environment for financial institutions, and designate regulators as watchdogs.
Financial information can be complex; consumers without expert knowledge are the most vulnerable stakeholders. Since information is power, this creates an imbalance of power between consumers and banking institutions.
On the other hand, banks have complete knowledge, including assumptions made, real risk factors, and cost implications. Banks do not share this information with consumers, only what they think the consumer needs to know to purchase the service.
Banking law seeks to protect consumers while creating a conducive environment where banking institutions thrive.
Banking laws exist to oversee the threefold relationship between the consumer, banks, and the regulators (government agencies, e.g., The Fed). The rules balance protecting consumer interest on one side and creating an environment where banks can be innovative enough to change with evolving industry dynamics and consumer needs on the other.
Banking regulations protect consumers and allow banks to benefit the economy.
The table below outlines eight areas of banking regulations, the level of enforcement (national or global), the responsible regulators, and their objectives.
Regulator(s): Bank for International Settlements (BIS)*, the Federal Deposit Insurance Corporation (FDIC), or the Federal Reserve Board (the Fed).
Objective: Standard determines how much capital a financial institution must keep to support their assets** and maintain a satisfactory capacity to absorb losses.
Regulator(s): The Basel Committee on Banking Supervision (BCBS)***.
Objective: Requires banks to hold a certain amount of highly liquid assets sufficient to fund cash outflows for 30 days.
Objective: Provides a rating of 1 (strong assets) to 5 (weak assets), reflecting existing and potential credit risk associated with banks' assets.
Regulator(s): The Fed.
Objective: Requires banks to identify, measure and manage strategic, liquidity, operational, market, and reputational risk.
Regulator(s): Financial Action Task Force (FATF), the Financial Crimes Enforcement Network (FinCEN), and the Office of Financial Assets Control (OFAC).
Objective: Banks must implement Know Your Customer (KYC) protocols to prevent customers from using their services for illegal activities.
Regulator(s): Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau.
Objective: Requires banks to comply with data protection laws and regulations whose provisions include having measures for processing private customer data transparently and responsibly.
The corporate Federal Reserve System, the OCC, and Federal Deposit Insurance Corporation (FDIC) require financial institutions to put effective corporate governance structures, including independent directors and board committees at the national level of enforcement.
The Bank for International Settlements (BIS) is a platform for central banks from at least 63 countries to collaborate on monetary policy, financial stability, and financial regulation.
Assets include loans and investment portfolios, cash, real estate, equipment, and off-balance sheet transactions.
The Basel Committee on Banking Supervision (BCBS) is not a regulator per se but an offshoot of BIS that develops and promotes international standards and guidelines for banking regulation.
Banks' legal requirements constantly evolve with the emergence of new technologies and changing consumer behavior. However, legislators design banking laws to create a level playing field and promote a fair and transparent financial system. By ensuring that all banks are subject to the same standards and requirements, these laws build trust and confidence in the banking system and foster a healthy and vibrant economy for all stakeholders.
In the United States, banks are regulated by federal or state law depending on their licenses. Federal banking law provides for three primary regulators: the OCC, the Fed, and the FDIC.
Banking laws at the national level promote the banking system's safety, protect consumers, deter crime, and ensure overall stability. These laws apply to every bank, including those chartered to operate at the state level.
The dual banking system in the United States allows banks to be chartered and regulated either at the federal level by the OCC or the State level by a state’s banking department. Though federal banking laws apply to state-chartered banks to some extent, these banks primarily fall under the jurisdiction of their respective state banking authorities.
U.S. banking law is a term used to refer to banking law and regulations that apply to all banks in the United States, regardless of whether they are federal or state-chartered.
Banking law and regulation have significantly shaped the present-day banking system in the United States. These laws have worked to protect the interests of consumers, reduce system risk in the financial markets, and maintain financial institution stability. This section examines the major banking laws, their historical contexts, objectives, and impacts.
Following the Panic of 1907, also known as the Knickerbocker Crisis, from a failed attempt to corner the copper market, the US responded with the Federal Reserve Act in 1913.
Knickerbocker Trust, one of the largest New York trust banks at the time, provided uncollateralized loans to stockbrokers, who used the money as collateral for call loans from other banks.
The system worked as long as the stock market was flourishing. However, the stockbrokers used the money to manipulate shares of the United Copper Company and corner the copper market. Their plan failed, and since Knickerbocker Trust played a significant role in providing liquidity to the financial market during that period, filing for bankruptcy caused a panic.
Consequently, other regional banks attempted to withdraw their money from other trust banks. But the banks’ low deposit-to-cash ratio triggered a national bank run, and many federal and state banks became insolvent.
The Federal Reserve Act was part of the reforms following the crisis. The Act created the Federal Reserve System (The Fed) as the central bank. The Fed oversees the banking sector and requires banks to hold part of their deposits as reserves, called federal funds. The Federal Reserve establishes a target interest rate for banks to lend these funds, called the fed funds rate. Today, the Fed controls inflation with interest rates.
Following the Panic of 1907, the Federal Reserve Act was enacted in 1913 to establish a central bank and stabilize the financial system. Today, the Fed sets the interest rate for lending between banks to control inflation.
After the Great Depression, several laws and policies, including the Glass-Steagall Act, also known as the Banking Act, were introduced to reform the financial market. The Act created the Federal Deposit Insurance Corporation and required banks to separate commercial and investment banking activities to eliminate conflict of interest and reduce risk.
Commercial banks were prohibited from trading securities, while investment banks could not take deposits.
Though the strict separation of investment and commercial banking activities faded over time, the FDIC remains today. FDIC insures deposits and supervises financial institutions.
Privacy laws protect consumers' personal information from being misused by financial institutions. Some of these laws are —
Gramm-Leach-Bliley Act (GLBA) (1999): Defines the Financial Privacy Rule and the Safeguard Rule, which, respectively, regulate the gathering and dissemination of customers' personal financial information and call for financial institutions to put security programmes in place to secure this information.
Fair Credit Reporting Act (FCRA) (1970): Outlines rules by which financial institutions can exchange consumer information and mandates that they give privacy alerts to customers.
Financial Privacy Act (RFPA) (1978): Protects consumers from federal government scrutiny. The Act defines what and how consumer information can be shared with federal agencies.
Dodd-Frank Wall Act (2010): Expanded consumer protection measures to include data privacy and disclosure.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was part of reforms following the 2007 - 2008 financial crisis.
The Act established the Consumer Financial Protection Bureau (CFPB) and introduced various regulatory changes and oversight institutions to strengthen the financial system, such as ––
The Financial Stability Oversight Council (FSOC) and the Orderly Liquidation Authority (OLA) to reduce systemic risk and monitor the stability of Systemically Important Financial Institutions (SIFI), colloquially called “too big to fail;”
The Consumer Financial Protection Bureau (CFPB) oversees lending, primarily mortgages, and credit cards. Its primary objective is to foster fairness in mortgages and lending products by ensuring financial institutions use understandable language. Legal templates with simplified language make contracts more accessible for consumers and institutions;
Additional incentives for whistleblowers expanded the range of protected employees to include those from subsidiaries and affiliates and extended the time limit for reporting violations from 90 to 180 days after discovery;
Partially reinstated the principle from the Banking Act to separate commercial and banking activities through the Volcker Rule. Banks cannot involve themselves with hedge funds or private equity firms; and
The Securities and Exchange Commission (SEC) Office of Credit Ratings supervises credit rating agencies.
Dodd-Frank Act was designed to address the issues that led to the 2007-2008 financial crisis and create a more transparent financial system. By enhancing oversight through regulatory bodies like the CFPB and FSOC, incentivizing whistleblowers, and implementing measures like the Volcker Rule, the Act aimed to protect consumers, reduce systemic risk and prevent future financial crises.
The Uniting and Strengthening America Patriot Act has significant provisions for financial institutions following the September 11th, 2001 terrorist attacks. For banking law, it increased information sharing between financial institutions and more elaborate Know Your Customer (KYC) requirements. The Act also provides for heavier penalties for enabling money laundering and terrorist financing and requires reporting of suspicious activities to the Financial Crimes Enforcement Network (FinCEN).
The Act, enforced by FinCEN, expands the responsibility of banks to report suspicious activities to prevent money laundering, tax evasion, and other financial crimes.
Enacted in 1977 to motivate financial institutions to address the credit needs of their communities, focusing on low- and moderate-income neighborhoods.
US banking laws focus on consumer protection and promoting fair practices in the financial sector. Many regulations, such as the Dodd-Frank (Consumer Protection) Act and the establishment of the Consumer Financial Protection Bureau (CFPB), emphasize the importance of safeguarding consumers from predatory lending approaches, fraud, and other financial risks. Others, such as the Federal Reserve Act, the Dodd-Frank (Wall Street Reform) Act, the USA Patriot Act, and the Bank Secrecy Act, provide structures for transparency and accountability in bids to insulate the financial system from criminal abuse and address emerging risks that may pose a threat to the financial stability of the country.
A banking lawyer can work with private banking law or practice as a government employee. A banking lawyer advises institutions and individuals on compliance with banking law in transactions, financial products, consumer language, transparency, and resolving disputes arising from banking activities.
Any government agency that oversees the financial sector can use a banking lawyer. Agencies such as the Fed, OCC, FSOC, FDIC, FinCEN, and the OFAC or state banking departments can leverage a banking attorney's skill, training, and experience. A banking law attorney can also work in the federal and state legislature to draft new bills or amendments.
Private institutions in the financial service industry, such as commercial and investment banks, credit rating agencies, insurance companies, venture capital firms, credit unions, financial advisory firms, hedge funds, asset management firms, and fintech companies, will likely require the services of a banking lawyer to navigate the elaborate private banking law landscape.
Further, a banking law attorney can also work as a lobbyist and policy advocate for banks or financial institutions. These institutions strategically engage the government to make their positions known. The private banking law attorney can also help the institutions determine and advocate for changes in existing laws that would better serve the industry.
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Banks must follow the rules addressing capital and liquidity requirements, risk management, anti-money laundering, counter-terrorism financing measures, privacy and data protection, and corporate governance. Banks must comply with all federal and state banking laws.
US banking laws respond to financial crises, protect consumers, foster innovation in the banking sector, and promote economic growth.
Duration theory isn't directly related to banking law but is about "duration" in finance. Duration measures how much the price of a fixed-income security, like a bond, changes when interest rates change. It helps institutions assess the risks tied to fixed-income investments, as it estimates how they will react to fluctuations in interest rates.