BANKING 
OVERVIEW

Banking, the largest sector within the financial services industry, includes all depository institutions, from commercial banks and thrifts (savings and loan associations and savings banks) to credit unions. In their role as financial intermediaries, banks use the funds they receive from depositors to make loans and mortgages to individuals and businesses, seeking to earn more on their lending activities than it costs them to attract depositors. However, in so doing they must manage many risk factors, including interest rates, which can result in a mismatch of assets and liabilities.

Over the past decade, many banks have diversified and expanded into new business lines such as credit cards, stock brokerage and investment management services. They are also moving into the insurance business, selling annuities and life insurance products in particular, often through the purchase of insurance agencies. (See Chapter 4: Convergence.) Banks can be federally or state chartered.
REGULATION

The Federal Reserve was established by Congress in 1913 to regulate the money supply according to the needs of the U.S. economy. The agency attempts to do this by changing bank reserve requirements and the discount rate that banks pay for loans from the Federal Reserve system and by increasing or decreasing its open-market operations, the buying and selling of federal securities. Because banks are sensitive to interest rates, Federal Reserve policy has a major impact on the banking sector.

The Federal Depository Insurance Corporation (FDIC) was created in 1933 to restore confidence in the banking system following the collapse of thousands of banks during the Great Depression. Under the program administered by the FDIC, which is an independent agency within the federal government, deposits in commercial banks and thrifts are insured for up to $100,000. In addition, the FDIC is charged with liquidating failing banks or disposing of their insured liabilities by selling them to a solvent institution. The agency also provides separate coverage for retirement accounts, such as 401(k)s, individual retirement accounts (IRAs) and Keoghs. A 2006 law increased the coverage for retirement accounts from $100,000 to $250,000.

Since 1863, banks have had the choice of whether to be regulated by the federal government or the states. Under the National Bank Act, national banks are chartered and supervised by the Office of the Comptroller of the Currency (OCC), part of the U.S. Treasury. Thrift institutions, including savings and loans associations and savings banks, can be federally chartered and regulated by the Office of Thrift Supervision (OTS), another agency in the U.S. Treasury, or state chartered and subject to state regulation. The National Credit Union Administration supervises federal credit unions, while state regulators supervise state credit unions. State-chartered banks are subject to some federal regulation if they are members of the Federal Reserve System or insured by the FDIC.

On March 29, 2008 the Treasury Department unveiled plans for a sweeping overhaul of the regulation of the U.S. financial services industry, aimed at strengthening consumer protections, promoting market stability and enhancing financial innovation. Provisions include a consolidation of bank regulation, stronger oversight of mortgage lending and an expansion of the Federal Reserve’s authority to investigate the financial industry. The proposal also supports the establishment of an optional federal charter (OFC) for insurers. An OFC would allow insurance firms to opt for a system of federal chartering, licensing, regulation and supervision or to continue to be regulated by individual states. The Blueprint for a Modernized Financial Regulatory Structure is posted on the U.S. Treasury Web Site at http://www.treas.gov/offices/domestic-finance/regulatory-blueprint/