According to a 2019 survey by the FDIC, 95% of American households have at least one family member that has a checking or savings account. Because of the safety provided by banks, credit unions, and other trusted financial institutions, Americans can largely rest easy knowing their money is insured and protected by the federal government. Here are five major federal laws that help make that happen.
- The strength of America's economy stems in part from the laws governing its banking system and the agencies that enforce them.
- Banking regulations have often been strengthened as a result of crises like the Great Depression of the 1930s and the Great Recession of the early 2000s.
- The most recent major reform, the Dodd-Frank Act of 2010, created the Consumer Financial Protection Board to enforce consumer-related banking laws, among its other responsibilities.
Five Important U.S. Banking Laws
The American banking system is governed by a large web of regulatory measures, many going back generations. It would be impossible to succinctly describe every major piece of legislation that helped the U.S. build the system it has today. Still, the following five measures represent some of the most pivotal actions taken by Congress to strengthen the banking sector and the larger financial system.
1. National Bank Act of 1864
Though actually the second National Bank Act, with a prior version passed one year earlier, the National Bank Act of 1864 marked the first time that the federal government began actively supervising commercial banks. This act created the Office of the Comptroller of the Currency, which was tasked with chartering, vetting, and supervising all national banks.
2. Federal Reserve Act of 1913
Just as the National Bank Act introduced a national banking system, the Federal Reserve Act of 1913 created the Federal Reserve System to oversee it. Commonly referred to as "The Fed," the Federal Reserve's job was to foster economic stability by serving as the country's central bank. Today, the Fed is widely known as the entity that raises and lowers interest rates when needed in order to keep the economy growing and inflation at bay.
3. Glass-Steagall Act of 1933
Though much of this law has been eliminated in recent decades, the Glass-Steagall Act remains influential. The most important thing it brought to the table that's still around is the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that insures bank deposits in the event that a bank fails. This was a response to the Great Depression, which saw massive bank runs devastate banks across the country, fueling the historic financial crisis. Today the FDIC insures most Americans' bank accounts up to certain limits.
4. Bank Secrecy Act of 1970
This law, which is also known as the Currency and Foreign Transactions Reporting Act, was established to combat money laundering. It requires that businesses "keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters," according to the Internal Revenue Service. Once filed, those documents can become evidence in any domestic and international investigations. Cash payments over $10,000 received by a trade or business, as well as money held in foreign bank and financial accounts, are of particular interest to law enforcement agencies charged with policing potential money laundering activities.
5. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Just as Glass-Steagall was created as a response to the Great Depression, Dodd-Frank was the federal government's reaction to the financial crisis of 2007-2008 and the ensuing Great Recession. Aimed at addressing the specific sectors of the financial system that had caused the crisis, Dodd-Frank set new guidelines for banks, mortgage lenders, and credit rating agencies. It also created the Consumer Financial Protection Bureau (CFPB) to oversee the enforcement of consumer laws.
In the years since, Dodd-Frank has undergone several rollbacks, with the most recent coming in the form of the Tax Cuts and Jobs Act of 2018, which loosened some bank regulations.
Who Regulates the U.S. Banking System?
Banks in the U.S. are regulated by a number of federal and state agencies, depending primarily on how they are chartered. The Office of the Comptroller of the Currency regulates national banks, while the Federal Reserve regulates state-chartered banks that are members of the Federal Reserve System; it also regulates bank holding companies, among others. The Federal Deposit Insurance Corporation regulates state banks that are not members of the Federal Reserve System and state-chartered banks are also regulated by their respective states.
Can the U.S. Government Regulate International Banking?
In certain circumstances, yes, it can. For example, the Federal Reserve regulates state-licensed foreign bank branches and agencies on U.S. soil. Prior to the passage of the International Banking Act of 1978, foreign banks with U.S. branches were subject to a mix of different state laws. Gains made in foreign bank accounts are also subject to scrutiny by the IRS, since that is considered taxable revenue and must be reported as such. On the international front, the U.S. also plays a major role in the Basel Committee on Banking Supervision, which sets international standards for bank regulation.
Who Benefits From U.S. Banking Laws?
It would be easy to say that everyone benefits from strong bank regulation—although there are some banks and other institutions that would prefer a less regulated system. For the average American consumer, bank regulations serve to protect the money they have saved and to make it possible for them to borrow money when they need it at fair terms. For business owners, bank regulations provide those same protections while also giving them guidelines to stay in compliance with the law. Finally, the U.S. government benefits from proper bank regulation, since it can more easily manage the next crisis.
Are Credit Unions Also Regulated Like Banks?
Yes, and like banks, credit unions in the U.S. can be chartered on the state or federal level, which affects how they are regulated. Federal credit unions are regulated by the National Credit Union Administration, an independent federal agency that also insures federal and many state credit unions.
The Bottom Line
The American banking system is important to sustaining a strong economy. Bank regulation can ensure that banks follow the same rules and compete on a fair basis. It can also help maintain consumers' confidence that they will be treated fairly when they deposit money, apply for a loan, or use any of the many other services that banks offer today.