When I was a U.S. Postal Inspector in 2001, I started my career investigating large-scale illegal narcotic cases at the San Ysidro, CA land port of entry. I’m referring to millions of dollars worth of cocaine and marijuana entering the United States via the southern borders of California. Working large-scale narcotic investigations are synonymous with money. A very important component of a narcotics investigation is following the money, seizing it and arresting the perpetrators on both ends. Anyone who works narcotics or used to work narcotics knows the importance of end-to-end disruptions (sender and recipient). Looking back, those were not just narcotic investigations, but financial investigations with the ability to affect the stability of the United States financial system.
As I progressed in my level of sophistication in seizing millions of dollars from narcotics traffickers, I became more deeply involved with the inner workings of financial institutions. I had the pleasure of working with and learning from some of the finest bank investigators in the United States. I was eager to learn everything I could about how banks operated and not just knowing how to issue subpoenas to seize bank accounts. Bank investigators would often tell me that the regulators will know about the investigation – we have an obligation to notify them.
It made me wonder:
- How many regulatory bodies are there?
- How did these regulatory bodies come into existence?
- Which regulatory agency is responsible for regulating what type of bank?
The banking and regulatory structure in the United States is complicated. The purpose of this short article is to highlight some of the regulators, and briefly discuss how they came into existence, and which financial institutions they regulate. It is not all-inclusive. There are federal and state regulators and some financial institutions are regulated by both federal and state regulators. Although there are a vast number of agencies that regulate and oversee financial institutions, I will concentrate on the top four federal regulatory agencies: Federal Deposit Insurance Corporation (FDIC), Controller of the Currency (OCC), Federal Reserve System (The Fed), and National Credit Union Administration (NCUA).
Historically, financial regulations in the United States have been influenced by changes in crises. For example, during the 1920s and early 1930s, thousands of banks failed which led to the creation of the FDIC by the Emergency Banking Act of 1933 (the Banking Act of 1935 made the FDIC a permanent agency) to restore trust in the banking system during the Great Depression. The FDIC is an independent agency of the federal government that insures deposits in banks and thrift institutions (thrift) in the event a bank fails. A bank becomes insured by the FDIC by filing an Interagency Charter and Federal Deposit Insurance Application. Wherever you see “Member FDIC,” it indicates the bank is covered by the federal government up to $250,000 per depositor, per account. Nearly all banks have FDIC insurance for their depositors, but there are limitations to the coverage. The FDIC will cover depository accounts (checking, savings, bank money market accounts) and CDs. The FDIC will not cover financial instruments (stocks, bonds, money market funds, T-bills,) safe deposit boxes, annuities, and insurance products. Another way to look at it is if you have $300,000 in one bank, only $250,000 is insured. The other $50,000 should be at another unrelated bank. It should be noted that since January 1934, no depositor has lost any money of insured funds as a result of a bank failure. The FDIC insures trillions of dollars of deposit in U.S. banks and thrifts. It should be noted that the Depositors Insurance Fund (DIF) is a private insurance fund that insures deposits of insured banks up to $250,000. The FDIC is the primary federal regulator of banks that are chartered by the states and do not join the Federal Reserve System. The primary goal or objective of the FDIC is to maintain stability and public confidence in the financial system. The FDIC supervises and examines more than 5,000 banks and savings institutions.
In February 1863, President Lincoln signed The National Currency Act (Act); the Act established the Office of the Comptroller of the Currency (OCC). In 1864, the Act became known as the National Bank Act. The National Bank Act was a response to the confusion of local banks, local money, and conflicting regulatory standards before the Civil War. In short, banking systems varied state to state. OCC’s primary function is to regulate, supervise, and offer charters to all national banks and federal savings associations and federal branches and agencies of foreign banks. It is an independent bureau of the U.S. Department of the Treasury. The OCC regulates and supervises approximately 1,200 national banks, federally licensed savings associations, and licensed branches of foreign banks in the United States.
The Federal Reserve System is often called the Fed. It was created in December 1913 by the signing of the Federal Reserve Act into law to provide a safer, more flexible, and more stable monetary and financial system. It established economic stability by introducing a central bank to oversee monetary policy. The Fed is the central bank of the United States and probably the most powerful financial institution in the world. The Fed has a two part structure. A central authority called the Board of Governors in D.C. and 12 federal reserve banks are located in major cities throughout the United States. The Board of Governors is an independent government agency and the 12 banks are similar to private corporations. The 12 regional banks supervise state member banks. The Fed sets monetary policy, supervises and regulates banking institutions. It should be noted, the Federal Open Market Committee (Committee) is a key entity of the Fed. The Committee reviews economic and financial conditions, monetary policy, price stability and economic growth. It is estimated 38 percent of commercial banks are members of the Fed. National banks must be members and state-chartered banks may become members if they meet certain requirements.
Although the NCUA was created by Congress in 1970, the first U.S. credit union dates back to 1909 and the credit union system that’s in place today dates back to 1920. A little unknown fact is that the federal supervision of credit unions was under the FDIC from 1942 until 1948. In 1967, a Congressman from Texas introduced House Resolution 14030 to create an independent regulator of credit unions. The bill was not passed, but it was the first step in the creation of what would become the NCUA. When the NCUA was created as an independent agency of the federal government, the National Credit Union Share Insurance Fund (NCUSIF) was also formed. Similar to the FDIC’s DIF, the NCUA’s NCUSIF insures depositors up to $250,000. It’s interesting to mention that until then, credit unions had operated without federal deposit insurance. Like the FDIC is for banks, the NCUA is for credit unions. It regulates and supervises federal credit unions and insures deposits at all federally insured credit unions.