Key Banking Regulations

Why This Matters

Banking regulations aren't just bureaucratic red tape—they're the guardrails that shape how financial institutions operate, take risks, and interact with consumers. You're being tested on your understanding of why these regulations exist, what problems they solve, and how they interconnect to create the modern financial system. The major themes here include systemic risk reduction, consumer protection, transparency requirements, and capital adequacy—concepts that show up repeatedly in exam questions about financial stability and market failures.

Don't just memorize dates and acronyms. Know what crisis or market failure prompted each regulation, what mechanism it uses to address the problem, and how regulations have evolved over time. When you see a question about the 2008 financial crisis, you should immediately connect it to Dodd-Frank and Basel III. When asked about deposit insurance, you need to explain why it prevents bank runs. That conceptual linkage is what separates a 3 from a 5.

---

Systemic Risk and Financial Stability

These regulations address the fundamental problem of systemic risk—the danger that one institution's failure can cascade through the entire financial system. They focus on separating risky activities, requiring adequate capital buffers, and preventing the interconnected failures that cause financial crises.

Glass-Steagall Act

• Separated commercial and investment banking—enacted in 1933 during the Great Depression to prevent banks from gambling with depositors' money
• Created the FDIC to insure deposits and restore public confidence after widespread bank failures
• Prohibited securities underwriting by deposit-taking banks, reducing conflicts of interest between lending and speculative activities

Dodd-Frank Wall Street Reform and Consumer Protection Act

• Responded to the 2008 financial crisis—the most comprehensive financial reform since the 1930s, targeting the "too big to fail" problem
• Volcker Rule restricts proprietary trading by banks, essentially recreating some Glass-Steagall protections
• Increased capital requirements and created the Financial Stability Oversight Council (FSOC) to monitor systemic risk across the financial system

Basel Accords (I, II, and III)

• International capital standards—developed by the Basel Committee to ensure banks worldwide maintain adequate buffers against losses
• Risk-weighted assets concept introduced in Basel II requires banks to hold more capital against riskier investments
• Basel III liquidity requirements (post-2008) mandate that banks hold enough liquid assets to survive 30 days of financial stress

---

Consumer Protection and Transparency

These regulations protect individual consumers from predatory practices and information asymmetry. They operate on the principle that informed consumers make better decisions, and that financial institutions have inherent advantages in knowledge and bargaining power.

Truth in Lending Act

• Requires standardized disclosure of credit terms—enacted in 1968 to combat deceptive lending practices
• APR disclosure allows consumers to compare the true cost of loans across different lenders, accounting for fees and compounding
• Right of rescission gives borrowers three days to cancel certain loan transactions, protecting against high-pressure sales tactics

Consumer Financial Protection Bureau (CFPB)

• Created by Dodd-Frank as a dedicated consumer watchdog with authority over mortgages, credit cards, and student loans
• Supervises both banks and non-banks—critically important because many predatory lenders operated outside traditional bank regulation before 2008
• Enforcement authority includes investigating complaints and penalizing unfair, deceptive, or abusive practices

Federal Deposit Insurance Act

• Deposit insurance up to $250,000 per depositor, per insured bank—the cornerstone of banking system confidence
• Prevents bank runs by eliminating depositors' incentive to withdraw funds at the first sign of trouble, breaking the self-fulfilling prophecy of panic
• Moral hazard tradeoff—while protecting depositors, it may encourage banks to take excessive risks knowing deposits are guaranteed

---

Anti-Money Laundering and Financial Crime

These regulations address the use of financial institutions for illegal purposes. They impose reporting requirements and due diligence obligations that help law enforcement track illicit funds.

Bank Secrecy Act

• Requires reporting of suspicious activity—financial institutions must file SARs (Suspicious Activity Reports) with FinCEN when transactions appear unusual
• Currency Transaction Reports mandatory for cash transactions over $10,000, creating a paper trail for large cash movements
• Know Your Customer (KYC) requirements force banks to verify customer identities and understand the nature of their business relationships

---

Market Structure and Competition

These regulations shape who can do what in financial services—determining the boundaries between different types of financial institutions and ensuring equitable access to banking services.

Gramm-Leach-Bliley Act

• Repealed Glass-Steagall's separation in 1999, allowing banks, securities firms, and insurers to consolidate into financial conglomerates
• Financial privacy provisions require institutions to disclose data-sharing practices and give consumers opt-out rights
• Controversial legacy—some economists argue it contributed to the 2008 crisis by enabling "too big to fail" institutions

Bank Holding Company Act

• Regulates corporate structure of banking organizations—requires Federal Reserve approval for acquisitions and non-banking activities
• Source of strength doctrine means parent companies must support struggling subsidiary banks, preventing cherry-picking of profitable units
• Amended by Gramm-Leach-Bliley to allow financial holding companies with broader powers

Community Reinvestment Act

• Combats redlining—enacted in 1977 to ensure banks serve low- and moderate-income neighborhoods where they take deposits
• CRA ratings affect regulators' decisions on bank mergers and branch applications, creating incentives for community lending
• Ongoing debate about effectiveness—supporters credit it with expanding access, critics argue it may encourage risky lending

---

Corporate Governance and Accountability

These regulations focus on the accuracy of financial information and the accountability of corporate leadership, particularly after high-profile scandals revealed systemic failures in oversight.

Sarbanes-Oxley Act

• Responded to Enron and WorldCom scandals—enacted in 2002 to restore investor confidence after massive accounting frauds
• CEO/CFO certification requires executives to personally attest to the accuracy of financial statements, creating individual liability
• Created PCAOB (Public Company Accounting Oversight Board) to regulate auditors and eliminate conflicts of interest in accounting firms

---

Quick Reference Table

---

Self-Check Questions

1. Compare and contrast Glass-Steagall and Dodd-Frank: What problem did each address, and what regulatory mechanism did each use to solve it?

2. Which two regulations were direct responses to the 2008 financial crisis, and what specific provisions in each target systemic risk?

3. A bank wants to merge with an insurance company. Which regulations would govern this decision, and how has the legal framework changed since 1933?

4. FRQ-style: Explain how deposit insurance prevents bank runs, then identify one potential negative consequence of this protection. Which regulation established this system?

5. A consumer receives a mortgage offer with unclear terms about the true cost of borrowing. Which regulation requires standardized disclosure, and which agency has enforcement authority over the lender's practices?