December 31, 2014
Introduction to Financial Services: Banking
The word “bank” is commonly used to refer to entities that
the full faith and credit of the United States. The FDIC
act as financial intermediaries to coordinate the flow of
currently insures commercial bank deposits in the United
resources from savers to borrowers. Commercial banks and
States up to $250,000.
thrifts accept deposits from savers in order to make loans to
individuals, businesses, nonprofits, and governments. In
Credit Unions (CUs). Unlike banks that have a profit
federal regulatory policy, bank is often reserved for firms
motive, arguably, CUs are nonprofit depositories, owned by
with special banking charters and their parent companies.
members and often offer services similar to commercial
This In Focus will use the term bank to refer to firms (or
banks. The National Credit Union Administration (NCUA)
subsidiaries) with bank, thrift, or credit union charters that
regulates CUs and insures their deposits in the United
are depository institutions.
States up to $250,000.
Structure of Banking
Bank Holding Companies (BHCs). One or more
depository subsidiaries may be part of a BHC that may own
Assets, Liabilities, and Equity. Customer borrowings
other financial subsidiaries that are not deposit subsidiaries.
(loans) and the securities banks acquire typically comprise
The Banking Act of 1933 (P.L. 73-66), commonly referred
the majority of the assets on a bank’s balance sheet. The
to as Glass-Steagall Act, prevented commercial banks from
deposits the customers make at the bank (i.e., checking,
engaging in investment bank activities. In 1999, the
savings, and other types of deposit accounts) are liabilities
Gramm-Leach-Bliley Act (P.L. 106-102) repealed portions
of the bank, as these funds are owed to its customers. Any
of the Glass-Steagall Act and the Bank Holding Company
debt a bank issues is also a liability. The difference between
Act of 1956 (P.L. 85-511). As a result, bank holding
assets and liabilities is the bank’s equity (i.e., ownership
companies can now have non-depository financial
interest); it is the bank’s capital.
subsidiaries, including investment banks. Investment banks
engage in raising capital and underwriting securities for
Regulators. Banks in the United States are incorporated as
their clients; advise buyers and sellers on mergers and
national banks either under the authority of the Office of the
acquisitions; and match up buyers and sellers of securities
Comptroller of the Currency (OCC) or the state. The
(derivatives, bonds, stocks, currencies, and commodities).
Federal Reserve (Fed) and the Federal Deposit Insurance
Investment banks cannot accept insured deposits and are
Corporation (FDIC) regulate state banks. Table 1 lists the
not subject to the prudential regulation regime administered
primary federal bank regulators and their oversight
by the bank regulators listed in Table 1.
responsibility.
Policy Issues
Table 1. Federal Bank Regulators
The Dodd-Frank Wall Street Reform and
Regulator Oversees
Consumer Protection Act
Federal Deposit Insurance
All FDIC insured depository
Corporation (FDIC)
institutions
The 111th Congress passed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (P.L. 111-203; Dodd-
Federal Reserve (Fed)
Bank holding companies and
Frank) in response to the financial crisis that began a few
Fed member banks
years earlier, making broad changes to the U.S. financial
National Credit Union
Federally chartered or insured
regulatory system. A number of its significant banking
Administration (NCUA)
credit unions
provisions are addressed below.
Office of the Comptrol er of
Nationally chartered banks and
The Dodd-Frank Act preserved the thrift charter but
the Currency (OCC)
national thrifts
eliminated the thrifts’ regulator, the Office of Thrift
Source: The Congressional Research Service (CRS).
Supervision, and merged its functions with other financial
regulatory agencies. Dodd-Frank created the Consumer
Note: One or more federal and state regulators may regulate the
financial activity of a bank.
Financial Protection Bureau (CFPB) as an independent
agency within the Fed. Many of the consumer financial
Deposit Insurance. Federal deposit insurance provides
protection functions that were previously delegated to other
stability to the financial markets by guaranteeing bank
bank regulatory agencies were transferred to the CFPB.
deposits up to the insured limit; in essence, it is intended to
Dodd-Frank also permanently increased the deposit
prevent bank runs and limit causes of systemic failure of the
insurance coverage limit to $250,000 and strengthened the
U.S. banking system. The Deposit Insurance Fund is
Deposit Insurance Fund.
financed through premiums paid by banks, and backed by
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Introduction to Financial Services: Banking
The Dodd-Frank Act requires enhanced prudential
Figure 1. Deposit Concentration, by Bank Size
regulation of bank holding companies with assets of $50
billion or more. These banks are also classified as
systemically important financial institutions (SIFIs). The
enhanced regulations require more stringent standards for
these SIFIs.
Volcker Rule. Section 619 of the Dodd-Frank Act, the
“Volcker Rule,” generally prohibits banks from engaging in
short-term proprietary trading of securities, derivatives,
commodity futures, and options on these instruments for
their own account. The rule also prohibits banks from
owning, sponsoring, or having certain relationships with
hedge funds or private equity funds. The rule does make
exceptions for certain types of activities. Banks are allowed
to participate in market making, hedging, securitizing, and
underwriting activities. U.S. Treasury securities and
municipal securities are exempt from the Volcker Rule.
Basel III

Source: CRS.
Basel III is a comprehensive set of banking reforms,
Note: Information was obtained from FDIC Quarterly Banking
developed by the Basel Committee on Banking
Profile as of September 30, 2014.
Supervision, located in Basel, Switzerland. Basel III is the
latest in a series of evolving agreements among central
Issues in the 114th Congress
banks and bank supervisory authorities globally to
standardize bank capital and liquidity requirements. The
Congress may evaluate issues and policies related to
Basel agreements are not treaties; individual countries can
regulatory regime for community banks, challenges to
make modifications to suit their specific needs. Parts of
community bank growth, the effects of the Dodd-Frank Act
Basel III were implemented in the United States in 2013.
and Basel III on the cost and availability of credit, mortgage
reforms, fair valuation of loans and securities, and whether
Capital Requirements. Banks that accept federally insured
“too big to fail” banks pose systemic risk. Additionally,
deposits are required to maintain sufficient capital reserves
Congress may consider differences in regulation between
to protect bank depositors. Liabilities, including deposits,
credit unions and banks, anti-money laundering and counter
are funds the bank owes. Bank capital can be written down
terrorism financing, mobile pay, and cybersecurity
to absorb losses. Banks can increase capital by retaining
challenges.
earnings or by issuing additional stock.
CRS Resources
Liquidity Coverage Ratio. Liquid assets are held by banks
to meet short-term obligations. The liquidity coverage ratio
CRS Report R43002, Financial Condition of Depository
is designed to ensure that financial institutions have the
Banks, by Darryl E. Getter
necessary liquidity on hand to meet cash outflows during a
30-day period. Cash and near cash items, such as central
CRS Report R41718, Federal Deposit Insurance for Banks
bank reserves, and government and corporate debt that can
and Credit Unions, by Darryl E. Getter
be converted easily and quickly into cash meet the
definition of liquid asset. Generally, only SIFIs and banks
CRS Report R41350, The Dodd-Frank Wall Street Reform
with $10 billion of foreign exposure on the balance sheet
and Consumer Protection Act: Background and Summary,
are required to meet the liquidity coverage ratio.
coordinated by Baird Webel
Market Concentration
CRS Report R43087, Who Regulates Whom and How? An
Overview of U.S. Financial Regulatory Policy for Banking
As shown in Figure 1, as of September 30, 2014, the FDIC
and Securities Markets, by Edward V. Murphy
insures 6,589 depository institutions, which hold $11.6
trillion in deposits. The largest 108 (1.6%) banks hold $9.3
CRS Report R42744, U.S. Implementation of the Basel
trillion, or 80% of the total deposits. The remaining 6,481
Capital Regulatory Framework, by Darryl E. Getter
(98.4%) banks hold $2.3 trillion, or 20% of the total
deposits. The number of smaller “community” banks has
Raj Gnanarajah, rgnanarajah@crs.loc.gov, 7-2175
declined in recent years, while the asset size of the largest

banks has grown.
IF10035
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