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Updated January 8, 2019
Introduction to Financial Services: Banking
Banks serve an important role in the financial system and
profitability and avoid bank failures, and thus protect
broader economy by aggregating the savings of households
taxpayers and the stability of the financial system. A bank’s
and businesses and lending to individuals, businesses, and
primary federal prudential regulator is determined by
federal and local governments. Economic output would be
charter type and corporate structure (see Table 1). Banks
lower if businesses had to finance investments themselves
are chartered as national banks under the authority of the
or if individuals could only make expenditures (e.g., home
Office of the Comptroller of the Currency (OCC) or as state
and car purchases) out of savings. In addition, banks
banks under the authority of a state regulator. The Federal
provide other important financial services, such as
Reserve (Fed) and the FDIC regulate state banks in
payments processing.
conjunction with state bank regulators.
This In Focus provides a broad overview of various
Table 1. Primary Federal Depository Regulators
banking topics—key concepts in banking, overview of
regulation, recent banking legislation, and policy issues.
Regulator
Oversees
Key Concepts in Banking
Office of the Comptrol er
Nationally chartered banks and
of the Currency (OCC)
national thrifts
The word bank typically refers to institutions that accept
deposits from savers, such as commercial banks and thrifts.
Federal Reserve (Fed)
Bank holding companies; and Fed
(Credit unions are another type of depository.) To accept
member state banks and thrifts
deposits, an institution must have a federal or state issued
Federal Deposit Insurance Non-Fed member state banks
charter. Bank deposits are generally insured by the federal
Corporation (FDIC)
and thrifts
government, subject to certain limits. Using customer
deposits and other funding, banks generally make loans and
National Credit Union
Federally chartered or insured
acquire certain other assets.
Administration (NCUA)
credit unions
Source: Congressional Research Service.
Balance Sheet. An understanding of a bank’s balance
sheet—its assets, liabilities, and capital—provides the
Basel III. Basel III is the latest in a series of evolving
foundation for analyzing many banking issues. Loans made
international agreements among central banks and bank
and securities owned by a bank typically comprise the
majority of the assets on a bank’s balance sheet. To get the
supervisory authorities to standardize bank capital and
liquidity regulations. Basel III strengthened these
funding to make loans and acquire assets, banks use
regulations in response to the 2007-2009 financial crisis.
liabilities and capital. Customer deposits (e.g., checking and
The Basel agreements do not have the same force as
savings account deposits) and any debt that a bank issues
treaties; they can be tailored to suit the specific needs of
(e.g., bonds, repurchase agreements) are liabilities of the
each country.
bank, as these funds are owed to its customers and
creditors. The difference between the assets and liabilities is
the bank’s equity (i.e., ownership interest)
Capital and Liquidity. Holding a high level of capital can
.
make a bank’s failure less likely because capital can be
written down to absorb losses. In addition, banks need
Deposit Insurance. Federal deposit insurance provides
liquidity to meet short-term obligations. For these reasons,
stability to the financial markets by guaranteeing
individuals’
banks are generally required to maintain sufficient levels of
bank deposits up to a $250,000 account limit.
capital to ensure solvency and protect bank depositors and
The insurance guarantee is backed by the full faith and
taxpayers and to hold liquid assets or use stable funding to
credit of the United States (and thus ultimately the
ensure adequate liquidity.
taxpayers). It is intended to prevent bank runs and promote
financial stability. The Federal Deposit Insurance
Consumer Compliance. Consumer compliance regulations
Corporation (FDIC) currently insures bank deposits, and the
seek to ensure that banks conform to applicable consumer
National Credit Union Administration (NCUA) insures
protection and fair-lending laws. The Dodd-Frank Wall
deposits at member credit unions.
Street Reform and Consumer Protection Act (Dodd-Frank
Overview of Regulation
Act; P.L. 111-203) created the Bureau of Consumer
Financial Protection (CFPB or BCFP) as a key regulator for
Banks are regulated to ensure they comply with various
consumer protection. Prudential regulators also regulate
statutory requirements. Two major components are
consumer compliance in some cases.
prudential and consumer regulation.
Recent Banking Legislation
Prudential. Prudential regulation (or “safety and
soundness” regulation) is designed to promote bank
In response to the 2007-2009 financial crisis, Congress
passed the Dodd-Frank Act. It was a major congressional
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Introduction to Financial Services: Banking
response to the crisis and the most comprehensive financial
observers argue that the regulatory burden is one of the
reform legislation since the 1930s.
factors that contribute to declining community banks.
Subsequent to the implementation of these changes, debates
A series of targeted relief to community banks below
have arisen over whether the benefits generated by the
certain asset sizes is provided by P.L. 115-174. For
changes made (e.g., greater financial stability and consumer
example, banks with less than $10 billion in assets are
protections) justify the costs (e.g., compliance costs to
exempt from the Volcker Rule and from capital and
banks and reduced credit availability). To address concerns
leverage requirements if they meet certain criteria. (The
related to a perceived regulatory burden imposed on banks
Volcker Rule generally prohibits banks from engaging in
by the Dodd-Frank Act, Congress passed the Economic
proprietary trading of securities, derivatives, commodity
Growth, Regulatory Relief, and Consumer Protection Act
futures, and options on these instruments from their own
(P.L. 115-174) in 2018, which modified certain aspects of
account to generate profit.) Banks with less than $10 billion
the Dodd-Frank Act and bank regulation.
in assets are also exempt from certain Basel III-based
regulation if they meet specific requirements. Banks with
Policy Issues
less than $5 billion in assets have reduced reporting
Congress continues to debate whether policy responses to
requirements, whereas banks with less than $3 billion in
the 2007-2009 financial crisis appropriately addressed the
assets can qualify for a less frequent examination by
risks leading up to the crisis and did so in way that was not
regulators. Some observers argue that tailoring does not go
overly burdensome to the banking system and the economy.
far enough and that additional regulatory relief should be
Congress may be interested in the impact of new
provided to community banks.
regulations implementing P.L. 115-174 as well as various
other policy issues, a selection of which are discussed
FinTech. Financial Technology, or FinTech, usually refers
below.
to technologies with the potential to alter the way certain
financial services are performed. Banks are affected by
Bank Holding Companies. Most banks are owned by a
technological developments in two ways: (1) they face
parent company—called a Bank Holding Company or
choices over how much to invest in emerging technologies
BHC—that owns other subsidiaries, and these overarching
and to what extent they want to alter their business models
organizations are also commonly referred to as banks.
in adopting technologies and (2) they potentially face new
Some BHCs have subsidiaries that engage in nonbank
competition from new technology-focused companies, who
financial activities, such as underwriting and dealing in
may or may not be subject to the same regulations. Such
certain types of securities. The Dodd-Frank Act required
technologies include online marketplace lending,
the Fed to apply enhanced prudential standards (EPS) to
crowdfunding, blockchain and distributed ledgers, and
BHCs with assets of $50 billion or more. P.L. 115-174
robo-advising, among many others. Certain financial
raises the thresholds at which EPS apply to BHCs with
innovations may create opportunities to improve social and
assets over $250 billion and allows regulators to determine
economic outcomes, but there is also potential to create
which EPS are applicable to BHCs with assets between
risks or unexpected financial losses.
$100 billion and $250 billion. BHCs with assets less than
$100 billion are, generally, exempt from EPS. Congress
Community Reinvestment Act. Congress passed CRA to
might continue to monitor the benefits or negative
address geographical mismatch of deposit-taking and
consequences of EPS.
lending activities. CRA requires federally insured banks to
make sufficient credit available in markets where they
Community Banks. A community bank is not officially
accept deposits to meet the needs of the local area’s
defined, but is generally thought to mean a small (though
housing, agricultural, and small business credit needs.
size is not necessarily a determining factor) bank that
Regulators are in the process of updating the CRA
services the credit needs of a local area. Congress has
regulatory framework to address changing market needs.
shown considerable interest in the state of community
Many in Congress have expressed an ongoing interest in
banks and how they affect the communities they serve.
how any new CRA regulations will affect the communities
served by the banks and availability of affordable credit to
The number of smaller community banks has declined in
low- and moderate-income communities.
recent years, whereas the asset share of the largest banks
has grown. There are 5,477 insured banks in the United
CRS Resources
States, which hold $17.7 trillion in assets and $16.5 trillion
CRS Report R45073, Economic Growth, Regulatory Relief,
in deposits. The nine largest banks, each have over $250
and Consumer Protection Act (P.L. 115-174) and Selected
billion in assets, hold nearly 50% of all assets and deposits.
Policy Issues, coordinated by David W. Perkins
The 129 banks that are between $10 billion and $250 billion
in asset size hold nearly 34% of all assets and 33% of all
CRS Report R41350, The Dodd-Frank Wall Street Reform
deposits. The remaining 5,339 banks, which are less than
and Consumer Protection Act: Background and Summary,
$10 billion in asset size, hold 16% of all assets and 17% of
coordinated by Baird Webel
all deposits.
Raj Gnanarajah,
Although bank regulation is tailored in a number of ways to
David W. Perkins, Analyst in Macroeconomic Policy
reduce the regulatory burden on these institutions, some
IF10035
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Introduction to Financial Services: Banking
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