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January 8, 2019
Introduction to Financial Services: The Regulatory Framework
This In Focus provides a brief introduction to the federal
over various consumer protection laws for certain
agencies that regulate U.S. financial markets. For more
financial products in a newly created agency, the
detail, see CRS Report R44918, Who Regulates Whom? An
Consumer Financial Protection Bureau.
Overview of the U.S. Financial Regulatory Framework, by
Marc Labonte.
These regulators regulate financial institutions, markets,
and products using licensing, registration, rulemaking,
The Financial System
supervisory, enforcement, and resolution powers.
Financial firms match the available funds of savers and
investors with borrowers and others seeking to raise funds
Other entities that play a role in financial regulation are
in exchange for future payouts. The products, instruments,
self-regulatory organizations, interagency bodies, state
and markets used to facilitate this matching are myriad, and
regulators, and international regulatory fora. Federal
they are overseen by a complex system of regulators. The
regulators generally play a secondary role in insurance
financial system is often divided into banking, insurance,
markets, where state regulation predominates.
and securities markets. Securities are financial contracts
that pledge to make payments from the issuer to the holder
Regulatory Fragmentation
and are traded on markets. Contracts take the form of debt
The financial regulatory system has been described as
(a borrower and creditor relationship) and equity (an
fragmented, with multiple overlapping regulators and a dual
ownership relationship).
state-federal regulatory system. The system evolved
piecemeal, as Congress responded to emerging issues,
Financial activity is inherently risky, but without risk-
punctuated by major changes in response to historical
taking, businesses could not expand or innovate and
financial crises. The most recent financial crisis also
households would be unable to purchase durable goods,
resulted in changes to the regulatory system through the
education, and housing that could not be financed out of
Dodd-Frank Act and the Housing and Economic Recovery
current income. Financial regulation aims to balance the
Act of 2008 (P.L. 110-289). To address the fragmented
benefits of finance with the risks that it poses.
nature of the system, the Dodd-Frank Act created the
Financial Stability Oversight Council (FSOC), a council of
The Financial Regulatory Framework
regulators and experts chaired by the Treasury Secretary.
Table 1 lists the federal financial regulators and whom they
regulate. It categorizes those regulators as follows:
In practice, regulatory jurisdiction is typically based on
charter type, not function. In other words, how and by
Depository regulators—regulate institutions
whom a firm is regulated depends more on the firm’s legal
(commercial banks, thrifts (savings associations),
status than the types of activities that it is conducting. This
and credit unions) that accept customer deposits;
means that a similar activity being conducted by two
different types of firms can be regulated differently by
Securities markets regulators—regulate
different regulators. Financial firms may be subject to more
securities products, markets, and market
than one regulator because they may engage in multiple
participants. For regulatory purposes, securities
financial activities. For example, a firm may be overseen by
markets can be divided into derivatives (whose
an institution regulator and by an activity regulator when it
value is based on an underlying commodity,
engages in a regulated activity and by a market regulator
financial indicator, or financial instrument) and
when it participates in a regulated market.
other types of securities;
Drawbacks to the fragmented regulatory system are the
Government-sponsored enterprise (GSE)
potential for jurisdictional gaps, which may cause
regulators—Congress created GSEs as privately
regulatory myopia, and overlaps, which may cause
owned institutions with limited missions and
redundant regulation. These gaps and overlaps could be
charters to support the mortgage and agricultural
exploited by financial firms to elude regulation or benefit
credit markets. It also created dedicated regulators
from a “race to the bottom” in regulatory standards between
exclusively to oversee the GSEs.
competing regulators. Advantages to the fragmented system
include more specialized regulators, with a deeper and more
Consumer protection regulator—the Dodd-
targeted knowledge of firms, products, and markets. In
Frank Wall Street Reform and Consumer
addition, overlapping regulators could reduce the likelihood
Protection Act in 2010 (Dodd-Frank Act; P.L.
of blind spots or “group think” in regulation.
111-203) consolidated and expanded jurisdiction
https://crsreports.congress.gov
Introduction to Financial Services: The Regulatory Framework
Table 1. Federal Financial Regulators and Whom They Regulate
Other Notable
Regulatory Agency
Institutions Regulated
Authority
Depository Regulators
Federal Reserve
Bank holding companies and certain subsidiaries (e.g., foreign
Operates discount window
subsidiaries), financial holding companies, securities holding companies,
(“lender of last resort”) for
and savings and loan holding companies
depositories; operates
Primary regulator of state banks that are members of the Federal
certain payment systems;
Reserve System, foreign banking organizations operating in the United
conducts monetary policy
States, Edge Corporations, and any firm or payment system designated
as systemically significant by the FSOC
Office of the Comptrol er
National banks, U.S. federal branches of foreign banks, and federally
of the Currency (OCC)
chartered thrift institutions
Federal Deposit Insurance
Federally insured depository institutions
Operates deposit insurance
Corporation (FDIC)
Primary regulator of state banks that are not members of the Federal
for banks; resolves failing
Reserve System and state-chartered thrift institutions
banks
National Credit Union
Federally chartered or federally insured credit unions
Operates deposit insurance
Administration (NCUA)
for credit unions; resolves
failing credit unions
Securities Markets Regulators
Securities and Exchange
Securities exchanges, broker-dealers; clearing and settlement agencies;
Approves rulemakings by
Commission (SEC)
investment funds, including mutual funds; investment advisers, including self-regulated organizations
hedge funds with assets over $150 mil ion; and investment companies
Nationally recognized statistical rating organizations
Security-based swap (SBS) dealers, major SBS participants, and SBS
execution facilities
Corporations selling securities to the public
Commodity Futures
Futures exchanges, futures commission merchants, commodity pool
Approves rulemakings by
Trading Commission
operators, commodity trading advisors, derivatives, clearing
self-regulated organizations
(CFTC)
organizations, and designated contract markets
Swap dealers, major swap participants, swap execution facilities, and
swap data repositories
Government-Sponsored Enterprise Regulators
Federal Housing Finance
Fannie Mae, Freddie Mac, and Federal Home Loan Banks
Acting as conservator
Agency (FHFA)
(since Sept. 2008) for
Fannie and Freddie
Farm Credit
Farm Credit System, Farmer Mac
Administration (FCA)
Consumer Protection Regulator
Consumer Financial
Nonbank mortgage-related firms, private student lenders, payday
Protection Bureau (CFPB)
lenders, and larger “consumer financial entities” determined by the
CFPB
Statutory exemptions for certain markets
Rulemaking authority for consumer protection for all banks;
supervisory authority for banks with over $10 bil ion in assets
Source: CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework, by Marc Labonte.
Marc Labonte, Specialist in Macroeconomic Policy
IF11065
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Introduction to Financial Services: The Regulatory Framework
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