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Updated January 4, 2021
Introduction to Financial Services: Banking
Banks serve an important role in the financial system and
charter type and corporate structure determine its primary
broader economy. They aggregate the savings of
federal prudential regulator (see Table 1). Banks are
households and businesses and lend to individuals,
chartered and regulated as national banks under the
businesses, and federal and local governments. Economic
authority of the Office of the Comptroller of the Currency
output would be lower if, instead of banks, businesses had
(OCC) or as state banks under the authority of a state
to finance investments themselves or individuals had to rely
regulator. The Federal Reserve (Fed) and the FDIC regulate
on their savings alone to make expenditures (e.g., home and
state banks in conjunction with state bank regulators. Most
car purchases). Banks also provide other important financial
banks are owned by a parent company—called a bank
services, such as payments processing.
holding company (BHC). Some BHCs have subsidiaries
that engage in nonbank financial activities, such as
This In Focus reviews key concepts in banking, provides an
underwriting and dealing in certain types of securities. The
overview of banking-related regulations and recent banking
Fed is the primary regulator of BHCs.
regulation, and highlights emerging policy issues.
Table 1. Primary Federal Depository Regulators
Key Concepts in Banking
Bank generally refers to an institution that accepts deposits,
Regulator
Oversees
makes loans, and processes payments, including
Office of the Comptrol er
National y chartered banks and
commercial banks and thrifts (but generally not credit
of the Currency (OCC)
national thrifts
unions, which have a different ownership model). To accept
deposits, an institution must have a federal or state issued
Federal Reserve (Fed)
Bank holding companies; and Fed
charter. Bank deposits are generally insured by the federal
member state banks and thrifts
government, subject to certain limits. Using customer
Federal Deposit Insurance Non-Fed member state banks
deposits and other funding, banks generally make loans and
Corporation (FDIC)
and thrifts
acquire certain other assets.
National Credit Union
Federal y chartered or insured
Balance Sheet. An understanding of a bank’s balance
Administration (NCUA)
credit unions
sheet—its assets, liabilities, and capital—provides the
Source: Congressional Research Service.
foundation for analyzing many banking issues. Loans made
and securities owned by a bank typically comprise the
Capital and liquidity rules are important prudential
majority of assets on a bank’s balance sheet. To get the
regulation tools. Holding a high level of capital can make a
funding to make loans and acquire assets, banks use
bank’s failure less likely because capital can be written
liabilities and capital. Customer deposits (e.g., checking and
down to absorb losses. For this reason, banks are generally
savings account deposits) and any debt that a bank issues
required to maintain sufficient levels of capital to ensure
(e.g., bonds, repurchase agreements) are liabilities of the
solvency and protect bank depositors and taxpayers. Banks
bank, as the bank owes these funds to its customers and
need liquidity to meet short-term obligations; thus, banks
creditors. The difference between the assets and liabilities is
the bank’s equity (i.e., ownership interest)
are generally required to hold liquid assets or use stable
.
funding to ensure adequate liquidity.
Deposit Insurance. Federal deposit insurance is intended to
Consumer Compliance. Consumer compliance regulations
prevent bank runs and promote financial stability to the
financial markets by guaranteeing individuals’
seek to ensure that banks conform to applicable consumer
bank
protection and fair-lending laws. The Consumer Financial
deposits up to a $250,000 account limit. Although the
Protection Bureau (CFPB), created by the Dodd-Frank Wal
deposit insurance is funded by the industry, it is backed by
Street Reform and Consumer Protection Act (Dodd-Frank
the full faith and credit of the United States (and thus,
Act; P.L. 111-203), is primarily responsible for issuing the
ultimately by the taxpayers). The Federal Deposit Insurance
rules that all banks must comply with. CFPB is the primary
Corporation (FDIC) insures bank deposits.
supervisor for consumer compliance at banks with more
Overview of Regulation
than $10 billion in assets. Prudential regulators are the
primary supervisors for consumer compliance at banks with
Two major components of bank regulation are prudential
$10 billion or less in total assets.
and consumer compliance regulation.
Recent Banking Legislation
Prudential. Prudential regulation (or “safety and
soundness” regulation) is designed to promote bank
Congress passed the Dodd-Frank Act in response to the
2007-2009 financial crisis. This major response was
profitability and avoid bank failures, thereby protecting
arguably the most comprehensive financial reform
taxpayers and the stability of the financial system. A bank’s
legislation since the 1930s.
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Introduction to Financial Services: Banking
Debates have arisen over whether the benefits generated by
Some observers argue that tailoring regulations does not go
the changes implemented under the act (e.g., greater
far enough to relieve regulatory burden on small banks.
financial stability and consumer protections) justify the
costs (e.g., compliance costs to banks and reduced credit
Figure 1. Asset Concentration by Bank Size
availability). To address concerns related to a perceived
regulatory burden imposed on banks by the Dodd-Frank
Act, Congress passed the Economic Growth, Regulatory
Relief, and Consumer Protection Act (P.L. 115-174) in
2018, which modified certain aspects of the Dodd-Frank
Act and bank regulation.
Policy Issues
Congress continues to debate whether policy responses to
the 2007-2009 financial crisis and subsequent reform
through P.L. 115-174 and regulation are appropriate. Other
ongoing policy issues of interest to Congress are
highlighted below.
Source: Created by CRS with information from FDIC’s Quarterly
Coronavirus Disease 2019 (COVID-19). The COVID-19
Banking profile.
pandemic could lead to losses on bank loans, which could
affect bank profitability and the availability of credit. In
Fintech. Financial technology, or “fintech,” usually refers
response, banks have received temporary regulatory relief
to technologies with the potential to alter the way certain
from regulators and the CARES Act (P.L. 116-136).
financial services are performed. Technological
developments affect banks in two ways: (1) banks face
Large Bank Regulation. The Dodd-Frank Act required the
choices over how much to invest in emerging technologies
Fed to apply enhanced prudential standards (EPS) to BHCs
and to what extent to alter their business models to adopt
with assets of $50 billion or more. P.L. 115-174 raised that
technologies; and (2) they potentially face competition from
threshold to $250 billion and granted the Fed discretion to
new technology-focused companies, which may offer
determine which EPS are applicable to BHCs with $100
similar products but may not be subject to the same
regulations as banks. One subject of debate is whether
billion to $250 billion.
aspects of the regulation of banks and fintech companies
Market Concentration and Community Banks.
are being appropriately calibrated given recent
Community bank is not officially defined but generally
developments.
refers to a small (though size is not necessarily a
determining factor) bank that services the needs of a local
Community Reinvestment Act (CRA). Congress passed
area. Congress has shown considerable interest in the status
CRA (P.L. 95-128) to address a lack of lending in low-
of community banks.
income neighborhoods. CRA requires regulators to evaluate
how well banks are meeting credit needs in the areas where
Bank consolidation has led to a high concentration of bank
they function and consider those evaluations when banks
assets in a small number of larger banks, as shown Figure
want to operate in new areas. In 2020, to address changing
1. The number of smaller community banks has been in
market needs, the OCC issued a final rule and the Fed
decline for decades, and the asset share of the largest banks
proposed a rule, but without consensus between them on
has grown. As of September 2020, there were 5,033 insured
how to reform CRA. Many in Congress have expressed
banks in the United States, down from a peak of 18,083 in
ongoing interest in how any new CRA regulations would
1986. The industry held $21.2 trillion in assets, 85% of
affect the communities served by banks and the availability
which were held by 151 of the largest banks, each of which
of affordable credit to low- and moderate-income areas.
had more than $10 billion in assets (the top 13 banks hold
CRS Resources
55% of all assets). The 766 banks with assets of between $1
billion and $10 billion held nearly 10% of all assets, and the
CRS Report R45518, Banking Policy Issues in the 116th
remaining 4,116 banks with less than $1 billion in assets
Congress, coordinated by David W. Perkins
collectively held about 5%.
CRS Report R46422, COVID-19 and the Banking Industry:
Several factors have contributed to bank consolidations in
Risk s and Policy Responses, coordinated by David W.
the past 35 years. The significant deregulation of interstate
Perkins
branch and banking restrictions in the 1980s and early
1990s played a role. Technological advances may have
CRS Report R45073, Economic Growth, Regulatory Relief,
increased economies of scale in banking. Some have argued
and Consumer Protection Act (P.L. 115-174) and Selected
small bank regulatory burden is another factor, as smaller
Policy Issues, coordinated by David W. Perkins
banks might have fewer resources to dedicate to
compliance. Small banks are subject to fewer regulations
Raj Gnanarajah, Analyst in Financial Economics
than large banks, and P.L. 115-174 included provisions
David W. Perkins, Specialist in Macroeconomic Policy
providing targeted relief to banks below certain asset sizes.
IF10035
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Introduction to Financial Services: Banking
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