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Introduction to Financial Services: The Regulatory Framework
This In Focus provides a brief introduction to the federal
111-203) consolidated and expanded jurisdiction
agencies that regulate U.S. financial markets. For more
over various consumer protection laws for certain
detail, see CRS Report R44918, Who Regulates Whom? An
financial products in a newly created agency, the
Overview of the U.S. Financial Regulatory Framework, by
Consumer Financial Protection Bureau.
Marc Labonte.
These regulators regulate financial institutions, markets,
The Financial System
and products using licensing, registration, rulemaking,
Financial firms match the available funds of savers and
supervisory, enforcement, and resolution powers. Financial
investors with borrowers and others seeking to raise funds
regulation aims to achieve diverse goals, which vary from
in exchange for future payouts. The products, instruments,
regulator to regulator: market efficiency and integrity,
and markets used to facilitate this matching are myriad, and
consumer and investor protections, capital formation or
they are overseen by a complex system of regulators. The
access to credit, taxpayer protection, illicit activity
financial system is often divided into banking, insurance,
prevention, and financial stability. Different types of
and securities markets. Securities are financial contracts
regulation—prudential (safety and soundness), disclosure,
that pledge to make payments from the issuer to the holder
standard setting, competition, and price and rate
and generally are traded on markets. Contracts take the
regulations—are used to achieve these goals .
form of debt (a borrower and creditor relationship) and
equity (an ownership relationship).
Other entities that play a role in financial regulation are
self-regulatory organizations, interagency bodies, state
Financial activity is inherently risky, but without risk-
regulators, and international regulatory fora. Federal
taking, businesses could not expand or innovate and
regulators generally play a secondary role in insurance
households would be unable to purchase durable goods,
markets, where state regulation predominates.
education, and housing that could not be financed out of
current income. Financial regulation aims to balance the
Regulatory Fragmentation
benefits of finance with the risks that it poses.
The financial regulatory system is fragmented, with
multiple overlapping regulators and a dual state-federal
The Financial Regulatory Framework
regulatory system. The system evolved piecemeal, as
Table 1 lists the federal financial regulators and whom they
Congress responded to emerging issues, punctuated by
regulate. It categorizes those regulators as follows:
major changes in response to historical financial crises. The
2007-2009 financial crisis also led to changes to the
Depository regulators—regulate institutions
regulatory system. To address the fragmented nature of the
(commercial banks, thrifts (savings associations),
system, the Dodd-Frank Act created the Financial Stability
and credit unions) that accept customer deposits;
Oversight Council (FSOC), a council of regulators and
experts chaired by the Treasury Secretary.
Securities markets regulators—regulate
securities products, markets, and market
In practice, regulatory jurisdiction over institutions is
participants. For regulatory purposes, securities
typically based on charter type, not function. This means
markets can be divided into derivatives (whose
that a similar activity being conducted by two different
value is based on an underlying commodity,
types of firms can be regulated differently by different
financial indicator, or financial instrument) and
regulators. Financial firms may be subject to more than one
other types of securities;
regulator because they may engage in multiple financial
activities. For example, a firm may be overseen by an
Government-sponsored enterprise (GSE)
institution regulator and by an activity regulator when it
regulators—Congress created GSEs as privately
engages in a regulated activity and by a market regulator
owned institutions with limited missions and
when it participates in a regulated market.
charters to support the mortgage and agricultural
credit markets. It also created dedicated regulators
Drawbacks to the fragmented regulatory system are the
exclusively to oversee the GSEs , some of which
potential for jurisdictional gaps, which may cause
were consolidated by the Housing and Economic
regulatory myopia, and overlaps, which may cause
Recovery Act of 2008 (P.L. 110-289).
redundant regulation. These gaps and overlaps could be
exploited by financial firms to elude regulation or benefit
Consumer protection regulator—the Dodd-
from a “race to the bottom” in regulatory standards between
Frank Wall Street Reform and Consumer
competing regulators. Advantages to the fragmented system
Protection Act in 2010 (Dodd-Frank Act; P.L.
include more specialized and knowledgeable regulators. In
https://crsreports.congress.gov
Introduction to Financial Services: The Regulatory Framew ork
addition, overlapping regulators could reduce the likelihood
of blind spots or “group think” in regulation.
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 federal regulator of state banks that are members of the
certain payment systems;
Federal Reserve System, foreign banking organizations operating in the
conducts monetary policy
United States, Edge Corporations, and any firm or payment system
designated as systemical y significant by the FSOC
Office of the Comptrol er
National banks, U.S. federal branches of foreign banks, and federal y
of the Currency (OCC)
chartered thrift institutions
Federal Deposit Insurance
Federal y insured depository institutions
Operates deposit insurance
Corporation (FDIC)
Primary federal regulator of state banks that are not members of the
for banks; resolves failing
Federal Reserve System and state-chartered thrift institutions
banks
National Credit Union
Federal y chartered or federal y 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
National y recognized statistical rating organizations
Security-based swap (SBS) dealers, major SBS participants, and SBS
execution facilities
Corporations sel ing 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 al 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
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Introduction to Financial Services: The Regulatory Framew ork
IF11065
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