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Updated January 13, 2022
Introduction to Financial Services: Banking
Banks serve an important role in the financial system and
profitability and avoid bank failures, thereby protecting
broader economy. They aggregate the savings of
taxpayers and the stability of the financial system. A bank’s
households and businesses and lend to individuals,
charter type and corporate structure determine its primary
businesses, and federal and local governments. Economic
federal prudential regulator (see Table 1). Banks are
output would be lower if, instead of banks, businesses had
chartered and regulated as national banks under the
to finance investments themselves or individuals had to rely
authority of the Office of the Comptroller of the Currency
on their savings alone to make expenditures (e.g., home and
(OCC) or as state banks under the authority of a state
car purchases). Banks also provide other important financial
regulator. The Federal Reserve (Fed) and the FDIC regulate
services, such as payment processing.
state banks in conjunction with state bank regulators. Most
banks are owned by a parent company—called a bank
This In Focus reviews key concepts in banking, provides an
holding company (BHC). Some BHCs have subsidiaries
overview of banking-related regulations and recent banking
that engage in nonbank financial activities, such as
regulation, and highlights emerging policy issues.
underwriting and dealing in certain types of securities. The
Fed is the primary regulator of BHCs.
Key Concepts in Banking
A bank generally refers to an institution that accepts
Table 1. Primary Federal Depository Regulators
deposits, makes loans, and processes payments, including
commercial banks and thrifts (but generally not credit
Regulator
Oversees
unions, which have a different ownership model). To accept
Office of the Comptroller
Nationally chartered banks and
deposits, an institution must have a federal or state charter.
of the Currency (OCC)
national thrifts
Bank deposits are generally insured by the federal
government, subject to certain limits. Using customer
Federal Reserve (Fed)
Bank holding companies and Fed
deposits and other funding, banks generally make loans and
member state banks and thrifts
acquire certain other assets.
Federal Deposit Insurance Non-Fed member state banks
Corporation (FDIC)
and thrifts
Balance Sheet. An understanding of a bank’s balance
sheet—its assets, liabilities, and capital (equity)—provides
National Credit Union
Federally chartered or insured
the foundation for analyzing many banking issues. Loans
Administration (NCUA)
credit unions
made and securities owned by a bank typically comprise the
Source: CRS.
majority of assets on a bank’s balance sheet. To get the
funding to make loans and acquire assets, banks use
Capital and liquidity rules are important prudential
liabilities and capital. Customer deposits (e.g., checking and
regulation tools. Holding a high level of capital can make a
savings account deposits) and any debt that a bank issues
bank’s failure less likely, because capital can be written
(e.g., bonds, repurchase agreements) are liabilities of the
down to absorb losses. For this reason, banks are generally
bank, as the bank owes these funds to its customers and
required to maintain sufficient levels of capital to ensure
creditors. The difference between the assets and liabilities
solvency and protect bank depositors and taxpayers. Banks
equals the bank’s equity (assets - liabilities = equity).
Equity can be thought of as the bank’s ownership stake
need liquidity to meet short-term obligations. Thus, banks
in
are generally required to hold liquid assets or use stable
the institution.
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 Wall
deposit insurance is funded by the industry, it is backed by
Street Reform and Consumer Protection Act (P.L. 111-
the full faith and credit of the United States (and thus,
203), is primarily responsible for issuing the rules that all
ultimately by the taxpayers). The Federal Deposit Insurance
banks must comply with. The 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.
Prudential. Prudential regulation (or “safety and
soundness” regulation) is designed to promote bank
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Introduction to Financial Services: Banking
Recent Banking Legislation
providing targeted relief to banks below certain asset sizes.
Congress passed Dodd-Frank in response to the 2007-2009
Some observers argue that tailoring regulations does not go
financial crisis. This major response was arguably the most
far enough to relieve regulatory burden on small banks.
comprehensive financial reform legislation since the 1930s.
Figure 1. Asset Concentration by Bank Size
Debates have arisen over whether the benefits generated by
the changes implemented under the act (e.g., greater
financial stability and consumer protections) justify the
costs (e.g., compliance costs to banks and reduced credit
availability). To address concerns related to a perceived
regulatory burden imposed on banks by Dodd-Frank,
Congress passed the Economic Growth, Regulatory Relief,
and Consumer Protection Act (P.L. 115-174) in 2018,
which modified certain aspects of Dodd-Frank 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
Source: Created by CRS with information from FDIC’s Quarterly
ongoing policy issues of interest to Congress are
Banking profile. Any differences are due to rounding.
highlighted below.
In the 117th Congress, some Members introduced the Bank
COVID-19. To address concerns over bank and consumer
Merger Review Modernization Act of 2021 (H.R. 5419 and
financial health during the COVID-19 pandemic, Congress
S. 2882), which would amend bank merger processes and
passed various legislation, including the CARES Act (P.L.
requirements. Similar bills were introduced in the 116th
116-136) and the Consolidated Appropriations Act, 2021
Congress. Among its provisions, the legislation would
(P.L. 116-260). These acts provided temporary relief for
authorize the CFPB to deny bank merger applications if the
banks. Bank regulators also modified some of the
new consolidated institution would not have adequate
regulations under existing authority to provide relief.
systems in place to ensure compliance with federal
consumer laws. Other provisions would require the bank
Large Bank Regulation. Dodd-Frank required the Fed to
regulators to perform a cost-benefit analysis and consider
apply enhanced prudential standards (EPS) to BHCs with
competitive effects on the market and Community
assets of $50 billion or more. P.L. 115-174 raised that
Reinvestment Act (CRA) performance.
threshold to $250 billion and granted the Fed discretion to
determine which EPS are applicable to BHCs with $100
Congress passed CRA (P.L. 95-128) to address a lack of
billion to $250 billion.
lending in low-income neighborhoods. CRA requires
regulators to evaluate how well banks are meeting credit
Market Concentration and Community Banks.
needs in the areas where they function and consider those
Community bank is not officially defined but generally
evaluations when banks want to operate in new areas.
refers to a small (though size is not necessarily a
determining factor) bank that services the needs of a local
Fintech. Financial technology, or “fintech,” usually refers
area. Congress has shown considerable interest in the status
to technologies with the potential to alter the way certain
of community banks. Bank consolidation has led to a high
financial services are performed. Banks may enter into
concentration of bank assets in a small number of larger
contracts with fintech companies to reach new markets or
banks, as shown in Error! Reference source not found..
improve efficiency. Alternatively, banks may face potential
The number of smaller community banks has been in
competition from those companies, which may offer similar
decline for decades. As of September 2021, there were
products but may not be subject to the same regulations as
4,914 insured banks in the United States, down from a peak
banks. Regulators are considering the extent to which
of 18,083 in 1986. The industry holds $23,252 billion in
certain fintech companies may be granted charters to
assets, 86% of which is held by 162 of the largest banks,
operate as special purpose banks.
each of which had more than $10 billion in assets. (The top
CRS Resources
13 banks hold 55% of all assets.)
CRS Report R46699, Banking Policy Issues in the 117th
Several factors have contributed to bank consolidations in
Congress, coordinated by David W. Perkins
the past 35 years. The significant deregulation of interstate
branch and banking restrictions in the 1980s and early
CRS Report R45073, Economic Growth, Regulatory Relief,
1990s played a role. Technological advances may have
and Consumer Protection Act (P.L. 115-174) and Selected
increased economies of scale in banking. Some have argued
Policy Issues, coordinated by David W. Perkins
small bank regulatory burden is another factor, as smaller
banks might have fewer resources to dedicate to
Raj Gnanarajah, Analyst in Financial Economics
compliance. Small banks are subject to fewer regulations
Andrew P. Scott, Analyst in Financial Economics
than large banks, and P.L. 115-174 included provisions
IF10035
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Introduction to Financial Services: Banking
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