Who Regulates Whom? An Overview of U.S. Financial Supervision

Who Regulates Whom? An Overview of U.S.
Financial Supervision
Mark Jickling
Specialist in Financial Economics
Edward V. Murphy
Specialist in Financial Economics
December 8, 2010
Congressional Research Service
7-5700
www.crs.gov
R40249
CRS Report for Congress
P
repared for Members and Committees of Congress

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Who Regulates Whom? An Overview of U.S. Financial Supervision

Summary
This report provides an overview of current U.S. financial regulation: which agencies are
responsible for which institutions, activities, and markets, and what kinds of authority they have.
Some agencies regulate particular types of institutions for risky behavior or conflicts of interest,
some agencies promulgate rules for certain financial transactions no matter what kind of
institution engages in it, and other agencies enforce existing rules for some institutions, but not
for others. These regulatory activities are not necessarily mutually exclusive.
There are three traditional components to U.S. banking regulation: safety and soundness, deposit
insurance, and adequate capital. The Dodd-Frank Wall Street Reform and Consumer Protection
Act (P.L. 111-203) added a fourth: systemic risk. Safety and soundness regulation dates back to
the 1860s when bank credit formed the money supply. Examinations of a bank’s safety and
soundness is believed to contribute to a more stable broader economy. Deposit insurance was
established in the 1930s to reduce the incentive of depositors to withdraw funds from banks
during a panic. Banks pay premiums to support the deposit insurance fund, but the Treasury
provides full faith and credit for covered deposits if the fund were to run short. Deposit insurance
is a second reason that federal agencies regulate bank operations, including the amount of risk
they may incur. Capital adequacy has been regulated since the 1860s when “wildcat banks”
sought to make extra profits by reducing their capital reserves, which increases their risk of
default and failure. Dodd-Frank created the interagency Financial Stability Oversight Council
(FSOC) to monitor systemic risk and consolidated bank regulation from five agencies to four. For
banks and non-banks designated by the FSOC as creating systemic risk, the Federal Reserve has
oversight authority, and the Federal Deposit Insurance Corporation (FDIC) has resolution
authority.
Federal securities regulation has traditionally been based on the principle of disclosure, rather
than direct regulation. Firms that sell securities to the public must register with the Securities and
Exchange Commission (SEC), but the agency generally has no authority to prevent excessive risk
taking. SEC registration in no way implies that an investment is safe, only that the risks have
been fully disclosed. The SEC also registers several classes of securities market participants and
firms. It has enforcement powers for certain types of industry misstatements or omissions and for
certain types of conflicts of interest. Derivatives trading is supervised by the Commodity Futures
Trading Commission (CFTC), which oversees trading on the futures exchanges, which have self-
regulatory responsibilities as well. Dodd-Frank has required more disclosures in the previously
unregulated over-the-counter (off-exchange) derivatives market and has granted the CFTC and
SEC authority over large derivatives traders.
The Federal Housing Finance Agency (FHFA) oversees a group of government-sponsored
enterprises (GSEs)—public/private hybrid firms that seek both to earn profits and to further the
policy objectives set out in their statutory charters. Two GSEs, Fannie Mae and Freddie Mac,
were placed in conservatorship by the FHFA in September 2008 after losses in mortgage asset
portfolios made them effectively insolvent.
Dodd-Frank consolidated consumer protection rulemaking, which had been dispersed among
several federal agencies in a new Bureau of Consumer Financial Protection. The bureau is
intended to bring consistent regulation to all consumer financial transactions, although the
legislation exempted several types of firms and transactions from its jurisdiction.
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Who Regulates Whom? An Overview of U.S. Financial Supervision

Contents
Introduction ................................................................................................................................ 1
What Financial Regulators Do..................................................................................................... 1
Banking Regulation .................................................................................................................... 6
Safety and Soundness Regulation.......................................................................................... 6
Deposit Insurance ................................................................................................................. 7
Capital Regulation ................................................................................................................ 7
Systemic Risk ....................................................................................................................... 8
Capital Requirements .................................................................................................................. 8
Basel III ................................................................................................................................ 9
Capital Provisions in Dodd-Frank ....................................................................................... 10
Non-Bank Capital Requirements ......................................................................................... 12
The SEC’s Net Capital Rule .......................................................................................... 12
CFTC Capital Requirements ......................................................................................... 12
Federal Housing Finance Agency .................................................................................. 13
The Federal Financial Regulators .............................................................................................. 14
Banking Regulators............................................................................................................. 14
Office of the Comptroller of the Currency ..................................................................... 15
Federal Deposit Insurance Corporation.......................................................................... 15
The Federal Reserve...................................................................................................... 16
Office of Thrift Supervision (Abolished by Dodd-Frank)............................................... 17
National Credit Union Administration ........................................................................... 18
Non-Bank Financial Regulators........................................................................................... 18
Securities and Exchange Commission ........................................................................... 18
Commodity Futures Trading Commission ..................................................................... 21
Federal Housing Finance Agency .................................................................................. 21
Bureau of Consumer Financial Protection ..................................................................... 22
Regulatory Umbrella Groups............................................................................................... 23
Financial Stability Oversight Council ............................................................................ 23
Federal Financial Institution Examinations Council ....................................................... 24
President’s Working Group on Financial Markets .......................................................... 24
Unregulated Markets and Institutions ........................................................................................ 25
Foreign Exchange Markets.................................................................................................. 25
U.S. Treasury Securities ...................................................................................................... 25
Private Securities Markets................................................................................................... 26
Comprehensive Reform Legislation in the 111th Congress ................................................... 26

Figures
Figure A-1. National Bank ........................................................................................................ 28
Figure A-2. National Bank and Subsidiaries .............................................................................. 28
Figure A-3. Bank Holding Company ......................................................................................... 29
Figure A-4. Financial Holding Company ................................................................................... 29
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Who Regulates Whom? An Overview of U.S. Financial Supervision


Tables
Table 1.Federal Financial Regulators and Who They Supervise ................................................... 4
Table 2.The Basel Accords: Risk Weightings for Selected Financial Assets Under the
Standardized Approach ............................................................................................................ 9
Table 3.Capital Standards for Federally Regulated Depository Institutions................................. 11

Appendixes
Appendix A. Forms of Banking Organizations........................................................................... 28
Appendix B. Bank Ratings: UFIRS and CAMELS .................................................................... 30
Appendix C. Acronyms ............................................................................................................. 32
Appendix D. Regulatory Structure Before the Dodd-Frank Act.................................................. 33
Appendix E. Glossary of Terms................................................................................................. 34

Contacts
Author Contact Information ...................................................................................................... 41
Acknowledgments .................................................................................................................... 41

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Who Regulates Whom? An Overview of U.S. Financial Supervision

Introduction
Historically, major changes in financial regulation in the United States have often come in
response to crisis. Thus, it is no surprise that the turmoil beginning in 2007 led to calls for reform.
Few would argue that regulatory failure was solely to blame for the crisis, but it is widely
considered to have played a part. In February 2009, Treasury Secretary Timothy Geithner
summed up two key problem areas:
Our financial system operated with large gaps in meaningful oversight, and without
sufficient constraints to limit risk. Even institutions that were overseen by our complicated,
overlapping system of multiple regulators put themselves in a position of extreme
vulnerability. These failures helped lay the foundation for the worst economic crisis in
generations.1
In this analysis, regulation failed to maintain financial stability at the systemic level because there
were gaps in regulatory jurisdiction and because even overlapping jurisdictions—where
institutions were subject to more than one regulator—could not ensure the soundness of regulated
financial firms. In particular, limits on risk-taking were insufficient, even where regulators had
explicit authority to reduce risk.
This report attempts to set out the basic principles underlying U.S. financial regulation and to
give some historical context for the development of that system. The first section briefly
discusses the various modes of financial regulation and includes a table identifying the major
federal regulators and the types of institutions they supervise. The table also indicates certain
emergency authorities available to the regulators, including those that relate to systemic financial
disturbances. The second section focuses on capital requirements—the principal means of
constraining risky financial activity—and how risk standards are set by bank, securities, and
futures regulators.
The next sections provide brief overviews of each federal financial regulatory agency and
discussions of several major financial markets that are not subject to any federal regulation.
What Financial Regulators Do
The regulatory missions of individual agencies vary, partly as a result of historical accident. Here
is a rough division of what agencies are called upon to do:
• Regulate Certain Types of Financial Institutions. Some firms become subject
to federal regulation when they obtain a particular business charter, and several
federal agencies regulate only a single class of institution. Depository institutions
are a good example: a new banking firm chooses its regulator when it decides
which charter to obtain—national bank, state bank, credit union, etc.—and the
choice of charter may not greatly affect the institution’s business mix. The
Federal Housing Finance Authority (FHFA) regulates only three government-
sponsored enterprises: Fannie Mae, Freddie Mac, and the Federal Home Loan

1 Remarks by Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan, February 10, 2009,
http://www.ustreas.gov/press/releases/tg18.htm.
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Who Regulates Whom? An Overview of U.S. Financial Supervision

Bank system. Regulation keyed to particular institutions has at least two
perceived disadvantages: regulator shopping, or regulatory arbitrage, may occur
if regulated entities can choose their regulator, and unchartered firms engaging in
the identical business activity as regulated firms may escape regulation
altogether.
• Regulate a Particular Market. The New York Stock Exchange dates from 1793,
federal securities regulation from 1934. Thus, when the Securities and Exchange
Commission (SEC) was created by Congress, stock and bond market institutions
and mechanisms were already well-established, and federal regulation was
grafted onto the existing structure. As the market evolved, however, Congress
and the SEC faced numerous jurisdictional issues. For example, de minimis
exemptions to regulation of mutual funds and investment advisers created space
for the development of a trillion-dollar hedge fund industry, which was
unregulated until the Dodd-Frank Act.
Market innovation also creates financial instruments and markets that fall
between industry divisions. Congress and the courts have often been asked to
decide whether a particular financial activity belongs in one agency’s jurisdiction
or another’s.
• Regulate a Particular Financial Activity. When regulator shopping or
perceived loopholes appear to weaken regulation, one response is to create a
regulator tasked with overseeing a particular type or set of transactions,
regardless of where the business occurs or which entities are engaged in it. In
1974, Congress created the Commodity Futures Trading Commission (CFTC) at
the time when derivatives were poised to expand from their traditional base in
agricultural commodities into contracts based on financial instruments and
variables. The CFTC was given “exclusive jurisdiction” over all contracts that
were “in the character of” options or futures contracts, and such instruments were
to be traded only on CFTC-regulated exchanges. In practice, exclusive
jurisdiction was impossible to enforce, as off-exchange derivatives contracts such
as swaps proliferated. In 2000, Congress exempted swaps from CFTC regulation,
but this exemption was repealed by Dodd-Frank.
On the view that consumer financial protections should apply uniformly to all
transactions, the Dodd-Frank Act created a Bureau of Consumer Financial
Protection, with authority (subject to certain exemptions) over an array of firms
that deal with consumers.
• Regulate for Systemic Risk. One definition of systemic risk is that it occurs
when each firm manages risk rationally from its own perspective, but the sum
total of those decisions produces systemic instability under certain conditions.
Similarly, regulators charged with overseeing individual parts of the financial
system may satisfy themselves that no threats to stability exist in their respective
sectors, but fail to detect systemic risk generated by unsuspected correlations and
interactions among the parts of the global system. The Federal Reserve was for
many years a kind of default systemic regulator, expected to clean up after a
crisis, but with limited authority to take ex ante preventive measures. Dodd-
Frank creates the Financial Stability Oversight Council (FSOC) to assume a
coordinating role, with the single mission of detecting systemic stress before a
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Who Regulates Whom? An Overview of U.S. Financial Supervision

crisis can take hold (and identifying firms whose individual failure might trigger
cascading losses with system-wide consequences).
From time to time, the perceived drawbacks to the multiplicity of federal regulators brings forth
calls for regulatory consolidation.2 The legislative debate over Dodd-Frank illustrates the different
views on the topic: early versions of the Senate bill would have replaced all the existing bank
regulators with a single Financial Institution Regulatory Authority. By the end, however, Dodd-
Frank created two new agencies (and numerous regulatory offices), and eliminated only the
Office of Thrift Supervision (OTS).
There have always been arguments against regulatory consolidation. Some believe that a
fragmentary structure encourages innovation and competition and fear that the “dead hand” of a
single financial supervisor would be costly and inefficient. Also, there is little evidence that
countries with single regulators fare better during crises or are more successful at preventing
them. One of the first proposals by the Conservative government elected in the UK in May 2010
was to break up the Financial Services Authority, which has jurisdiction over securities, banking,
derivatives, and insurance.
Table 1 below sets out the federal financial regulatory structure as it will exist once all the
provisions of the Dodd-Frank Act become effective. (In many cases, transition periods end a year
or 18 months after July 21, 2010, the date of enactment. Thus, OTS does not appear in Table 1,
even though the agency will continue to operate into 2011.) Appendix D of this report contains a
pre-Dodd-Frank version of the same table. Supplemental material—charts that illustrate the
differences between banks, bank holding companies, and financial holding companies—appears
in Appendix A.


2 See, e.g., U.S. Department of the Treasury, Blueprint for a Modern Financial Regulatory Structure, March 2008,
which called for a three-agency structure: a systemic risk regulator, a markets supervisor, and a consumer regulator.
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Table 1.Federal Financial Regulators and Who They Supervise
Emergency/Systemic
Other Notable
Regulatory Agency
Institutions Regulated
Risk Powers
Authority
Federal Reserve
Bank holding companiesa
Lender of last resort to

and certain subsidiaries,
member banks (through
financial holding
discount window lending)
companies, securities
holding companies, savings
In “unusual and exigent
and loan holding
circumstances” the Fed
companies, and any firm
may extend credit beyond
designated as systemically
member banks, for the
significant by the FSOC
purpose of providing
liquidity to the financial
State banks that are
system, but not to aid
members of the Federal
failing financial firms
Reserve System, U.S.
branches of foreign banks,
May initiate resolution
and foreign branches of
process to shut down
U.S. banks
firms that pose a grave
threat to financial stability
Payment, clearing, and
(requires concurrence of
settlement systems
2/3 of the FSOC)
designated as systemically
significant by the FSOC,
unless regulated by SEC or
CFTC
Office of the Comptrol er
National banks, U.S.


of the Currency (OCC)
federal branches of foreign
banks, federal y chartered
thrift institutions
Federal Deposit Insurance
Federally-insured
After making a

Corporation (FDIC)
depository institutions,
determination of systemic
including state banks that
risk, the FDIC may invoke
are not members of the
broad authority to use the
Federal Reserve System
deposit insurance funds to
and state-chartered thrift
provide an array of
institutions
assistance to depository
institutions, including debt
guarantees
National Credit Union
Federally-chartered or
Serves as a liquidity lender
Operates a deposit
Administration (NCUA)
insured credit unions
to credit unions
insurance fund for credit
experiencing liquidity
unions, the National
shortfal s through the
Credit Union Share
Central Liquidity Facility
Insurance Fund (NCUSIF)
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Emergency/Systemic
Other Notable
Regulatory Agency
Institutions Regulated
Risk Powers
Authority
Securities and Exchange
Securities exchanges,
May unilaterally close
Authorized to set financial
Commission (SEC)
brokers, and dealers;
markets or suspend
accounting standards
clearing agencies; mutual
trading strategies for
which al publicly traded
funds; investment advisers
limited periods
firms must use
(including hedge funds with
assets over $150 million)
Nationally-recognized
statistical rating
organizations
Security-based swap (SBS)
dealers, major SBS
participants, SBS execution
facilities
Corporations selling
securities to the public
must register and make
financial disclosures
Commodity Futures
Futures exchanges,
May suspend trading,

Trading Commission
brokers, commodity pool
order liquidation of
(CFTC)
operators, commodity
positions during market
trading advisors
emergencies.
Swap dealers, major swap
participants, swap
execution facilities
Federal Housing Finance
Fannie Mae, Freddie Mac,
Acting as conservator

Agency (FHFA)
and the Federal Home
(since Sept. 2008) for
Loan Banks
Fannie and Freddie






Nonbank mortgage-related

Bureau of Consumer
firms, private student
Financial Protection
Writes rules to carry out
lenders, payday lenders,
the federal consumer

and larger “consumer
financial protection laws
financial entities” to be

determined by the Bureau

Consumer businesses of

banks with over $10 billion
in assets
Does not supervise
insurers, SEC and CFTC
registrants, auto dealers,
sellers of nonfinancial
goods, real estate brokers
and agents, and banks with
assets less than $10 billion
Source: CRS.
a. See Appendix A.
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Banking Regulation
Absent regulation, the banking system tends to multiply the supply of credit in good times and
worsen the contraction of credit in bad times. Bank profits in good times and losses in bad times
amplify the cycle of credit in the aggregate economy even in the presence of a lender-of-last
resort. One policy goal of bank regulation is to lessen the tendency of banks to feed credit bubbles
and magnify credit contractions. The regulation of the funding and activities of individual banks,
including capital requirements, is one policy tool that has been used to try to stabilize the
aggregate credit cycle in the United States.
There are three traditional components to U.S. banking regulation: safety and soundness, deposit
insurance, and adequate capital. Dodd-Frank added a fourth: systemic risk. Safety and soundness
regulation dates back to the 1860s when bank credit formed the money supply, and recent events
have demonstrated that bank safety and soundness remains an important component of the
aggregate credit cycle. Deposit insurance was established in the 1930s to reduce the incentive of
depositors to withdraw funds from banks during a panic. Banks pay premiums to support the
deposit insurance fund, but the Treasury provides full faith and credit for covered deposits if the
fund were to run short. Deposit insurance is a second reason that federal agencies regulate bank
operations, including the amount of risk they may incur. Capital adequacy has been regulated
since the 1860s when “wildcat banks” sought to make extra profits by reducing their capital
reserves, which increased their risk of default and failure. Dodd-Frank created a council to
monitor systemic risk, and consolidated bank regulation from five agencies to four. For banks and
non-banks designated as creating systemic risk, the Federal Reserve has oversight authority, and
the Federal Deposit Insurance Corporation (FDIC) has resolution authority.
Safety and Soundness Regulation
As a general concept, safety and soundness authority refers to examining and regulating the
probability of a firm’s default, and the magnitude of the losses that its owners and creditors would
suffer if the firm defaulted. One public policy justification for monitoring the safety and
soundness decisions of banks is that bank risk decisions suffer from the fallacy of composition—
the consequences to a single bank acting in its own interests diverge from the aggregate
consequences that occur if many banks choose similar risk strategies simultaneously. The fallacy
of composition is sometimes illustrated by the stadium example—a single person standing up at a
ballgame is able to see the field better, but if everyone stands up at the same time, few people will
be able to see the field better, yet most people are less comfortable. In the case of banks and bank
regulation, a single bank may be able to increase profits by making more risky loans or failing to
insure against counterparty default, without significantly increasing the probability of losing its
own access to liquidity should events turn out badly. However, if many banks simultaneously
make more risky loans, or fail to insure against counterparty default, then no single bank may
gain market share or be more profitable. Yet in the aggregate, interbank liquidity is more likely to
collapse, and the broader economy can suffer a precipitous contraction of credit. Since the 1860s,
federal bank regulators have had some authority to examine and regulate the riskiness of
individual banks’ activities because the decisions of individual banks can affect the availability of
aggregate credit and the size of aggregate financial losses.
If there is more than one agency with examination powers, then there may be a race to the bottom
in banking supervision. Some observers have claimed that the multiplicity of banking regulators
allowed some banks to shop for their regulator prior to the financial crisis of 2008. To the extent
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that this is true, regulators that are funded by chartering fees may have had an incentive to allow
their covered institutions to engage in more risky behavior at the margin because at least some of
the cost of risky lending would be borne by people outside the examining agency’s jurisdiction.
Dodd-Frank consolidated the Office of the Comptroller of the Currency (OCC) and the OTS into
a single banking regulator within Treasury, although the Federal Reserve, the FDIC, and the
National Credit Union Administration (NCUA) retained their respective examination authorities
for their covered lenders.
Subsequent to a financial crisis, individual banks may be more cautious than would be optimum
in the aggregate; the fallacy of composition also applies to lending standards that are too tight.
Federal regulator’s guidance will in some circumstances encourage banks to maintain the flow of
credit to creditworthy borrowers in a challenging environment. In the extreme case in which
credit markets completely collapse, the Federal Reserve has the ability to perform a lender-of-
last-resort role—the Fed may expand its lending facilities at its discount window. Dodd-Frank
included a council of regulators to facilitate coordination among agencies with examination
authority. In addition, Dodd-Frank required that any future Federal Reserve emergency lending be
of a general character, rather than limited to single institutions.
Deposit Insurance
Deposit insurance is designed to make the funding of banks more stable and to protect some of
the savings of American households. Prior to the 1930s, American financial crises were often
accompanied by rapid withdrawal of deposits from banks rumored to be in trouble. Even prudent,
well-managed banks would often have difficulty surviving these runs by depositors. Federal
deposit insurance assures depositors that the full faith and credit of the federal government
guarantees their deposits up to a preset level. Banks with insured deposits have suffered almost no
depositor runs since the establishment of deposit insurance; and banks have been assessed an
insurance premium by the FDIC based on the amount of their insured deposits.
The financial crisis of 2008 revealed a number of lessons related to bank runs and deposit
insurance. Several non-banks suffered the equivalent of depositor runs, including money market
mutual funds and the interbank repo market. Because the equivalent of depositor runs can occur
in other financial activities, Dodd-Frank expanded the assessment base for FDIC premiums to
include a bank’s entire balance sheet, not just its insured deposits. Furthermore, creditors of
systemically important institutions may, under extreme circumstances, be provided with
additional guarantees should a firm fail if the new systemic risk council believes that the firm’s
failure could cause the equivalent of a non-bank run.
Capital Regulation
In general, capital requirements in the context of banking regulation refer to the portion of a
bank’s total assets that is available to absorb losses. Capital requirements are technically a subset
of safety and soundness regulation, but their special place in limiting bank activity and insulating
the banking system from widespread losses warrants special attention. There are several
categories of capital and of minimum capital requirements, but the general effect of a minimum
capital requirement is to limit the ability of a bank to fund itself by relying on borrowing from
other institutions. Higher capital requirements tend to make a bank able to survive higher levels
of borrower defaults, but also limit the amount of credit that the bank will make available to
businesses, households, and governments. If there are multiple potential regulators, banks may
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attempt to shop for the least strict capital requirements. Coordination of capital requirements in
Dodd-Frank and through international negotiations is discussed in more detail below.
Systemic Risk
Systemic risk generally refers to risks to the financial system as a whole that are not readily
apparent by examining individual institutions or markets. Such risks may be concentrated in a
few large firms, or evidenced in firms that play key roles in connecting disparate markets.
Furthermore, such risks might be independent of individual firms altogether, and instead lie in
unsustainable market imbalances, such as trade relationships or government fiscal policies.
Although several agencies recognized their role in monitoring some forms of systemic risk prior
to the financial crisis of 2008, no single agency was responsible for coordinating government
regulations or had the authority to address all forms of financial systemic risk that built up in the
economy.
Dodd-Frank creates the FSOC to designate firms that might pose systemic risks and to monitor
systemic risk in the overall economy. Although the FSOC will have a permanent staff and access
to financial data collection, the Federal Reserve will act as the systemic risk regulator and the
FDIC will serve as the resolution authority for firms designated by the FSOC. These powers are
discussed in more detail under each agency below.
Capital Requirements
As a general accounting concept, capital means the equity of a business—the amount by which its
assets exceed its liabilities.3 The more capital a firm has, the greater its capacity to absorb losses
and remain solvent. Financial regulators require the institutions they supervise to maintain
specified minimum levels of capital—defined in various ways—in order to reduce the number of
failing firms and to minimize losses to investors, customers, and taxpayers when failures do
occur. Capital requirements represent a cost to businesses because they reduce the amount of
funds that may be loaned or invested in the markets. Thus, there is a perpetual tension: firms
structure their portfolios to reduce the amount of capital they must hold, while regulators
continually modify capital standards to prevent excessive risk-taking.
In U.S. banking regulation, capital standards are based on the Basel Accords, an international
framework developed under the auspices of the Bank for International Settlements.4 The guiding
principle of the Basel standards is that capital requirements should be risk-based. The riskier an
asset, the more capital a bank should hold against possible losses. The Basel Accords provide two
broad methodologies for calculating risk-based capital: (1) a standardized approach to credit risk
determinations, based on external risk assessments (such as bond ratings), and (2) an alternative
approach that relies on banks’ internal risk models and rating systems. Adoption of the latter
method—set out in the 2004 Basel II framework—in the United States has been slow, and thus far
is limited to a few large banks.5 In July 2010, in response to the global financial crisis, the Basel

3 Regulatory uses of “capital” include more specific definitions and classifications.
4 See CRS Report RL33278, The Basel Accords: The Implementation of II and the Modification of I, by Walter W.
Eubanks.
5 See CRS Report RL34485, Basel II in the United States: Progress Toward a Workable Framework, by Walter W.
(continued...)
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Committee proposed a more stringent set of capital requirements, called Basel III. These
proposals are discussed below.
Table 2 shows how the standardized approach works in assessing the amount of capital to be held
against credit risk in various types of financial instruments.6 The Basel accords call for a basic
capital requirement of 8% of the value of an asset; the risk-weighting then determines what
percentage of that 8% baseline will apply to a given asset. For example, if the risk-weighting is
0%, no capital must be held (i.e., 8% X 0% = 0). A risk weighting of 100% means that the full 8%
requirement applies. Assets weighted above 100% require that a multiple of the 8% capital
requirement be held.
Table 2.The Basel Accords: Risk Weightings for Selected Financial Assets Under the
Standardized Approach
(percentages of the 8% baseline capital requirement)
BBB+ to
Asset
AAA to AA-
A+ to A-
BBB-
BB+ to B-
Below B-
Unrated
Sovereign
Debt
0% 20% 50% 100% 150% 100%
Bank
Debt 20% 50% 50% 100% 150% 100%
Corporate Debt
20%
50%
100%
NA
150% (below
100%
BB-)
Assets not Assigned Ratings by Standard & Poor’s or other Credit Rating Agencies
Residential Mortgages
35%




Commercial Real Estate
100%




Past Due Loans
100%-150% (depending on specific provisions made to cover loan losses)
Securitization Tranches rated between BB+ and BB- 350%



Source: Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital
Standards, BIS, November 2005, pp. 15-22.
Basel III
In July 2010, the Basel Committee announced a set of measures strengthening existing capital
requirements, which became known as Basel III.7 Under the new standards, banks will be
required to hold common equity in the amount of 4.5% of risk-weighted assets, up from 2% under
Basel II. In addition, there will be a supplemental capital conservation buffer of 2.5%, meaning
that common equity must total at least 7% of assets. If the capital conservation buffer is breached,
banks will face limits on the payment of bonuses and dividends until it is restored.

(...continued)
Eubanks.
6 Note that Section 939A of Dodd-Frank requires all federal agencies to remove references to credit ratings in their
regulations. U.S. banking agencies will need to substitute another measure of credit-worthiness to comply with the
requirement.
7 Bank for International Settlements, “Group of Governors and Heads of Supervision Announces Higher Global
Minimum Capital Requirements,” September 12, 2010, at http://www.bis.org/press/p100912.htm.
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Risk measurement for some assets will become more stringent—capital requirements for trading
book assets will be linked to a measure of stressed value at risk. In addition, capital standards will
reflect liquidity risk, and banks will be required to maintain reserves of liquidity sufficient to cope
with a 30-day systemic liquidity shock.
Banks that are “globally systemic” will have to carry an extra layer of loss-absorbing capacity.
The Dodd-Frank Act already enacted a similar provision related to all firms (including nonbanks)
that are designated as systemically important by the FSOC. These firms will be subject to higher
capital standards—the precise amounts will be determined by the Federal Reserve by rule.
The Basel III proposals call for a lengthy transition period: some requirements will not take effect
until 2019. The schedule for implementation of new capital regulations is determined at the
national level, and is likely to be a lengthy process, for at least some countries.
Federal banking regulators use versions of the Basel accords as the basis for their capital
requirements. Table 3 sets out the specific standards imposed by each.
Capital Provisions in Dodd-Frank
The Dodd-Frank Act includes numerous provisions that seek to strengthen capital requirements,
especially for systemically important institutions. The general thrust of these provisions is that
systemically significant firms should be required to hold extra capital to compensate for the risk
that their failure might pose to the system at large. Title I requires banking regulators to establish
minimum risk-based capital requirements and leverage requirements on a consolidated basis for
depository institutions, depository holding companies, and firms designated as systemically
significant by the Financial Stability Oversight Council that are no lower than those were set for
depository institutions as of the date of enactment. Under this provision, no longer will holding
companies be authorized to include trust-preferred securities in Tier I capital. These requirements
are phased in, and certain small firms are exempted.
Title VI requires the federal banking regulators to make capital “requirements countercyclical, so
that the amount of capital required to be maintained … increases in times of economic expansion
and decreases in times of economic contraction, consistent with … safety and soundness.”8
Section 115(c) requires the Financial Stability Oversight Council to study the feasibility of
implementing a contingent capital requirement for systemically significant firms. Contingent
capital is debt that can be converted into equity by the issuing firm under certain circumstances.
Following the study, if the FSOC recommends, the Fed may impose contingent capital
requirements on systemically significant firms.
Section 165(j) requires the Federal Reserve to impose leverage limits on bank holding companies
with assets over $50 billion and on the systemically important nonbank financial companies that
it will supervise. When this section is implemented, such firms will be required to maintain a
debt-to-equity ratio of no more than 15-to-1.

8 Dodd-Frank Act, Section 616.
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Table 3.Capital Standards for Federally Regulated Depository Institutions
Agency Capital
Standard
Source
OCC
Minimum risk-based capital ratio of 8%. (The ratio measures bank capital against assets, with asset values risk-weighted, or adjusted
12 CFR § 3.6 (“Minimum capital
on a scale of riskiness.)
ratios”)
In addition, banks must maintain Tier 1 capitala in an amount equal to at least 3.0% of adjusted total assets. (A simple definition of
Tier 1 capital is stockholders’ equity, or the net worth of the institution. ) The 3% total assets leverage ratio applies to the most
highly rated banks, which are expected to have well-diversified risks, including no undue interest rate risk exposure; excellent
control systems; good earnings; high asset quality; high liquidity; and well managed on-and off-balance sheet activities; and in general
be considered strong banking organizations, with a rating of 1 under CAMELSb rating system of banks. For other banks, the
minimum Tier 1 leverage ratio is 4%.
FDIC
The FDIC requires institutions to maintain the same minimum leverage capital requirements (ratio of Tier 1 capital to assets) as the
12 CFR § 325.3 (“Minimum
OCC, that is, 3% for the most highly-rated institutions and 4% for others.
leverage capital requirement”)
Federal Reserve
State banks that are members of the Federal Reserve System must meet an 8% risk-weighted capital standard, of which at least 4%
12 CFR § 208.4, Regulation H
must be Tier 1 capital (3% for strong banking institutions rated “1” under the CAMELS rating system of banks).
(“Membership of State Banking
Institutions in the Federal
In addition, the Fed establishes levels of reserves that depository institutions are required to maintain for the purpose of facilitating
Reserve System”) and 12 CFR §
the implementation of monetary policy by the Federal Reserve System. Reserves consist of vault cash (currency) or deposits at the
204.9 (Reserve requirements)
nearest regional Federal Reserve branch, held against the bank’s deposit liabilities, primarily checking, saving, and time deposits
(CDs). The size of these reserves places a ceiling on the amount of deposits that financial institutions can have outstanding, and ties
deposit liabilities to the amount of assets (loans) these institutions can acquire.
OTS (abolished by
Risk-based capital must be at least 8% of risk-weighted assets. Federal statute requires that OTS capital regulations be no less
12 CFR §567
Dodd-Frank)
stringent than the OCC’s. Tangible capital must exceed 1.5% of adjusted total assets. The leverage ratio (Tier 1 capital to assets)
must be 4% of adjusted total assets (3% for thrifts with a composite CAMELS rating of 1).
NCUA
Credit unions must maintain a risk-based net worth of 7%, as a minimum to be considered well-capitalized.
NCUA Regulations (Section 702,
Subpart A)
Source: CRS.
a. Tier 1 capital or core capital means the sum of common stockholders’ equity, noncumulative perpetual preferred stock, and minority interests in consolidated
subsidiaries, minus all intangible assets, minus identified losses, minus investments in certain financial subsidiaries, and minus the amount of the total adjusted carrying
value of nonfinancial equity investments that is subject to a deduction from Tier 1 capital.
b. See Appendix B.
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Non-Bank Capital Requirements
The SEC’s Net Capital Rule
The SEC’s net capital rule, set out in17 CFR 240.15c3-1, imposes an “Aggregate Indebtedness
Standard.” No broker/dealer shall permit its aggregate indebtedness to all other persons to exceed
1500% of its net capital (or 800% of its net capital for 12 months after commencing business as a
broker or dealer). The 1500% (or 15-to-1) ratio of debt to liquid capital, is arithmetically
equivalent to a 6⅔% capital requirement.
To calculate liquid capital, SEC rules require that securities and other assets be given a “haircut”
from their current market values (or face value, in the case of bonds), to cover the risk that the
asset’s value might decline before it could be sold. The haircut concept is essentially the same as
the standardized risk weights in the Basel Accords. The riskier the asset, the greater the haircut.
For example, U.S. Treasury securities might have a haircut of zero to 1%; municipal securities,
7%; corporate bonds, 15%; common stock, 20%; and certain assets, such as unsecured
receivables or securities for which no ready market exists, receive a haircut of 100%. As
discussed below, the intent of the net capital rule is not the same as that of banking capital
requirements, because the SEC is not a safety and soundness regulator. The net capital rule is
meant to ensure that brokerages cease operations while they still have assets to meet their
customers’ claims.
The Dodd-Frank Act requires the SEC to set capital standards for major security-based swap
dealers and major security-based swap participants. The specific standards will be promulgated in
the form of regulations, probably in 2011.
CFTC Capital Requirements
Futures commission merchants (or FCMs, the futures equivalent of a securities broker/dealer) are
subject to adjusted net capital requirements. Authority to enforce the capital rules is delegated by
the CFTC to the National Futures Association (NFA), a self-regulatory organization created by
Congress.
Each NFA Member that is required to be registered with the CFTC as a Futures Commission
Merchant (Member FCM) must maintain “Adjusted Net Capital” (as defined in CFTC Regulation
1.17) equal to or in excess of the greatest of:
(i) $500,000;
(ii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $6,000 for each
remote location operated;
(iii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $3,000 for each
associated person;
(iv) For securities brokers and dealers, the amount of net capital specified by SEC
regulations;
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(v) 8% of domestic and foreign domiciled customer and 4% of non-customer (excluding
proprietary) risk maintenance margin/performance bond requirements for all domestic and
foreign futures and options on futures contracts excluding the risk margin associated with
naked long option positions;
(vi) For Member FCMs with an affiliate that engages in foreign exchange (FX) transactions
and that is authorized to engage in those transactions solely by virtue of its affiliation with a
registered FCM, $7,500,000; or
(vii) For Member FCMs that are counterparties to FX options, $5,000,000, except that FX
Dealer Members must meet the higher requirement in Financial Requirements Section 11.9
The Dodd-Frank Act requires the CFTC to set capital standards for major security-based swap
dealers and major security-based swap participants. The specific standards will be promulgated in
the form of regulations, probably in 2011.
Federal Housing Finance Agency
FHFA is authorized to set capital classification standards for the Federal Home Loan Banks,
Fannie Mae, and Freddie Mac that reflect the differences in operations between the banks and the
latter two government-sponsored enterprises.10 The law defines several capital classifications, and
prescribes regulatory actions to be taken as a GSE’s condition worsens.
FHFA may downgrade the capital classification of a regulated entity (1) whose conduct could
rapidly deplete core or total capital, or (in the case of Fannie or Freddie) whose mortgage assets
have declined significantly in value, (2) which is determined (after notice and opportunity for a
hearing) to be in an unsafe or unsound condition, or (3) which is engaging in an unsafe or
unsound practice.
No growth in total assets is permitted for an undercapitalized GSE, unless (1) FHFA has accepted
the GSE’s capital restoration plan, (2) an increase in assets is consistent with the plan, and (3) the
ratio of both total capital to assets and tangible equity to assets is increasing. An undercapitalized
entity is subject to heightened scrutiny and supervision.
If a regulated entity is significantly undercapitalized, FHFA must take one or more of the
following actions: new election of Directors, dismissal of Directors and/or executives, and hiring
of qualified executive officers, or other actions. Without prior written approval, executives of a
significantly undercapitalized regulated entity may not receive bonuses or pay raises. In addition,
FHFA may appoint a receiver or conservator for several specified causes related to financial
difficulty and/or violations of law or regulation.
When a GSE becomes critically undercapitalized, mandatory receivership or conservatorship
provisions apply. For example, FHFA must appoint itself as the receiver if a regulated entity’s
assets are (and have been for 60 days) less than its obligations to its creditors, or if the regulated
entity has (for 60 days) not been generally paying its debts as they come due. The FHFA

9 National Futures Association, NFA Manual/Rules, Section 7001, http://www.nfa.futures.org/nfaManual/
manualFinancial.asp#fins1.
10 See Sections 1142 and 1143 of the Housing and Economic Recovery Act of 2008, P.L. 110-289.
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appointed itself conservator for both Fannie and Freddie in September 2008, before either GSE
had failed to make timely payments on debt obligations.
The Federal Financial Regulators
Banking Regulators
Banking regulation in United States has evolved over time into a system of multiple regulators
with overlapping jurisdictions. There is a dual banking system, in which each depository
institution is subject to regulation by its chartering authority: state or federal. In addition, because
virtually all depository institutions are federally insured, they are subject to at least one federal
primary regulator (i.e., the federal authority responsible for examining the institution for safety
and soundness and for ensuring its compliance with federal banking laws). The primary federal
regulator of national banks is their chartering authority, the OCC. The primary federal regulator
of state-chartered banks that are members of the Federal Reserve System is the Board of
Governors of the Federal Reserve System. State-chartered banks that are not members of the
Federal Reserve System have the FDIC as their primary federal regulator. Thrifts (both state and
federally chartered) had the Office of Thrift Supervision as their primary federal regulator, until
the Dodd-Frank Act abolished the OTS and distributed its responsibilities among the OCC, the
FDIC, and the Fed. All of these institutions, because their deposits are covered by FDIC deposit
insurance, are also subject to the FDIC’s regulatory authority. Credit unions–federally chartered
or federally insured–are regulated by the National Credit Union Administration, which
administers a deposit insurance fund separate from the FDIC’s.
In general, lenders are expected to be prudent when extending loans. Each loan creates risk for
the lender. The overall portfolio of loans extended or held by a lender, in relation to other assets
and liabilities, affects that institution’s stability. The relationship of lenders to each other, and to
wider financial markets, affects the financial system’s stability. The nature of these risks can vary
between industry sectors, including commercial loans, farm loans, and consumer loans. Safety
and soundness regulation encompasses the characteristics of (1) each loan, (2) the balance sheet
of each institution, and (3) the risks in the system as a whole.
Each loan has a variety of risk characteristics of concern to lenders and their regulators. Some of
these risk characteristics can be estimated at the time the loan is issued. Credit risk, for example,
is the risk that the borrower will fail to repay the principal of the loan as promised. Rising interest
rates create another risk because the shorter-term interest rates that the lender often pays for its
funds rise (e.g., deposit or CD rates) while the longer-term interest rates that the lender will
receive from fixed-rate borrowers remain unchanged. Falling interest rates are not riskless either:
fixed-rate borrowers may choose to repay loans early, reducing the lender’s expected future cash
flow. Federal financial regulators take into account expected default rates, prepayment rates,
interest-rate exposure, and other risks when examining the loans issued by covered lenders.
Each lender’s balance sheet can reduce or enhance the risks of the individual loans that make it
up. A lender with many loans exposed to prepayment risk when interest rates fall, for example,
could compensate by acquiring some assets that rise in value when interest rates fall. One
example of a compensating asset would be an interest-rate derivative contract. Lenders are
required to keep capital in reserve against the possibility of a drop in value of loan portfolios or
other risky assets. Federal financial regulators take into account compensating assets, risk-based
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capital requirements, and other prudential standards when examining the balance sheets of
covered lenders.
When regulators determine that a bank is taking excessive risks, or engaging in unsafe and
unsound practices, they have a number of powerful tools at their disposal to reduce risk to the
institution (and ultimately to the federal deposit insurance fund). They can require banks to
reduce specified lending or financing practices, dispose of certain assets, and order banks to take
steps to restore sound balance sheets. Banks have no alternative but to comply, since regulators
have “life-or-death” options, such as withdrawing deposit insurance or seizing the bank outright.
The federal banking agencies are briefly discussed below.
Office of the Comptroller of the Currency
The OCC was created in 1863 as part of the Department of Treasury to supervise federally
chartered banks (“national” banks) and to replace the circulation of state bank notes with a single
national currency (Chapter 106, 13 STAT. 99). The OCC regulates a wide variety of financial
functions, but only for federally chartered banks. The head of the OCC, the Comptroller of the
Currency, is also a member of the board of the FDIC and a director of the Neighborhood
Reinvestment Corporation. The OCC has examination powers to enforce its responsibilities for
the safety and soundness of nationally chartered banks. The OCC has strong enforcement powers,
including the ability to issue cease and desist orders and revoke federal bank charters.
In addition to institution-level examinations, the OCC oversees systemic risk among nationally
chartered banks. One example of OCC systemic concerns is the regular survey of credit
underwriting practices. This survey compares underwriting standards over time and assesses
whether OCC examiners believe the credit risk of nationally chartered bank portfolios is rising or
falling. In addition, the OCC publishes regular reports on the derivatives activities of U.S.
commercial banks.
Pursuant to Dodd-Frank, the OCC will be the primary regulator for federally chartered thrift
institutions.
Federal Deposit Insurance Corporation
The FDIC was created in 1933 to provide assurance to small depositors that they would not lose
their savings if their bank failed (P.L. 74-305, 49 Stat. 684). The FDIC is an independent agency
that insures deposits, examines and supervises financial institutions, and manages receiverships,
assuming and disposing of the assets of failed banks. The FDIC manages the deposit insurance
fund, which consists of risk-based assessments levied on depository institutions. The fund is used
for various purposes, primarily for resolving failed or failing institutions. The FDIC has broad
jurisdiction because nearly all banks and thrifts, whether federally or state-chartered, carry FDIC
insurance.
Deposit insurance reform was enacted in 2006 (P.L. 109-173, 119 STAT. 3601), including raising
the coverage limit for retirement accounts to $250,000 and indexing both its limit and the general
deposit insurance coverage ceiling to inflation. The reform act made changes to the risk-based
assessment system to determine the payments of individual institutions. Within a range set by the
reform act, the FDIC uses notice and comment rulemaking to set the designated reserve ratio
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(DRR) that supports the Deposit Insurance Fund (DIF). The FDIC uses its power to examine
individual institutions and to issue regulations for all insured depository institutions to monitor
and enforce safety and soundness. The FDIC is the primary federal regulator of state banks that
are not members of the Federal Reserve System and state-chartered thrift institutions.
In 2008, as the financial crisis worsened, Congress enacted a temporary increase in the deposit
insurance ceiling from $100,000 to $250,000 for most accounts.11 The increase was made
permanent by Dodd-Frank.
Using emergency authority it received under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA, P.L. 102-242),12 the FDIC made a determination of systemic
risk in October 2008 and announced that it would temporarily guarantee (1) newly issued senior
unsecured debt of banks, thrifts, and certain holding companies, and (2) non-interest bearing
deposit transaction accounts (e.g., business checking accounts), regardless of dollar amount.13
Under Dodd-Frank, the FDIC’s authority to guarantee bank debt is made explicit.
The Dodd-Frank Act also expanded the FDIC’s role in liquidating troubled financial institutions.
Under Dodd-Frank, the FSOC will designate certain financial institutions—banks and
nonbanks—as systemically important. In addition to more stringent capital regulation, those firms
will be required to draw up “living wills,” or plans for orderly liquidation. The Federal Reserve,
with the concurrence of two-thirds of the FSOC, may determine that a firm represents a “severe
threat” to financial stability and may order it closed. The FDIC will administer the resolution
process for nonbanks as well as banks.14
The Federal Reserve
The Board of Governors of the Federal Reserve System was established in 1913 to provide
stability in the banking sector through the regulation of bank reserves (P.L. 63-43, 38 STAT. 251).
The System consists of the Board of Governors in Washington and 12 regional reserve banks. In
addition to its authority to conduct national monetary policy, the Federal Reserve has safety and
soundness examination authority for a variety of lending institutions including bank holding
companies; U.S. branches of foreign banks; and state-chartered banks that are members of the
federal reserve system. Under the Gramm-Leach-Bliley Act (GLBA, P.L. 106-102), the Fed
serves as the umbrella regulator for financial holding companies, which are defined as
conglomerates that are permitted to engage in a broad array of financially related activities.
The Dodd-Frank Act made the Fed the primary regulator of all financial firms (bank or nonbank)
that are designated as systemically significant by the Financial Stability Oversight Council (of
which the Fed is a member). Capital requirements for such firms may be stricter than for other
firms. In addition, Dodd-Frank made the Fed the principal regulator for savings and loan holding
companies and securities holding companies, a new category of institution formerly defined in
securities law as an investment bank holding company.

11 Section 135 of the Emergency Economic Stabilization Act of 2008 (EESA, P.L. 110-343).
12 FDICIA created a new section 13(c)(4) of the Federal Deposit Insurance Act,12 USC § 1823(c)(4)(G).
13 “FDIC Announces Plan to Free Up Bank Liquidity,” press release, October 14, 2008, http://www.fdic.gov/news/
news/press/2008/pr08100.html.
14 For more detail, see CRS Report R41384, The Dodd-Frank Wall Street Reform and Consumer Protection Act:
Systemic Risk and the Federal Reserve, by Marc Labonte.
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In addition to institution-level examinations of covered lenders, the Federal Reserve oversees
systemic risk. This role came about not entirely through deliberate policy choices, but partly by
default, as a result of the Fed’s position as lender of last resort and its consequent ability to inject
capital or liquidity into troubled institutions. The Federal Reserve’s standard response to a
financial crisis has been to announce that it stood ready to provide liquidity to the system. Until
2007, this announcement was sufficient: a number of crises—the Penn Central bankruptcy, the
stock market crash of 1987, the junk bond collapse, sovereign debt crises, the Asian crises of
1997-1998, the dot.com crash, and the 9/11 attacks—were quickly brought under control, in most
cases without doing harm to the U.S. economy. In 2007, however, the Fed’s statements and its
actual provision of liquidity failed to restore stability. As a result, the Fed’s role as the primary
systemic risk regulator was closely scrutinized and the Financial Stability Oversight Council was
created.
Finally, Title VIII of Dodd-Frank gave the Fed new safety and soundness authority over payment,
clearing, and settlement systems that the FSOC determines to be systemically important. The
utilities and institutions that make up the U.S. financial infrastructure process millions of
transactions daily, including bill payments, loans, securities purchases, and derivatives trades,
representing trillions of dollars. The Federal Reserve is authorized to write risk management
standards (except for clearing entities subject to appropriate rules of the CFTC or SEC) and to
participate in supervisory examination and enforcement activities in coordination with prudential
regulators.
Office of Thrift Supervision (Abolished by Dodd-Frank)
The OTS, created in 1989 during the savings and loan crisis (P.L. 101-73, 103 STAT. 183), is the
successor institution to the Federal Savings and Loan Insurance Corporation (FSLIC), created in
1934 and administered by the old Federal Home Loan Bank Board. The OTS has the
responsibility of monitoring the safety and soundness of federal savings associations and their
holding companies. The OTS also supervises federally insured state savings associations. The
OTS is part of the Treasury Department but is primarily funded by assessments on covered
institutions. The primary business model of most thrifts is accepting deposits and offering home
loans, but thrifts offer many other financial services.
There are three main advantages for firms to choose a federal thrift charter. First, a federal thrift
charter shields the institution from some state regulations, because federal banking law can
preempt state law.15 Second, a federal thrift charter permits the institution to open branches
nationwide under a single regulator, while state-chartered thrifts must comply with multiple state
regulators. Third, a federal thrift charter and its holding company are regulated by the same
regulator, but a federal bank charter may split regulation of the institution (OCC) from regulation
of its holding company (FRB). Thus, a number of diversified financial institutions that are not
primarily savings and loans have come under the supervision of OTS as “thrift holding
companies,” including Lehman Brothers, AIG, and Morgan Stanley.
OTS was created in response to the savings and loan crisis of the late 1980s. That crisis was
characterized by an increase in the number of bad loans coincident with inflation, rising costs of
deposits, and significantly declining collateral values, primarily in commercial real estate. The

15 The scope of federal preemption has been the subject of recent court decisions. See CRS Report RS22485, Watters v.
Wachovia Bank, N.A., by M. Maureen Murphy.
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magnitude of the losses threatened to overwhelm the deposit insurance funds in the FSLIC. In
1989 Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA; P.L. 101-73), which reorganized thrift regulation and created OTS. FIRREA also
created the Resolution Trust Corporation (RTC), charged with sorting out which thrifts could be
successfully reorganized or merged with others and which were beyond help. The RTC paid
deposit insurance claims and liquidated the assets of failed thrifts.
The Dodd-Frank Act abolished the OTS and distributed its regulatory functions among the Fed,
the FDIC, and the OCC. It will cease to exist after a transition period that ends in the second half
of 2011.
National Credit Union Administration
The NCUA, originally part of the Farm Credit Administration, became an independent agency in
1970 (P.L. 91-206, 84 STAT. 49). The NCUA regulates all federal credit unions and those state
credit unions that elect to be federally insured. It administers a Central Liquidity Facility, which is
the credit union lender of last resort, and the National Credit Union Share Insurance Fund, which
insures credit union deposits. Credit unions are member-owned financial cooperatives, and must
be not-for-profit institutions. As such, they receive preferential tax treatment compared to mid-
sized banks.
Non-Bank Financial Regulators
Securities and Exchange Commission
The SEC was created as an independent agency in 1934 to enforce newly-written federal
securities laws (P.L. 73-291, 48 Stat. 881). The SEC is not primarily concerned with ensuring the
safety and soundness of the firms it regulates, but rather with maintaining fair and orderly
markets and protecting investors from fraud. This distinction largely arises from the absence of
government guarantees for securities investors comparable to deposit insurance. The SEC
generally16 does not have the authority to limit risks taken by non-bank financial institutions, nor
the ability to prop up a failing firm. Two types of firms come under the SEC’s jurisdiction: (1) all
corporations that sell securities to the public, and (2) securities broker/dealers and other securities
markets intermediaries.
Firms that sell securities—stocks and bonds—to the public are required to register with the SEC.
Registration entails the publication of detailed information about the firm, its management, the
intended uses for the funds raised through the sale of securities, and the risks to investors. The
initial registration disclosures must be kept current through the filing of periodic financial
statements: annual and quarterly reports (as well as special reports when there is a material
change in the firm’s financial condition or prospects).
Beyond these disclosure requirements, and certain other rules that apply to corporate governance,
the SEC does not have any direct regulatory control over publicly traded firms. Bank regulators
are expected to identify unsafe and unsound banking practices in the institutions they supervise,

16 Dodd-Frank created two exceptions to this rule, discussed below.
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and have power to intervene and prevent banks from taking excessive risks. The SEC has no
comparable authority; the securities laws simply require that risks be disclosed to investors.
Registration with the SEC, in other words, is in no sense a guarantee that a security is a good or
safe investment.
To enable investors to make informed investment choices, the SEC has statutory authority over
financial accounting standards. All publicly traded firms are required to use generally accepted
accounting principles (GAAP), which are formulated by the Financial Accounting Standards
Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the SEC
itself.
Besides publicly traded corporations, a number of securities market participants are also required
to register with the SEC (or with one of the industry self-regulatory organizations that the SEC
oversees). These include stock exchanges, securities brokerages (and numerous classes of their
personnel), mutual funds, auditors, investment advisers, and others. To maintain their registered
status, all these entities must comply with rules meant to protect public investors, prevent fraud,
and promote fair and orderly markets. The area of SEC supervision most analogous to banking
regulation is broker/dealer regulation. Several provisions of law and regulation protect brokerage
customers from losses arising from brokerage firm failure. The Securities Investor Protection
Corporation (SIPC), created by Congress in 1970, operates an insurance scheme funded by
assessments on broker/dealers (and with a backup line of credit with the U.S. Treasury). SIPC
guarantees customer accounts up to $500,000 for losses arising from brokerage failure or fraud
(but not market losses). Unlike the FDIC, however, SIPC does not examine broker/dealers and
has no regulatory powers.
Since 1975, the SEC has enforced a net capital rule applicable to all registered broker/dealers.
The rule requires broker/dealers to maintain an excess of capital above mere solvency, to ensure
that a failing firm stops trading while it still has assets to meet customer claims. Net capital levels
are calculated in a manner similar to the risk-based capital requirements under the Basel Accords,
but the SEC has its own set of risk weightings, which it calls haircuts. The riskier the asset, the
greater the haircut.
Although the net capital rule appears to be very close in its effects to the banking agencies’ risk-
based capital requirements, there are significant differences. The SEC has no authority to
intervene in a broker/dealer’s business if it takes excessive risks that might cause net capital to
drop below the required level. Rather, the net capital rule is often described as a liquidation
rule—not meant to prevent failures but to minimize the impact on customers. Moreover, the SEC
has no authority comparable to the banking regulators’ prompt corrective action powers: it cannot
preemptively seize a troubled broker/dealer or compel it to merge with a sound firm.
The differences between bank and securities regulation with respect to safety and soundness came
into sharp focus with the collapse of Bear Stearns, one of the five largest investment banks, in
March 2008.17 The SEC monitored Bear Stearns’ financial condition until shortly before the
collapse (which was precipitated by the refusal of other market participants to extend short-term
credit), and believed that the firm had sufficient levels of capital and liquidity. When bankruptcy

17 See CRS Report RL34420, Bear Stearns: Crisis and “Rescue” for a Major Provider of Mortgage-Related Products,
by Gary Shorter.
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suddenly loomed, it was the Federal Reserve that stepped in to broker the sale of Bear Stearns to
JP Morgan Chase by agreeing to purchase $30 billion of “toxic” Bear Stearns assets.
The Bear Stearns situation highlighted several apparent anomalies in the U.S. regulatory
structure. The SEC lacked safety and soundness powers over the institutions it supervised, while
the Fed was forced to commit funds to an investment bank over which it had no regulatory
jurisdiction. The anomaly became even more pronounced when the Fed subsequently established
a lending facility to provide short-term credit to other investment banks.18
The Bear Stearns collapse showed the inability of the SEC to respond to a brokerage failure with
systemic risk implications. There is more to the story, however, than the differences between bank
regulation and the SEC’s net capital rule. In 2004, the SEC devised a voluntary supervisory
scheme for the largest investment banks, called the Consolidated Supervised Entities (CSE)
program.19 The CSE firms were all registered broker/dealers, but were also large holding
companies with extensive operations carried on outside the broker/dealer unit. Thus, the SEC had
no capital requirement that applied to the entire investment bank. Under CSE, this was to change:
as a substitute for the net capital rule, the firms agreed to abide by the Basel risk-based standard,
and maintain that level of capital at the holding company level. On a voluntary basis, the firms
agreed to grant the SEC the authority to examine and monitor their compliance, above and
beyond the SEC’s explicit statutory authority.20
Whatever the intent of the CSE program, it did not succeed in preventing excessive risk-taking by
the participants.21 By the end of September 2008, all five CSE investment banks had either failed
(Lehman Brothers), merged to prevent failure (Merrill Lynch and Bear Stearns), or applied for
bank holding company status (Morgan Stanley and Goldman Sachs).22 On September 26, 2008,
SEC Chairman Cox announced the end of the CSE program, declaring that “[t]he last six months
have made it abundantly clear that voluntary regulation does not work. When Congress passed
the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC
or any agency the authority to regulate large investment bank holding companies.”23
With Dodd-Frank, Congress eliminated the investment bank holding company framework in
section 17 of the Securities Exchange Act of 1934. Section 618 of Dodd-Frank permits a
securities holding company that wishes to be subject to supervision on a consolidated basis to
submit to regulation by the Federal Reserve. Under Title I of Dodd-Frank, any securities firm that

18 See CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte
19 SEC, “Holding Company Supervision Program Description: Consolidated Supervised Entities (“CSEs”),”
http://www.sec.gov/divisions/marketreg/hcsupervision.htm.
20 The Market Reform Act of 1990 permits the SEC to collect certain financial information from unregulated affiliates
of broker/dealers, under the Broker-Dealer Risk Assessment Program. The impetus for the CSE program was a
European Union requirement that investment banks operating in Europe be subject to consolidated financial
supervision.
21 Some argue that CSE allowed the investment banks to hold less capital and increase their leverage. For two views on
this issue, see Stephen Labaton, “Agency’s ‘04 Rule Let Banks Pile Up New Debt, and Risk,” New York Times,
October 3, 2008, p. A1, and: Testimony of SEC Chairman Christopher Cox, House Oversight and Government Reform
Committee, October 23, 2008. (Response to question from Rep. Christopher Shays.)
22 By becoming bank holding companies, Morgan Stanley and Goldman Sachs placed themselves under Federal
Reserve regulation, presumably to signal to the markets that their financial condition was being monitored.
23 SEC, “Chairman Cox Announces End of Consolidated Supervised Entities Program,” press release 2008-230.
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is deemed to be systemically significant by the FSOC will automatically come under the
consolidated supervision of the Federal Reserve.
Other provisions of Dodd-Frank, however, gave the SEC new responsibilities that have aspects of
safety and soundness regulation. Under Section 731, the SEC will set capital requirements for
major security-based swap participants and security-based swap dealers. Section 956 gives the
SEC new authority to prohibit compensation structures in broker-dealers and investment advisory
firms that create inappropriate risks.
Commodity Futures Trading Commission
The CFTC was created in 1974 to regulate commodities futures and options markets, which at the
time were poised to expand beyond their traditional base in agricultural commodities to
encompass contracts based on financial variables such as interest rates and stock indexes. The
CFTC’s mission is to prevent excessive speculation, manipulation of commodity prices, and
fraud. Like the SEC, the CFTC oversees industry self-regulatory organizations (SROs)—the
futures exchanges and the National Futures Association—and requires the registration of a range
of industry firms and personnel, including futures commission merchants (brokers), floor traders,
commodity pool operators, and commodity trading advisers.
The Dodd-Frank Act greatly expanded the CFTC’s jurisdiction by eliminating exemptions for
certain over-the-counter derivatives. As a result, swap dealers, major swap participants, swap
clearing organizations, swap execution facilities, and swap data repositories will be required to
register with the CFTC. These entities will be subject to business conduct standards contained in
statute or promulgated as CFTC rules.
Like the SEC, the CFTC does not directly regulate the safety and soundness of individual firms,
with the exception of newly-regulated swap dealers and major swap participants, for whom it will
set capital standards pursuant to Dodd-Frank.
Federal Housing Finance Agency
The FHFA was created in 2008 by the Housing and Economic Recovery Act of 2008 (P.L. 110-
289) to consolidate and strengthen regulation of a group of housing finance-related government-
sponsored enterprises (GSEs): Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.24
The FHFA succeeded the Office of Federal Housing Enterprise Oversight (OFHEO) and the
Federal Housing Finance Board (FHFB).
The impetus to create the FHFA came from concerns about risk—including systemic risk—
arising from the rapid growth of the GSEs, particularly Fannie and Freddie. These two GSEs
were profit-seeking, shareholder-owned corporations that took advantage of their government-
sponsored status to accumulate undiversified investment portfolios of over $1.5 trillion,
consisting almost exclusively of home mortgages (and securities and derivatives based on those
mortgages).

24 For more on GSEs and their regulation, see CRS Reports CRS Report RS21724, GSE Regulatory Reform:
Frequently Asked Questions, by N. Eric Weiss, and CRS Report RS21663, Government-Sponsored Enterprises (GSEs):
An Institutional Overview, by Kevin R. Kosar.
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The FHFA was given enhanced safety and soundness powers resembling those of the federal bank
regulators. These powers included the ability to set capital standards, to order the enterprises to
cease any activity or divest any asset that posed a threat to financial soundness, and to replace
management and assume control of the firms if they became seriously undercapitalized.
The FHFA’s first action was to place both Fannie and Freddie in conservatorship.25 Fannie and
Freddie continue to operate, under an agreement with the U.S. Treasury. The Treasury will
provide capital to the two firms, by means of preferred stock purchases, to ensure that each
remains solvent. In return, the government received warrants equivalent to a 79.9% equity
ownership position in the firms.
Bureau of Consumer Financial Protection
Title X of Dodd-Frank created a Bureau of Consumer Financial Protection, to bring the consumer
protection regulation of depository and non-depository financial institutions into closer
alignment.26 The bureau is an independent entity within the Federal Reserve with authority over
an array of consumer financial products and services (including deposit taking, mortgages, credit
cards and other extensions of credit, loan servicing, check guaranteeing, collection of consumer
report data, debt collection, real estate settlement, money transmitting, and financial data
processing). It will also serve as the primary federal consumer financial protection supervisor and
enforcer of federal consumer protection laws over many of the institutions that offer these
products and services.
However, the bureau’s regulatory authority varies based on institution size and type. Regulatory
authority differs for (1) depository institutions with more than $10 billion in assets, (2) depository
institutions with $10 billion or less in assets, and (3) non-depositories. The Dodd-Frank Act also
explicitly exempts a number of different entities and consumer financial activities from the
bureau’s supervisory and enforcement authority. Among the exempt entities are
• merchants, retailers, or sellers of nonfinancial goods or services, to the extent that
they extend credit directly to consumers exclusively for the purpose of enabling
consumers to purchase such nonfinancial goods or services;
• automobile dealers;
• real estate brokers and agents;
• financial intermediaries registered with the SEC or CFTC;
• insurance companies; and
• depository institutions with $10 billion or less in assets.

25 See CRS Report RS22950, Fannie Mae and Freddie Mac in Conservatorship, by Mark Jickling.
26 See CRS Report R41338, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title X, The Consumer
Financial Protection Bureau, by David H. Carpenter.
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Regulatory Umbrella Groups
The need for coordination and data sharing among regulators has led to the formation of
innumerable interagency task forces to study particular market episodes and make
recommendations to Congress. Three interagency organizations have permanent status.
Financial Stability Oversight Council
Title I of the Dodd-Frank Act creates the FSOC on the date of enactment.27 The council is chaired
by the Secretary of the Treasury, and the other voting members consist of the heads of the Federal
Reserve, FDIC, OCC, NCUA, SEC, CFTC, FHFA, the Bureau of Consumer Financial Protection,
and a member appointed by the President with insurance expertise. Nonvoting members, serving
in an advisory capacity, include the director of the Office of Financial Research (which is created
by Title I to support the FSOC), the head of the Federal Insurance Office (created by Title V of
Dodd-Frank), a state banking supervisor, a state insurance commissioner, and a state securities
commissioner.
The FSOC is tasked with identifying risks to financial stability and responding to emerging
systemic risks, while minimizing moral hazard arising from expectations that firms or their
counterparties will be rescued from failure. The FSOC’s duties include
• collecting information on financial firms from regulators and through the Office
of Financial Research;
• monitoring the financial system to identify potential systemic risks;
• proposing regulatory changes to Congress to promote stability, competitiveness,
and efficiency;
• facilitating information sharing and coordination among financial regulators;
• making regulatory recommendations to financial regulators, including “new or
heightened standards and safeguards”;
• identifying gaps in regulation that could pose systemic risk;
• reviewing and commenting on new or existing accounting standards issued by
any standard-setting body; and
• providing a forum for the resolution of jurisdictional disputes among council
members. The FSOC may not impose any resolution on disagreeing members,
however.
The council is required to provide an annual report and testimony to Congress.
In contrast to some proposals to create a systemic risk regulator, the Dodd-Frank Act does not
give the Council authority (beyond the existing authority of its individual members) to eliminate
emerging threats or close regulatory gaps it identifies. In many cases, the council can only make
regulatory recommendations—it cannot impose change.

27 See CRS Report R41384, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Systemic Risk and the
Federal Reserve, by Marc Labonte.
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Although the FSOC does not have direct supervisory authority over any financial institution, it
plays an important role in regulation, because firms that it designates as systemically important
come under a consolidated supervisory regime that may be considerably more stringent than the
standards that apply to non-systemic firms. The FSOC is also required to approve (by a two-thirds
vote) decisions by the Federal Reserve to shut down systemically significant financial firms that
pose a severe threat to financial stability.
Federal Financial Institution Examinations Council
The Federal Financial Institutions Examination Council (FFIEC) was created by legislation28 in
1979 as a formal interagency body to coordinate federal regulation of lending institutions.
Through the FFIEC, the federal banking regulators issue a single set of reporting forms for
covered institutions. The FFIEC also attempts to harmonize auditing principles and supervisory
decisions. The FFIEC is made up of the Federal Reserve, OCC, FDIC, OTS, and NCUA, each of
which employs examiners to enforce safety and soundness regulations for lending institutions.
Federal financial institution examiners evaluate the risks of covered institutions. The specific
safety and soundness concerns common to the FFIEC agencies can be found in the handbooks
employed by examiners to monitor lenders. Each subject area of the handbook can be updated
separately. Examples of safety and soundness subject areas include important indicators of risk,
such as capital adequacy, asset quality, liquidity, and sensitivity to market risk.
President’s Working Group on Financial Markets
The President’s Working Group on Financial Markets (PWG) was created by President Reagan
through executive order in 1988.29 The PWG includes the Secretary of the Treasury and the
Chairmen of the Federal Reserve, the SEC, and the CFTC. It is not a formal agency subject to
congressional oversight, although each member is subject to Senate confirmation at the time of
appointment.
The impetus for the creation of the PWG was the stock market crash of October 1987, and
specifically the role that the stock index futures markets (under CFTC jurisdiction) had played in
creating panic in the stock market (regulated by SEC). Studies conducted by the SEC, the CFTC,
a blue-ribbon panel appointed by the President (the Presidential Task Force on Market
Mechanisms, or Brady Commission), and the stock and futures exchanges reached strikingly
different conclusions; the task of the PWG was to review the studies and issue a further report.
The PWG was not dissolved, but continued to provide interagency coordination and information
sharing, and to study entities and products that raised intermarket regulatory issues, such as hedge
funds and OTC derivatives. In March 2008, at the direction of President Bush, the PWG issued a
policy statement on the ongoing financial crisis.30

28 P.L. 95-630, 92 STAT. 3641.
29 Executive Order 12631, March 18, 1988, 53 FR 9421.
30 President’s Working Group on Financial Markets, “Policy Statement on Financial Market Developments,” March
2008, http://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf.
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Unregulated Markets and Institutions
Although federal financial statutes and regulations fill many volumes, not all participants in the
financial system are regulated. In some cases, unregulated (or self-regulated) markets appear to
work very well, but disruptions or major frauds in these markets are likely to bring calls for
increased government supervision. The dynamic nature of financial markets is a perennial
challenge to regulatory structure design, because a market that appears insignificant at the time a
law is written may grow into a potential threat to systemic stability in a few years. The following
are some of the major unregulated markets and institutions.
Foreign Exchange Markets
Buying and selling currencies is essential to foreign trade, and the exchange rate determined by
traders has major implications for a country’s macroeconomic policy. The market is one of the
largest in the world, with average daily turnover in excess of $3 trillion.31 Nevertheless, no U.S.
agency has regulatory authority over the foreign exchange market.
Trading in currencies takes place between large global banks, central banks, hedge funds and
other currency speculators, commercial firms involved in imports and exports, fund managers,
and retail brokers. There is no centralized marketplace, but rather a number of proprietary
electronic platforms that have largely supplanted the traditional telephone broker market.
Despite the fact that extreme volatility in exchange rates for a number of European and Asian
currencies in the 1990s was often blamed on currency speculators, neither U.S. nor foreign
regulators have moved towards regulating the market.
U.S. Treasury Securities
The secondary, or resale, market for Treasury securities is largely unregulated. Like the foreign
exchange market, there is no central exchange, but there are a number of proprietary, computer-
based transaction systems. Treasury securities were exempted from SEC regulation by the
original securities laws of the 1930s. In 1993, following a successful corner of a Treasury bond
auction by Salomon Brothers, Congress passed the Government Securities Act Amendments (P.L.
103-202), which required brokers and dealers that were not already registered with the SEC to
register as government securities dealers. (Existing broker/dealer registrants were simply required
to notify the SEC that they were in the government securities business.) Nevertheless, the
government securities market remains much more lightly regulated than the corporate securities
markets.
The primary market in Treasury securities, where new debt instruments are sold to fund
government operations, is also relatively unregulated. A principal channel for the distribution of
new Treasuries is a group of firms called primary dealers, who purchase securities at auction for
their own accounts and for their customers. The primary dealers are 19 commercial and
investment banks, both foreign and domestic. The primary dealer list is maintained by the Federal

31 Bank for International Settlements, Triennial Central Bank Survey: Foreign exchange and derivatives market
activity, December 2007, p. 1, http://www.bis.org/publ/rpfxf07t.pdf.
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Reserve Bank of New York, which conducts auctions for the Treasury, but its relationship to the
dealers is commercial, rather than regulatory.32 The New York Fed does, however, collect certain
data about primary dealers’ transactions in government securities.
In March 2008, as part of its multifaceted attempt to supply liquidity to the financial system, the
Federal Reserve established a Primary Dealer Credit Facility, to make short-term loans against a
variety of collateral (including asset-backed and mortgage-backed securities) to the primary
dealers.33 This step attracted attention in part because the primary dealer group included
investment banking firms over which the Fed had no regulatory authority.
Private Securities Markets
The securities laws mandate registration of and extensive disclosures by public securities issuers,
but also provide for private sales of securities, which are not subject to disclosure requirements.
Private placements of securities may only be offered to limited numbers of “accredited investors”
who meet certain asset tests. (Most purchasers are life insurers and other institutional investors.)
There are also restrictions on the resale of private securities.
The size of the private placement market is subject to considerable variation from year to year,
but at times the value of securities sold privately exceeds what is sold into the public market. In
recent decades, venture capitalists and private equity firms have come to play important roles in
corporate finance. The former typically purchase interests in private firms, which may be sold
later to the public, while the latter often purchase all the stock of publicly traded companies and
take them private.
Comprehensive Reform Legislation in the 111th Congress
The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) included
provisions to bring a number of previously unregulated markets under federal supervision.
Notable examples include the following:
• Hedge Funds and Private Equity Funds.34 Title IV of Dodd-Frank repealed an
exemption in the Investment Advisers Act of 1940 for advisers with fewer than
15 clients. Many hedge funds and private equity funds relied on this exemption to
avoid SEC registration. Now, funds with more than $100 million in assets must
register with the SEC as investment advisers, which will make them subject to
disclosure and business conduct rules. (Smaller advisers will register with the
states.) Funds with more than $150 million in assets that meet the statutory
definition of “private fund” may be subject to extensive and frequent disclosure
requirements, involving information regarding their portfolios and strategies
which the SEC will share with the FSOC.

32 See http://www.newyorkfed.org/aboutthefed/fedpoint/fed02.html.
33 Federal Reserve Bank of New York, “Federal Reserve Announces Establishment of Primary Dealer Credit Facility,”
Press Release, March 16, 2008. http://www.newyorkfed.org/newsevents/news/markets/2008/rp080316.html.
34 See CRS Report R40783, Hedge Funds: Legal History and the Dodd-Frank Act, by Kathleen Ann Ruane and
Michael V. Seitzinger.
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• Over-the-Counter Derivatives.35 OTC derivatives, a $600 trillion market, were
generally not subject to the Commodity Exchange Act before Dodd-Frank. Title
VII of Dodd-Frank establishes a comprehensive regime for the regulation of
swap contracts by the CFTC, and security-based swap contracts by the SEC.
• Nonbank Lenders. During the housing boom of the early 2000s, substantial
volumes of mortgages were written not by chartered depository institutions, but
by nonbank lenders with access to credit from Wall Street firms involved in the
securitization of mortgages. These lenders were not subject to safety and
soundness regulation, although they were required to comply with the Federal
Reserve’s Truth in Lending Act consumer protection regulations. Hundreds of
these nonbank mortgage lenders failed in 2007 and 2008, as delinquency rates on
their subprime and other non-traditional mortgages soared. The Bureau of
Consumer Financial protection, created by Title X of Dodd-Frank, will have
authority (subject to certain exemptions) over nonbank mortgage lending, payday
lending, and other extensions of credit by non-depository institutions. While the
Bureau is not granted a full array of safety and soundness powers, it may require
covered non-depositories to register with the Bureau, submit to background
checks, and adhere to other measures “to ensure that such persons are legitimate
entities and are able to perform their obligations to consumers.”36


35 See CRS Report R41398, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives,
by Mark Jickling and Kathleen Ann Ruane.
36 Dodd-Frank Section 1024. See CRS Report R41338, The Dodd-Frank Wall Street Reform and Consumer Protection
Act: Title X, The Consumer Financial Protection Bureau, by David H. Carpenter.
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Appendix A. Forms of Banking Organizations
The structure of banks can be complex. Currently, the regulator of a particular activity of a bank
or its subsidiary depends in part on the activity of the subsidiary or its charter, as described above.
The following flow charts provide simplified representations of various bank structures. In some
cases, the umbrella bank and its subsidiaries may have different regulators.
Figure A-1. National Bank


Figure A-2. National Bank and Subsidiaries


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Figure A-3. Bank Holding Company


Figure A-4. Financial Holding Company

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Appendix B. Bank Ratings: UFIRS and CAMELS
Federal bank regulators conduct confidential assessments of covered banks. The Federal
Financial Institutions Examination Council (FFIEC) helps coordinate the ratings system used by
bank examiners so that there is some consistency to the examinations, although the ratings do
take into account differences in bank size, sophistication, complexity of activities, and risk
profile. The FFIEC adopted the Uniform Financial Institutions Rating System (UFIRS) in 1979.
The system was revised in 1996 and is often referred to as the CAMELS rating system. CAMELS
stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to
market risk. A description of the CAMELS system is found in the Comptrollers Handbook: Bank
Supervision Process, provided by the OCC.37 Market factors can affect more than one category in
the CAMELS ratings.
Capital Adequacy
This component assesses the level of capital held by the institution in relation to the risks that it
takes. Capital adequacy can be affected by a number of factors, including changes in credit risk,
market risk, and the institution’s financial condition. Increases in problem assets would require
increased capital. Capital adequacy is also supposed to reflect risks even if they are technically
off of the bank’s balance sheet.
Asset Quality
Asset quality refers to existing and potential credit risk associated with a the bank’s portfolio.
Like capital adequacy, this component is supposed to reflect risk even if it is not technically on
the bank’s balance sheet. Asset quality can include changes in loan default rates, investment
performance, exposure to counterparty risk, and all other risks that may affect the value or
marketability of an institution’s assets.
Management Capability
The governance of the bank, including management and board of directors, is assessed in relation
to the nature and scope of the bank’s activities. This rating is affected by the level and quality of
management oversight. It also includes legal compliance, responsiveness to auditor
recommendations, and similar issues.
Earnings Quantity and Quality
The rating of a bank’s earnings takes into account current earnings and the sustainability of future
earnings. Earnings that rely on favorable tax effects and nonrecurring events receive lower
ratings. Similarly, inadequate controls for expenses can reduce the rating for earnings. Difficulties
in forecasting and managing risks can also reduce the earnings rating.

37 The Comptrollers handbooks are occasionally updated. The most recent handbook for the Bank Supervision Process
is dated September 2007 and can be found at http://www.occ.gov/handbook/banksup.pdf.
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Liquidity
Liquidity includes the ability of a bank to meet its expected funding needs. For a given institution
size and complexity, this factor assesses the ability of the firm to fulfill its financial obligations in
a timely manner. Liquidity refers to the ability to meet short-term funding needs without incurring
excessive losses, which might occur if assets had to be sold at a steep discount in a time-pressure
situation (or “fire sale”). Liquidity also includes assessments of specific financial categories, such
as the trend and stability of deposits, and the expected ability to securitize and sell pools of assets.
Sensitivity to Market Risk
Market risk includes potential changes in the prices of financial assets, such as movements in
interest rates, foreign exchange rates, commodity prices, and stock prices. The nature and scope
of a bank’s activities can affect the markets that it is exposed to; therefore, market risk is closely
related to the other CAMELS factors. This rating takes into account management’s ability to
identify and manage the risks that can arise from the bank’s trading activities in financial markets.
It also takes into account interest rate risk from nontrading positions, such as any duration
mismatch in loans held to maturity.
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Appendix C. Acronyms
AICPA
American Institute of Certified Public Accountants
BIS
Bank for International Settlements
CAMELS
Capital Adequacy, Asset Quality, Management, Liquidity, Sensitivity to Market
Risk
CFTC
Commodity Futures Trading Commission
CSE
Consolidated Supervised Entities
DIF
Deposit Insurance Fund
EESA
Emergency Economic Stabilization Act
FASB
Financial Accounting Standards Board
FCM
Futures Commission Merchant
FDIC
Federal Deposit Insurance Corporation
FDICIA
The FDIC Improvement Act of 1991
FFIEC
Federal Financial Institution Examination Council
FHFA
Federal Housing Finance Agency
FHFB
Federal Housing Finance Board
FINRA
Financial Industry Regulatory Authority
FIRREA
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
FRB
Federal Reserve Board
FSOC
Financial Stability Oversight Council
FSLIC
Federal Savings and Loan Insurance Corporation
FX
Foreign Exchange
GLBA
Gramm-Leach-Bliley Act
GAAP
General y Accepted Accounting Principles
GSE
Government-Sponsored Enterprise
NCUA
National Credit Union Administration
OCC
Office of the Comptrol er of the Currency
OFHEO
Office of Federal Housing Enterprise Oversight
OFR
Office of Financial Research
OTS
Office of Thrift Supervision
PCS
Payment, Clearing, and Settlement Systems
PWG
President’s Working Group on Capital Markets
SEC
Securities and Exchange Commission
SIPC
Securities Investor Protection Corporation
SRO
Self Regulatory Organization
UFIRS
Uniform Financial Institutions Rating System
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Appendix D. Regulatory Structure Before the Dodd-
Frank Act
Emergency/Systemic
Other Notable
Regulatory Agency
Institutions Regulated
Risk Powers
Authority
Federal Reserve
Bank holding companies,a
Lender of last resort to
The Fed issues consumer
financial holding
member banks (through
protection regulations under
companies, state banks
discount window lending).
various federal laws,
that are members of the
In “unusual and exigent
including the Truth-in-
Federal Reserve System,
circumstances” the Fed
Lending Act
U.S. branches of foreign
may lend to “any individual,
banks, foreign branches of
partnership, or corporation . .
U.S. banks
”
Office of the Comptrol er
National banks, U.S.


of the Currency (OCC)
federal branches of foreign
banks
Federal Deposit Insurance
Federally-insured
After making a

Corporation (FDIC)
depository institutions,
determination of systemic
including state banks that
risk, the FDIC may invoke
are not members of the
broad authority to use the
Federal Reserve System
deposit insurance funds to
provide an array of
assistance to depository
institutions
Office of Thrift Supervision
Federal y chartered and


(OTS)
insured thrift institutions,
savings and loan holding
companies
National Credit Union
Federally-chartered or
Serves as a liquidity lender
Operates a deposit
Administration (NCUA)
insured credit unions
to credit unions
insurance fund for credit
experiencing liquidity
unions, the National
shortfal s through the
Credit Union Share
Central Liquidity Facility
Insurance Fund (NCUSIF)
Securities and Exchange
Securities exchanges,
May unilaterally close
Authorized to set financial
Commission (SEC)
brokers, and dealers;
markets or suspend
accounting standards
mutual funds; investment
trading strategies for
which al publicly traded
advisers. Registers
limited periods
firms must use
corporate securities sold
to the public
Commodity Futures
Futures exchanges,
May suspend trading,

Trading Commission
brokers, pool operators,
order liquidation of
(CFTC)
advisers
positions, or raise margins
in emergencies.
Federal Housing Finance
Fannie Mae, Freddie Mac,
Acting as conservator

Agency (FHFA)
and the Federal Home
(since Sept. 2008) for
Loan Banks
Fannie and Freddie
Source: CRS.
Note: Provisions in italics were repealed by Dodd-Frank.
c. See Appendix A.
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Appendix E. Glossary of Terms
This glossary has been compiled from several earlier CRS reports, from the CFTC and SIFMA
websites, and from other sources.
Affiliate—A corporate relationship of control. Two companies are affiliated when one owns all or
a large part of another, or when both are controlled by a third (holding) company (see subsidiary).
All subsidiaries are affiliates, but affiliates that are less than 50% controlled are usually not
treated as subsidiaries.
Agency relationship—A business relationship of two parties in which one represents the other in
transactions with third parties. The agent negotiates on behalf of the party actually at risk, who is
known as the “principal.” A commission goes to the agent who does not take on the risk of the
transaction; the profit or loss goes to the principal.
Asset-backed security—A bond that represents a share in a pool of debt obligations or other
assets. The holder is entitled to some part of the repayment flows from the underlying debt. (See
“securitization.”)
Bank holding company—A business incorporated under state law, which controls through equity
ownership (“holds”) one or more banks and, often, other affiliates in financial services as allowed
by its regulator, the Federal Reserve. On the federal level, these businesses are regulated through
the Bank Holding Company Act.
Bank Holding Company Act—The federal statute under which the Federal Reserve regulates
bank holding companies and financial holding companies (FHC). Besides the permissible
financial activities enumerated in the Gramm-Leach-Bliley Act (P.L. 106-102), the law provides a
mechanism between the Federal Reserve and the Department of the Treasury to decide what is an
appropriate new financial activity for FHCs.
Blue sky laws—State statutes that govern the offering and selling of securities.
Broker/dealer—An individual or firm that buys and sells securities for itself as well as for
customers. Broker/dealers are registered with the Securities and Exchange Commission.
Bubble—Self-reinforcing process in which the price of an asset exceeds its fundamental value
for a sustained period, often followed by a rapid price decline. Speculative bubbles are usually
associated with a “bandwagon” effect in which speculators rush to buy the commodity (in the
case of futures, “to take positions”) before the price trend ends, and an even greater rush to sell
the commodity (unwind positions) when prices reverse.
Capital requirements—Capital is the owners’ stake in an enterprise. It is a critical line of
defense when losses occur, both in banking and nonbanking enterprises. Capital requirements
help assure that losses that might occur will accrue to the institution incurring them. In the case of
banking institutions experiencing problems, capital also serves as a buffer against losses to the
federal deposit insurance funds.
Charter conversion - Banking institutions may, with the approval of their regulators, switch their
corporate form between: commercial bank or savings institution, National or State charter, and to
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stockholder ownership from depositor ownership. Various regulatory conditions may encourage
switching.
Clearing Organization—An entity through which futures and other derivative transactions are
cleared and settled. A clearing organization may be a division or affiliate of a particular exchange,
or a freestanding entity. Also called a clearing house, multilateral clearing organization, or
clearing association.
Collateralized debt obligation (CDO)—A bond created by the securitization of a pool of asset-
backed securities.
Collateralized mortgage obligation (CMO)—A multiclass bond backed by a pool of mortgage
pass-through securities or mortgage loans.
Commercial bank—A deposit-taking institution that can make commercial loans, accept
checking accounts, and whose deposits are insured by the Federal Deposit Insurance Corporation.
National banks are chartered by the Office of the Comptroller of the Currency; state banks, by the
individual states.
Commodity Futures Modernization Act of 2000 (CFMA, P.L. 106-554, 114 Stat. 2763)—
Overhauled the Commodity Exchange Act to create a flexible structure for the regulation of
futures and options trading, and established a broad statutory exemption from regulation for OTC
derivatives. Largely repealed by the Dodd-Frank Act.
Community financial institution—As provided for in the Gramm-Leach-Bliley Act, a member
of the Federal Home Loan Bank System whose deposits are insured under the Federal Deposit
Insurance Act and which has assets of less than $500 million (calculated according to provisions
in the law, and in succeeding years to be adjusted for inflation). Such institutions may become
members without meeting requirements with regard to the percentage of total assets that must be
in residential mortgage loans and may borrow from the Federal Home Loan Banks for small
business and agriculture.
Conservatorship—When an insolvent financial institution is reorganized by a regulator with the
intent to restoring it to an ongoing business.
Counterparty—The opposite party in a bilateral agreement, contract, or transaction, such as a
swap.
Credit Default Swap (CDS)—A tradeable contract in which one party agrees to pay another if a
third party experiences a credit event, such as default on a debt obligation, bankruptcy, or credit
rating downgrade.
Credit Risk—The risk that a borrower will fail to repay a loan in full, or that a derivatives
counterparty will default.
Credit union—A nonprofit financial cooperative of individuals with one or more common bonds
(such as employment, labor union membership, or residence in the same neighborhood). May be
state or nationally chartered. Credit unions accept deposits of members’ savings and transaction
balances in the form of share accounts, pay dividends (interest) on them out of earnings, and
primarily provide consumer credit to members. The federal regulator for credit unions is the
National Credit Union Administration.
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Dealer—An individual or financial firm engaged in the purchase and sale of securities and
commodities such as metals, foreign exchange, etc., for its own account and at its own risk as
principal (see broker). Commercial banks are typically limited to acting as dealers in specified
high-quality debt obligations, such as those of the federal government.
Depository institution—Customarily refers to commercial banks, savings institutions, and credit
unions, since traditionally the greater part of their funding has been in the form of deposits.
Deposits are a customer’s funds placed with an institution according to agreed on terms and
conditions and represent a credit to the depositor.
Derivatives—Financial contracts whose value is linked to the price of an underlying commodity
or financial variable (such as an interest rate, currency price, or stock index). Ownership of a
derivative does not require the holder to actually buy or sell the underlying interest. Derivatives
are used by hedgers, who seek to shift risk to others, and speculators, who can profit if they can
successfully forecast price trends. Examples include futures contracts, options, and swaps.
Discount window—Figurative term for the Federal Reserve facility for extending credit directly
to eligible depository institutions. It may be used to relieve temporary cash shortages at banks and
other depository institutions. Borrowers are expected to have tried to borrow elsewhere first and
must provide collateral as security for loans. The term derives from the practice whereby bankers
would come to a Reserve Bank teller window to obtain credit in the early days of the Federal
Reserve System.
Dual banking system—The phrase refers to the fact that banks may be either federally or state-
chartered. In the case of state-chartered banks, the state is the primary regulator; for national
banks, the Office of the Comptroller of the Currency is the primary regulator.
Electronic fund transfer (EFT) systems—A variety of systems and technologies for transferring
funds electronically rather than by paper check.
Exchange—A central marketplace with established rules and regulations where buyers and
sellers meet to trade futures and options contracts or securities.
Federal Home Loan Banks—Twelve regional member-owned federally sponsored organizations
that extend credit to their member banking institutions, largely to finance mortgages made to
homeowners. The 12 FHLBs make up a single government-sponsored enterprise.
Federal safety net—A broad term referring to protection of banking institutions through deposit
insurance, discount window credit, other lender of last resort support, and certain forms of
regulations to reduce risk. Commercial and industrial companies generally lack any of these
cushions against loss.
Financial businesses—In discussions about financial services modernization, usually refers to
commercial banks and savings institutions, securities firms, and insurance companies and agents,
as contrasted with commercial and industrial firms.
Financial holding company—A holding company form authorized by the Gramm-Leach-Bliley
Act that goes beyond the limits a of bank holding company. It can control one or more banks,
securities firms, and insurance companies as permitted by law and/or regulation.
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Financial institution—An enterprise that uses its funds chiefly to purchase financial assets such
as loans and debt securities, as opposed to tangible property. Financial institutions are
differentiated by the manner in which they invest their funds: in loans, bonds, stocks, or some
combination; as well as by their sources of funds. Depository financial institutions are
differentiated in that they may accept deposits which are federally insured against loss to the
depositor. Nondepository financial institutions such as life and property/casualty insurance
companies, pension funds, and mutual funds obtain funds through other types of receipts, whose
values may fluctuate with market conditions.
Financial subsidiary—Under the Gramm-Leach-Bliley Act, both national and state-chartered
banks are authorized to form financial subsidiaries to engage in activities that would not
otherwise be permitted within the bank itself, subject to certain limits. Besides the permissible
financial activities enumerated in P.L. 106-102, the law provides a mechanism between the U.S.
Department of the Treasury and the Federal Reserve to decide what is an appropriate new
financial activity for a financial subsidiary.
Firewalls—Barriers to the flow of capital, information, management, and other resources among
business units owned by a common entity. In case of financial distress of one operation (“fire”),
the “walls” are intended to prevent the spread of loss to the other units—especially to banking
units. Example: losses in a securities subsidiary of a holding company could not be covered by
any of the holding company’s bank subsidiaries.
Foreign bank—Banks and their holding companies headquartered in other countries may have a
variety of financial operations in the United States: U.S.-chartered subsidiary banks, agencies,
branches, and representative offices. Their primary federal regulator is the Federal Reserve, under
the International Banking Act of 1978 as amended. States and the Office of the Comptroller of the
Currency may also regulate them.
Functional regulation—Regulatory arrangements based on activity (“function”) rather than
organizational structure. The Gramm-Leach-Bliley Act called for more functional regulation than
in the past.
Glass-Steagall Act—Part of the Banking Act of 1933; divided the commercial and investment
banking industries. The Gramm-Leach-Bliley Act repealed two sections of the act dealing with
the relationship between banks and securities firms.
Government-sponsored enterprise (GSE)—GSEs are private companies with government
charters. Government sponsorship typically gives them a funding advantage over purely private
competitors, while their charters restrict the kinds of businesses they may conduct.
Gramm-Leach-Bliley Act of 1999—P.L. 106-102, also known as the Financial Services
Modernization Act, authorized increased affiliations between banks, securities firms, and insurers.
Permitted the establishment of financial holding companies, under the regulation of the Federal
Reserve. Also addressed privacy protection for consumers’ financial data.
Haircut—In computing the value of assets for purposes of capital, segregation, or margin
requirements, a percentage reduction from the stated value (e.g., book value or market value) to
account for possible declines in value that may occur before assets can be liquidated.
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Hedge funds—Hedge funds are essentially unregulated mutual funds. They are pools of invested
money that buy and sell stocks and bonds and many other assets, including precious metals,
commodities, foreign currencies, and derivatives (contracts whose prices are derived from those
of other financial instruments). Hedge funds are limited to qualified investors with high net
worth.
Hedging—Investing with the intention of reducing the impact of adverse movements in interest
rates, commodities, or securities prices. Typically, the hedging instrument gains value as the
hedged item loses value, and vice versa.
Insolvent—A firm whose liabilities exceed its assets.
Institutional regulation—Regulation that is institution-specific as contrasted with activity-
specific (see functional regulation).
Investment bank—A financial intermediary, active in the securities business. Investment
banking functions include underwriting (marketing newly registered securities to individual or
institutional investors), counseling regarding merger and acquisition proposals, brokerage
services, advice on corporate financing, and proprietary trading.
Investment bank holding company—A holding company for securities firms authorized under
the Gramm-Leach-Bliley Act. Such holding companies are subject to regulation by the Securities
and Exchange Commission.
Issuer—A person or entity (including a company or bank) that offers securities for sale. The
issuing of securities, where the proceeds accrue to the issuer, is distinct from the secondary, or
resale, market, where securities are traded among investors.
Lender of last resort—Governmental lender that acts as the ultimate source of credit in the
financial system. In the United States, the Federal Reserve has this role.
Leverage—The ability to control large dollar amounts of a commodity or security with a
comparatively small amount of capital. Leverage can be obtained through borrowing or the use of
derivatives.
Limited-purpose bank—Although generally commercial firms may not conduct a banking
business, some exceptions exist. Examples: Nonbank banks are banks that either accept deposits
or make commercial loans but cannot do both. Such banks grew up through a loophole in law
which was closed by the Competitive Equality Banking Act of 1987 (CEBA). Credit card banks
conduct credit card operations. Industrial loan companies in a few states may offer restricted
banking services.
Liquidity—The ability to trade an asset quickly without significantly affecting its price, or the
condition of a market with many buyers and sellers present. Also, the ability of a person or firm to
access credit markets.
Liquidity risk—The possibility that the market for normally-liquid assets will suddenly dry up,
leaving firms unable to convert assets into cash. Also, the risk that other firms will refuse to
extend credit on any terms to a firm that is perceived as distressed.
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Market risk—The risk that the price of a tradeable security or asset will decline, resulting in a
loss to the holder.
Merchant banker—A European style investment banker concentrating on corporate deals, in
which it may invest its own funds.
Money market mutual fund (MMF)—A form of mutual fund that pools funds of individuals
and other investors for investment in high-grade, short-term debt and bank deposits paying
market rates of return. Examples of these money market instruments include U.S. Treasury bills,
certificates of deposit, and commercial paper. In addition to the investment features, most MMFs
offer check-writing redemption features.
Moral hazard—The tendency of people to take more risks once another party has agreed to
provide protection. Regulatory interventions to bail out failing firms are often said to create moral
hazard, on the assumption that others will expect to be saved from their mistakes, too.
Mortgage-backed security (MBS)—A bond backed by a pool of mortgage loans. The
bondholders receive a share of the interest and principal payments on the underlying mortgages.
The cash flows may be divided among different classes of bonds, called tranches.
Mutual fund—An investing company that pools the funds of individuals and other investors, and
uses them to purchase large amounts of debt or equity obligations of businesses and sometimes
debt obligations of governments. The owners of the mutual fund hold proportional shares in the
entire pool of securities in which a fund invests. Owners pay taxes on their distributions from a
fund; the mutual fund itself is not normally subject to federal or state income taxation.
Naked option—The sale of a call or put option without holding an equal and opposite position
in the underlying instrument.
Operational risk—The possibility that a financial institution will suffer losses from a failure to
process transactions properly, from accounting mistakes, from rogue traders or other forms of
insider fraud, or from other causes arising inside the institution.
Over-the-counter (OTC)—Trading that does not occur on a centralized exchange or trading
facility. OTC transactions can occur electronically or over the telephone.
Ponzi Scheme—Named after Charles Ponzi, a man with a remarkable criminal career in the early
20th century, the term has been used to describe pyramid arrangements whereby an enterprise
makes payments to investors from the proceeds of a later investment rather than from profits of
the underlying business venture, as the investors expected, and gives investors the impression that
a legitimate profit-making business or investment opportunity exists, where in fact it is a mere
fiction.
Receivership—When an insolvent financial institution is taken over with the intent to liquidate
its assets.
Resolution Trust Corporation (RTC) - The agency set up to resolve savings and loans declared
failed beginning in 1989. Between 1989 and mid-1995, the Resolution Trust Corporation closed
or otherwise resolved 747 thrifts with total assets of $394 billion.
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Savings association—A savings and loan association, mutual savings bank, or federal savings
bank, whose primary function has traditionally been to encourage personal saving (thrift) and
home buying through mortgage lending. In recent years, such institutions’ charters have been
expanded to allow them to provide commercial loans and a broader range of consumer financial
services. The federal regulator for most savings associations is the Office of Thrift Supervision.
Also known as savings and loans, thrifts, and mutual savings banks.
Securities Investor Protection Corporation (SIPC)—A private nonprofit membership
corporation set up under federal law to provide financial protection for the customers of failed
brokers and/or dealers. SIPC is a liquidator; it has no supervisory or regulatory responsibilities for
its members, nor is it authorized to bail out or in other ways assist a failing firm.
Securitization—The process of transforming a cash flow, typically from debt repayments, into a
new marketable security. Holders of the securitized instrument receive interest and principal
payments as the underlying loans are repaid. Types of loans that are frequently securitized are
home mortgages, credit card receivables, student loans, small business loans, and car loans.
Self-regulatory organizations (SROs)—National securities or futures exchanges, national
securities or futures associations, clearing agencies and the Municipal Securities Rulemaking
Board are all authorized to make and enforce rules governing market participants. The respective
federal regulatory agency has authority in connection with SROs and may require them to adopt
or modify their rules. Examples of SROs in the securities industry include the Financial Industry
Regulatory Authority (FINRA), and the New York Stock Exchange.
Special-purpose entities (SPEs)—Also referred to as off–balance-sheet arrangements, SPEs are
legal entities created to perform a specific financial function or transaction. They isolate financial
risk from the sponsoring institution and provide less-expensive financing. The assets, liabilities,
and cash flows of an SPE do not appear on the sponsoring institution’s books.
Speculation—A venture or undertaking of an enterprising nature, especially one involving
considerable financial risk on the chance of unusual profit.
State regulation—Under the dual system of bank regulation, states as well as the federal
government may charter, regulate, and supervise depository institutions. States are the primary
regulators in the insurance field. States also have authority over securities companies, mortgage
lending companies, personal finance companies, and other types of companies offering financial
services.
Structured debt—Debt that has been customized for the buyer, often by incorporating complex
derivatives.
Subordinated debt—Debt over which senior debt takes priority. In the event of bankruptcy,
subordinated debtholders receive payment only after senior debt claims are paid in full.
Subsidiary—A company whose controlling shares are owned 50% or more by another (“parent”)
corporation. Like companies with less than 50% ownership, it is an affiliate of the controlling
company. A subsidiary is usually consolidated for regulatory and reporting purposes with its
parent.
Systemic Risk—The term “systemic risk” does not have a single, agreed-upon definition. Some
define systemic risk as the risk an institution faces that it cannot diversify against. In other
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circumstances, systemic risk is defined as the risk that the linkages between institutions may
affect the financial system as a whole, through a dynamic sometimes referred to as contagion.
Thrift holding company—Also known as a savings and loan holding company, a business that
controls one or more savings associations. These holding companies are regulated under the
Home Owners’ Loan Act by the Office of Thrift Supervision.
Too-big-to-fail doctrine—an implicit regulatory policy holding that very large financial
institutions must be rescued by the government, because their failure would destabilize the entire
financial system. (See “moral hazard.”)
Umbrella supervision—The term applied to comprehensive regulation of a holding company
and its parts by one or more holding company regulator(s).
Underwriter—For securities markets, see investment bankers. For insurance, underwriters are
the life, health and property-casualty companies that receive premiums and pay off losses and
other risks as they occur. The underwriters bear the risks of losses and expenses exceeding
receipts.
Unitary thrift holding company (UTHC)—A holding company that owns a single thrift
institution. A distinction between UTHCs and other thrift holding companies has been that a
UTHC could be involved in any lines of business, whereas the others have been restricted to
certain activities primarily financial in nature. The Gramm-Leach-Bliley Act limits the
commercial activities and affiliations of new UTHCs.
Universal bank—An organizational model typical of some foreign countries whereby a bank can
exist as an operating enterprise and own directly a variety of other businesses (See Subsidiary). It
contrasts with the banking model typical in the United States where the parent holding company
owns several different businesses, all structurally separate (See “affiliate.”). In practice, the two
approaches are not exclusive.

Author Contact Information

Mark Jickling
Edward V. Murphy
Specialist in Financial Economics
Specialist in Financial Economics
mjickling@crs.loc.gov, 7-7784
tmurphy@crs.loc.gov, 7-6201


Acknowledgments
The authors gratefully acknowledge helpful comments from our colleagues Walter Eubanks, Marc Labonte,
and Maureen Murphy.

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