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Brokers and dealers make up brokerage firms, which are security firms that also facilitate the smooth and orderly functions of secondary financial markets. Brokers arrange trades between buyers and sellers---that is, they arrange for a buyer to purchase securities from a seller. The broker charges a brokerage fee, or commission, for arranging the trade. Dealers are market makers who, in addition to arranging trades between buyers and sellers, stand ready to be a principal in a transaction and may maintain an inventory of securities. Dealers stand ready to purchase and hold previously issued securities sold by investors. The dealer carries an inventory of securities and then sells them to other investors. Since the dealer holds a stock of securities, there is the risk that the price of the securities will fall and the brokerage firm will experience a capital loss.
Types of Orders
Three types of orders may be placed with brokerage firms: market orders, limit orders, and short sells. Market orders direct the broker or dealer to purchase or sell the securities at the present market price. Limit orders instruct the broker or dealer either to purchase the securities at the market price if it is above a certain minimum. Securities are bought at one price (the bid price) and sold at a higher price (the asked price).
Ashort sell instructs the broker or dealer to borrow shares of stocks and sell them today with the guarantee that the borrowed stocks will be replaced by a particular date in the future. The investor engages in a short sell if he or she believes that the stock's price is going to fall in the future and that the borrowed shares will be paid back with shares purchased in the future at the lower price. If the volume of short sells is very high, this is an indication that investors believe the stock's price is going to fall. If the price does not fall, the buyer of the short sell must purchase the shares at a higher price and thus loses money. If many buyers of short sells are in this position, the market price is pushed even higher.
Margin Loans
Full-service brokerage firms not only arrange for the trading of securities, but they also give investment advice to potential investors. They also make loans called margin loans, to investors to help them purchase securities. In this case, investors do not have to put up funds equal to the full value of the purchase. Rather they can purchase stocks on the margin by borrowing. The margin requirement is the percentage of a stock purchase that can be borrowed as opposed to being paid in readily available funds. Many individual brokerage firms set higher margin requirements and vary those requirements, depending on the stocks being traded and the trading behavior of individual customers.
Brokerage Fees
Until 1975, all brokerage firms charged investors virtually the same brokerage fees for executing trades of financial securities. Brokerage firms distinguished themselves among investors by engaging in nonprice competition. Some attempted to offer better and more attentive advice established through market research. Others had geographical advantages, name recognition, or other attributes that led to better customer relationships. All of this began to change when Congress passed the Securities Acts Amendment of 1975 that eliminated fixed commissions. Instead of engaging only in nonprice competition, brokerage firms could compete by offering lower fees.
In addition to regulation by the SEC, the securities industry is also self-regulated by the National Association of Securities Dealers (NASD) and various securities exchanges, such as the New York and American Stock Exchanges. Brokerage firms that are registered with the SEC must also purchase insurance for their customers from the Securities Industry Protection Corporation (SIPC). SIPC is a nonprofit membership corporation that U.S. registered brokers and dealers are required by law to join. Congress established SIPC in 1970. The purpose of SIPC is to protect investors securities from liquidation by the brokerage firm. Each investor is insured for $500,000. Note that this does not protect investors from losses because of falls in securities prices. Rather, it protects the investor from losses resulting in the bankruptcy or insolvency of the brokerage firm.
Recap
Brokerage firms are important financial institutions because they facilitate the smooth functioning of securities markets. Brokers arrange the trading of financial securities markets. Brokers arrange the trading of financial securities among corporations and investors in exchange for a brokerage. Dealers not only arrange trades, but also buy and sell financial securities for their own portfolios, in order to make a market. Market orders direct the broker or dealer to purchase or sell the securities at the present market price if it is above a certain minimum. A short sell instructs the broker or dealer to borrow shares of stocks, and sell them today with the guarantee that the borrowed stocks will be replaced by a date in the future. The investor engages in a short sell if he or she believes that the stock's price is going to fall in the future and that the borrowed shares will be paid back with shares bought at a lower price.
*SOURCE: THE FINANCIAL SYSTEM & THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 354-355*
Securities firms aid in the smooth functioning of the financial system. There are two main functions of securities firms: investment banking and the buying and selling of previously issued securities. Investment banking deals with the marketing of newly issued securities in the primary market. Brokers and dealers assist in the marketing of previously issued securities in the secondary market. Some security firms provide both functions, while others provide only one or the other.
Investment Banks: The Primary Market
Investment banks are financial institutions that design, market, and underwrite new issuances of securities---stocks or bonds---in the primary market. Merrill Lynch, Salomon Smith Barney, Morgan Stanley, Dean Witter, and Goldman Sachs are some of the better-known investment banks. Their main offices tend to be in New York City, but they are electronically-linked to branch offices in other major cities in the United States and around the world.
The design function of the investment bank is important because a corporation may need assistance in pricing the new financial instruments that it will issue in the open market. The corporation looks to the investment bank to provide advice about the design of the new offering. In return for their services, the investment bank is paid a fee. Many investment banks, in addition to their primary market activity, are also brokers and dealers in the secondary markets.
Responsibilities for New Offerings
There are two types of new offerings. When a company has not previously sold financial stocks or bonds to the public, the offering is an initial public offering (IPO). The investment bank will try to establish an appropriate price by looking at stock prices of other firms in the industry with comparable characteristics. Because there are no previously issued securities being publicly traded, it is usually much more difficult to determine the price at which securities in an IPO should be offered. In the case of bonds, investment banks look to the market prices of existing bonds with comparable maturity, risk, and liquidity. The existing degree of leverage (reliance or borrowed funds) of the issuer is also a determinant of how much can be raised and at what price in the bond market.
When stocks or bonds have been previously issued, the offering is called a seasoned issuance. The price of the new issue should be the same as the market price of the outstanding shares. However, the investment bank must still anticipate how the new issue will affect the market price of the outstanding shares. Likewise, with a seasoned issuance of bonds, the investment bank must anticipate how the greater degree of leverage will affect the price at which the new bonds can be sold.
Timing. Timing is one of the most important factors affecting the selling price of new securities. For example, it may be a good time to sell if the corporation's outstanding stock is trading at relatively high prices, if favorable earnings reports have recently been issued, and if the economy is particularly strong. A relatively larger amount of funds can be raised by issuing fewer shares at a higher price than if the stock was trading at a lower price. Likewise, if long-term interest rates are relatively low and profit expectations are high, it may be a good time to issue bonds.
The Role of the Securities and Exchange Commission. Once the amount, type, and pricing of securities has been established, the investment bank assists the corporation in filling out and filing the necessary documents with the Securities and Exchange Commission (SEC). The SEC is a government regulatory agency that was created in 1934 to regulate the securities industry. Primary areas of regulation include "disclosure" requirements for new securities issues and the monitoring of illegal and fraudulent behavior in securities markets.
The SEC maintains active supervision of investment banks, particularly with regard to information that must be disclosed to potential investors. A registration statement must be filed with the SEC before the offering can be issued. This statement contains information about the offering, the company and other disclosure information, including relevant information about management that the funds will be used for, and the financial help of the corporation. Once the registration statement has been filed, the SEC has 20 days to respond. If the SEC does not object during the 20-day period, then the securities can be sold to the public. The lack of an objection by the SEC in no way means that the new securities are of high quality or that the price is appropriate. It simply means that it appears that the proper information has been disclosed to potential investors. The prospectus. which is a subpart of the registration statement, must be given to investors before they purchase the securities. It contains all of the disclosures and pertinent information about the offering that the SEC requires.
Credit Rating. Investment banks also assist in obtaining a credit rating for the new issuance from Standard & Poor's or Moody's Investors Services. A trustee is selected that will monitor whether or not the corporation fulfills the terms of the offering as outlined in the bonds indenture. The terms of the offering, along with many other provisions, are spelled out in the bond indenture before the bonds are issued. Investment banks may also assist in arranging that the issuance of new stock is listed (traded) on an exchange and/or in the over-the-counter market.
Underwriting and Marketing. Once the necessary steps to issue the new securities have been taken, the investment bank takes on the responsibility of underwriting and marketing the securities. In underwriting the security, the investment bank purchases the entire issuance at an agreed-upon price. It then assumes responsibility for marketing the newly issued securities. If the price at which the bank sells the securities is greater than the price they paid, the bank will earn a profit on the spread. If the securities sell for less than the agreed upon price, the investment bank accepts the loss.
Sometimes one investment bank may be reluctant to take full responsibility for a new issuance. In this case, the bank may form a syndicate by asking other investment banks to underwrite part of the new offering. The syndicate is merely a group of investment banks, each of which underwrites a portion of a new securities offering. In a syndicate, each participating investment bank earns the profit---or assumes the loss---on the portion of the new offering it underwrites.
Private Placement
Investment banks also handle private placement. This is an alternative for a corporation issuing new securities that bypasses the process described previously and places the new securities offering privately. In a private placement, new securities are sold to a limited number of investors. Because the number of investors is small, they are of necessity very large investors as commercial banks, insurance companies, pension plans, or mutual funds. Private placements occur more frequently with bonds than with stocks.
Recap
Investment banks design, market, and underwrite the issuance of new securities (stocks and bonds) in the primary market. The securities may be an IPO or a seasoned offering. In addition to advising the issuer about market conditions and prospective prices, the investment bank also assists in filing the necessary forms with the SEC so that the new securities can be publicly sold. A registration statement must be filed with the SEC. Part of the registration statement is the prospectus that contains information and disclosures about the issuance. The formation is disclosed to the public and approval by the SEC to sell the securities is in no way an endorsement of their quality or that the price is proper. Private placement of securities to a limited number of investors is an alternative to going through the underwriting process.
*SOURCE: THE FINANCIAL SYSTEM & THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 351-354*
Carol, a student at State University majoring in economics, is about to register for fall semester classes. She is interested in working overseas for a large financial institution, so she is attracted to a political science course (Pol Sci 505) that examines different political systems and how they influence the conduct of policy. The problem is that it is a graduate course and undergraduates are not allowed to register for such courses. Undaunted, Carol meets with the instructor and convinces him that she is fully capable of handling the material. He tells her to register for Pol Sci 296, a listing usually reserved for special independent study courses, and to attend Pol Sci 505. In this way, Carol gets to take the course she desires, and in the process evades the college regulation.
In recent semesters, State University has been experimenting by offering several classes over the internet. This year it is starting a virtual university where students can earn a degree without ever coming to campus. This program will relieve the university's need for more classroom space, and enable it to serve students who live in remote geographical areas and cannot come to campus. All in all, the university, driven to cut costs while serving more students, is finding creative ways to do so. Such adaptive or innovative behavior permeates many colleges today.
Innovation is also widespread in the economy at large. The driving force behind such behavior is reasonably straightforward: Participants in the economy (individuals and institutions) are simply trying to come as close as possible to achieving their objectives. The objective could be a well-rounded education likely to lead to a well-paying and interesting job in the case of a student, maximum return at the minimum risk for an investor, or maximum profitability in the case of a firm. This process, referred to as maximization, is nothing more than the attempt of economic units to do the best they can, given their objectives, and the circumstances they face. But what does "doing the best one can" mean in this context? Simply put, if the circumstances pose a barrier to achieving an objective, there is an obvious incentive to find a way to surmount, or otherwise avoid, the obstacle. As the quotation at the beginning of the post suggests, such incentives give birth to the innovation we subsequently observe.
In our discussion of the financial system, I have repeatedly emphasized that change is an enduring characteristic. The current system is different from what it was 10 years ago, and it will be different 10 years hence. Previous posts have described some of the particularly noteworthy changes. Financial innovation is the creation of new financial instruments, markets,and institutions in the financial services industry. The major forces producing these changes include innovation in the ways people spend, save, and borrow funds in a globalized economy and innovation in the operations and scope of activities engaged in by financial intermediaries (FIs). In recent decades, computer and information technologies have played a major role in financial innovation. These advances have allowed for innovations in the way financial instruments are bought and sold, the creation of a variety of new financial instruments, and the globalization of financial markets that fulfill previously unmet services.
Major Causes of Financial Innovation
The famous economist Joseph Schumpter wrote extensively about the process of economic development, emphasizing the key role played by the entrepreneurial innovator. The prototype is a creative, insightful individual, or group of individuals, willing to take a few risks in the pursuit of higher profits. The innovation may involve the development and adoption of a cheaper method of production or the introduction of an entirely new product. Holding other factors constant, lower production costs will, of course, raise profits. Similarly, if a new product catches on, sales and profits will increase.
Less dramatic but no less important examples of innovative activity include the application of newly developed or existing technology in a new field or product area and the discovery and adoption of new methods of operating that legally evade rules and regulations. In both cases, the innovation increases profits. The adoption of new computer and information technologies and the avoidance of regulations have played key roles in the process of financial innovation since the 1960s. Two other factors have also been important in generating recent financial innovation: (1) FIs have faced increasing competition from other financial and nonfinancial institutions, causing them to innovate as part of a struggle to survive in a globalized environment, and (2) as prices, inflation, interest rates, and exchange rates have become more volatile, innovations have been developed to deal with this instability. All told, these factors have caused the period since the mid-1960s to be an era of rapid financial innovation, with one innovation leading to another and resulting in a restructuring of the entire financial services sector.
*SOURCE: THE FINANCIAL SYSTEM & THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 278-279*
Bank Holding Companies and Financial Holding Companies
by
Charles Lamson
When we hear the name Johnson & Johnson many of us probably think of baby powder, shampoo, and Band-Aids. These are major products associated with the J&J brand name. In fact, J&J is a conglomerate, producing numerous other products through its many subsidiaries, including Tylenol, surgical instruments, sausage casings, toys, tranquilizers, and contraceptives. In other words, J&J is a company that owns and operates many firms that produce a wide variety of products.
A bank holding company is a corporation that owns several firms, at least one of which is a bank. The remaining firms are engaged in activities that are closely related to banking. If the holding company owns one bank, it is called a one-bank holding company. If it owns more than one, it is called, not surprisingly, a multibank holding company.
Many banks organize themselves into holding companies, because they expect this organizational form to be more profitable than a simple bank would be. More specifically, this corporate form allows banks (1) to circumvent restrictions on branching, and thus, seek out sources and uses of funds in other geographical markets, and (2) to diversify into other product areas, thus providing the public with a wider array of financial services, while reducing the risk associated with limiting operations to traditional banking services.
Thus, organizing as a bank holding company allowed banks to effectively circumvent prohibitions on intrastate and interstate branching, which have now become virtually eliminated, and to participate in activities that otherwise would be barred. Such activities include data processing, leasing, investment counseling, and servicing out of state loans.
Perhaps even more dramatic than the conversion of large banks to bank holding companies is the ongoing trend for bank holding companies to convert to financial holding companies. Under the Gramm-Leach-Bliley Act (GLBA) of 1999, bank holding companies, securities firms, insurance companies, and other financial institutions can affiliate under common ownership to form financial holding companies. A financial holding company can offer their customers a complete range of financial services, many of which were previously prohibited. These activities include:
securities underwriting and dealing
insurance agency and underwriting activities
merchant banking activities
any other activity that the Fed determines to be financial in nature or incidental to financial activities.
any nonfinancial activity that the Fed determines is complementary to the financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or to the financial system
Merchant banking is the making of direct equity investments (purchasing stock) in start-up or growing nonfinancial businesses. Under GLBA, financial holding companies will be able to own up to 100 percent of commercial, nonfinancial businesses as long as ownership is for investment purposes only, the financial holding company is not involved in the day-to-day management of the company, and the investment is for 10 years or less. Prior to this law, bank holding companies could own only 5 percent of a commercial company directly and up to 49 percent through certain subsidiaries.
To become a financial holding company, bank holding companies that meet certain criteria must file a declaration with the Federal Reserve. The declaration must certify that, among other things, all the bank holding company's depository institution subsidiaries are well capitalized and well managed.
To summarize, banks, under the holding company corporate umbrella, have been expanding the geographical areas they serve and the array of financial services they offer to the public. Bank holding companies may also apply to become financial holding companies if they meet certain criteria. Under the financial holding company status, bank holding companies, insurance companies, and securities firms can affiliate under common ownership. In addition, financial holding companies can engage in an even broader array of financial and nonfinancial services than bank holding companies can. The expansion by banks into areas traditionally served by other more specialized FIs (financial institutions) has been matched by other FIs and other nonfinancial institutions expanding into areas traditionally served mainly by banks, such as the checkable deposits offered by S&Ls and the credit cards offered by General Motors.
*THE FINANCIAL SYSTEM & THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 260-262*
The primary reason the banking system is regulated is to preserve its safety and soundness, and insure the fair and efficient delivery of banking services to the public. From the regulator's perspective, continuous oversight is needed to ensure that banks are operated prudently and in accordance with standing statutes and regulations. Broadly speaking, regulation involves the formulation and issuance of specific rules to govern the structure and conduct of banks.
For the most part, the regulatory structure prevailing at the beginning of the 1970s was inherited from and the product of the 1930s. The structure was put in place as a result of events that occurred at the start of and during the Great Depression. In October 1929, prices on the New York Stock exchange collapsed. The Dow Jones Industrial Index, a measure of stock market values, stood at 200 in January. They rose to 381 in September 1929 and then collapsed. Eventually, the Dow reached a low of 41 in July 1932. From 1929 through 1933, more than 8,000 banks failed, industrial production fell more than 50 percent, and the nation's unemployment rate rose from 3 percent to 25 percent. At the time people believed that these events were intimately connected and that the Great Depression was caused, and/or severely aggravated, by serious defects in the structure and regulation of the financial system. More specifically, the failure of many financial institutions was alleged to be the result of (1) excessive and destructive competition among banks, which had led to the payment of unduly high interest rates on deposits, and (2) the granting of it was believed that banks sought out such loans and the high yields they carried because of the high rates being paid on deposits. When the stock market crashed, the value of the speculators' portfolios collapsed, leading them to default on their bank loans. The banks, in turn, became insolvent (bankrupt) or were left so weakened that depositors rushed to withdraw their funds.
Given this diagnosis, the legislative and regulatory remedies established at the time are readily understandable. Among the most widespread and ultimately pernicious "cures" was the establishment of maximum ceilings on the interest rates banks could pay on deposits. The ceilings, which were imposed under the Glass-Steagall Act of 1933, were popularly known as Regulation Q. Interest payments on demand deposits, which were the only type of checkable deposit in existence at the time, were prohibited, and interest payments on time and savings deposits were not to exceed the rate ceilings set by the relevant regulatory authority. The rationale for the ceilings was seductive and attractive: By holding down the rates on deposits (sources of bank funds), the rates on loans (uses of funds) could be held down. Banks would no longer need to seek out and grant high-risk, high-yield loans.
To further limit bank failures, the Glass-Steagall Act put deposit insurance into place with the creation of the Federal Deposit Insurance Corporation (FDIC). Most banks and other depository institutions are now fully insured up to $100,000. The presence of deposit insurance eliminated bank runs or bank panics in which depositors fearing that their bank would fail, "ran" to get their funds out.
In addition, the Banking Act of 1933 (also known as the Glass-Steagall Act) separated commercial banking from investment banking, which is the underwriting and marketing of primary corporate securities. Banks were no longer allowed to own or underwrite corporate securities. Thus, the assets commercial banks could hold were efficiently limited to cash assets, government securities, and loans. The commercial banks' role was to accept deposits paying up to the Regulation Q interest rate ceilings and to make predominantly commercial loans.
We have already seen the Fed is the most important regulator of commercial banks that are members of the Fed. The Fed also sets reserve requirements and provides discount facilities for all depository institutions. Under the regulatory structure that prevailed from the 1930s until the early 1980s, the Fed shared regulatory responsibilities with two federal bodies---the Comptroller of the Currency and the FDIC---and with state banking departments. Prior to the 1980s, the scope of regulation included more restrictions on entry, branching, types of assets and liabilities permitted, financial services that could be offered, and interest that could be paid on certain types of deposits and charged on certain types of loans. Today, banks have found ways around many of these regulations, and many regulations have been relaxed, if not totally eliminated. Recently, other regulations, dealing mainly with bank capital requirements and risk management, have gained in importance.
To aid in understanding this complex regulatory structure, it is useful to begin with the birth of a bank. None of us could just decide to open a bank tomorrow. Commercial banks in the United States are chartered, that is, they are given permission to engage in the business of commercial banking by either the federal government or one of the 50 state governments. When applying for a charter, the applicant must demonstrate a knowledge of the business of banking and have a substantial supply of capital funds. If a bank's charter is granted by the federal government, the bank is called a national bank. The office of the Comptroller of the Currency is the federal government agency charged with chartering national banks. For example, Wells Fargo Bank of San Francisco is a federally chartered bank. A bank can also be chartered by a state banking authority. This system, in which commercial banks are chartered and regulated by the federal government or a state government, is usually referred to as the dual banking system. Think of it as a duel chartering system.
Banks that are federally chartered must belong to the Federal Reserve System, and must subscribe to federal deposit insurance with the FDIC. The latter provides insurance for individual deposit accounts up to $100,000 per account and charges banks an insurance premium that varies with the reserves that the insurance fund has available. The premium is slightly more for high-risk banks. Thus, national banks are subject to the regulatory and supervisory authority of the Comptroller, the Fed, and the FDIC.
A state-chartered bank will be regulated by its banking authority. If it chooses to join the Federal Reserve System. the state bank will also have to subscribe to federal deposit insurance, since all Fed members must have FDIC insurance without joining the Fed.
One of the interesting and probably unique features of the system is that those being regulated can choose the regulator. In effect, they can "vote with their feet." By this I mean that banks can apply for either a state or federal charter, or attempt to shift from one to the other.
Historically, most banks, especially smaller ones, found it more profitable to be state-chartered non-Fed members. State banking authorities were often viewed as being more friendly in regulating and supervising institutions, and more lenient in allowing non-banking activities than their federal counterparts. In addition, the reserve requirements, which specify that a bank must hold reserve assets equal to a portion of its deposit liabilities, were often lowered for state-chartered/regulated banks than for national banks regulated by the Fed. Lower reserve requirements meant more potential profits. Because a smaller portion of deposits were held as reserve assets, a larger portion could be used for loans and other interest-earning investments. (Reserve requirements are now the same for all depository institutions.) Larger banks, which usually were Fed members, often provided nonmembers with many of the services the Fed would normally have provided. Fed members also have to buy stock in the Fed equal to 3 percent of their assets. The stock pays dividends that are lower than what banks could earn by making loans.
More than 97.5 percent of all banks have elected to be part of the FDIC. Apparently banks feel it is important to offer the depositors the safety and peace of mind federal deposit insurance engenders. For those who think this point is trivial, recall that in the midst of the Great Depression---between 1929 and 1933, to be exact---more than 8,000 banks failed in the United States. As those banks failed, depositors in other banks rushed to withdraw their funds out of fear that the problems would spread. Such a run on even a healthy solvent bank can cause severe difficulties because the bank's asset portfolio may be illiquid with not enough cash or liquid assets on hand to pay off the many depositors making withdrawals. Limiting cash withdrawals to, say, $25 a week, or closing the bank temporarily, as often occurred, reinforced the public's perception that this bank, and perhaps all banks, were in serious difficulty. As the epidemic spread, such illiquid banks were often forced out of business, and the entire financial system was threatened. In what must be judged one of the most successful pieces of legislation in history, Congress created the FDIC in 1933. This, by and large, halted the runs on solvent but illiquid banks, and thus, restored some stability to the banking and financial systems. Deposit insurance was first made a "full faith and credit obligation" of the federal government in 1989. Prior to that year, the FDIC was on somewhat the same footing as private insurance companies, in that the federal government was not required by law to pay off depositors if the FDIC ran out of funds in the face of widespread bank failures.
Clearly, having a dual banking system with a variety of regulatory authorities leads to a considerable overlap of responsibilities, with some institutions subject to regulation and supervision by as many as three regulatory authorities. In an attempt to minimize the overlap, primary regulatory responsibility for each category of banks has been assigned to one regulator, who then shares the resulting information. Regulatory responsibility has been distributed in the following manner: (1) the FDIC for state-chartered, insured banks that have not joined the Fed; (2) the Comptroller of the Currency for national banks, which also must be FDIC insured and Fed members; (3) the Fed for state-chartered, insured members of the Fed and all bank holding companies; and (4) the states for state-chartered banks that do not subscribe to FDIC insurance or belong to the Fed. Exhibit 1 gives additional details for each category.
1. Regulatory Responsibilities
FDIC:
Regulates state-chartered, insured, non-Fed members and insured branches of foreign banks
Comptroller of the Currency:
Regulates national banks that are not bank holding companies and federally chartered branches of foreign banks
Fed:
Regulates state-chartered, insured members of the Fed, all bank holding companies, and branches of foreign banking organizations operating in the United States and their parent bank
States:
Regulate state-chartered, non-FDIC-insured banks that are not Fed members
SOURCE: Federal Deposit Insurance Corporation.
Some people believe that the current set of regulations, supervising authorities, and statutes of the dual chartering system provides an incentive for local banks with state charters to adapt and structure their services, so as to fulfill the needs of the local community, while guidelines for federally chartered banks may relate to national and international concerns. They also argue that the dual system fosters competition and innovation among banks. Opponents of the dual system argue that the overlapping of regulatory agencies breeds considerable confusion and leads to lax enforcement; they maintain that this system gives banks considerable freedom to escape proper supervision and regulation.
*SOURCE: THE FINANCIAL SYSTEM & THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 253-258*
