Overview: The basics of banking regulations
Why regulations are needed in banking
We got to know about the many risks a bank faces in our last series on banking risks (click here to read the series). We also came to know about how a bank puts in place many rules, systems, and processes to protect itself from those risks. But we also came to know about how important the banking sector is to a country’s economy—governments also put in place many regulations for the banking sector.
These regulations aim to ensure that the risks are minimized. If any unforeseen event occurs, then the interests of bank customers are protected. On a wider scale, the regulations also seek to absorb and minimize shock in the economy.
The government carries out its regulations through a number of institutions called regulators. In the U.S., the main banking regulator that issues regulations for the banks to follow is the Federal Reserve (or the Fed). Look at the image above to see how the Fed is structured.
Other institutions, like the Federal Deposit Insurance Corporation (or FDIC) and the Office of the Comptroller of the Currency (or OCC), aid the Fed in regulating the banking sector. State-chartered banks and credit unions also have their separate regulators. We’ll look at the main regulators in the subsequent articles of this series.
Banks such as JPMorgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC), and other banks in an ETF like the Financial Select Sector SPDR Fund (XLF) need to follow these regulations.
However, before we move on to the regulations in a bank, we need to understand some technical terms related to banking regulations. We also need to know about some institutions that frame the regulations. Some of you may not be well-versed in, and may not know the importance of, some of these terms and institutions. So for the benefit of those individuals, we’ll explain these terms and institutions in the next parts of this series before moving on to banking regulations.