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Legal and Regulatory Framework of Financial System

The OCC was established in 1863 as part of the Department of Finance to supervise state-chartered banks (“national” banks; 13 Stat. 99). The OCC regulates a variety of financial functions, but only for state-chartered banks. The head of the OCC, the Comptroller of the Currency, is also a member of the FDIC Board of Directors and a director of the Neighborhood Reinvestment Corporation. The OCC has audit powers to fulfill its responsibility for the safety and soundness of nationally chartered banks. The OCC has significant enforcement powers, including the ability to issue cease and desist orders and to revoke Bundesbank charters. Under the Dodd-Frank Act, the OCC is the primary regulator of government-chartered savings banks. Given concerns about the continued viability of GSEs, the impetus for the creation of the FHFA came from concerns about the risks – including systemic risks – posed by Fannie and Freddie. Both of these GSEs were profit-for-profit corporations owned by shareholders who used their government-sponsored status to amass more than $1.5 trillion in undiversified investment portfolios, consisting almost entirely of mortgages (and securities and derivatives based on those mortgages).37 After all, there are times when a solution is the only result.

Resolution is the process of liquidating or restructuring a financial institution in a way that minimizes damage to the economy. To ensure that businesses comply with regulations, they need to be monitored. Our monitoring work is intrusive and allows us to monitor financial service providers to ensure they are playing by the rules. The CFTC was created in 1974 to regulate commodity futures and options markets, which at the time were willing to expand beyond their traditional base in agricultural commodities to include contracts based on financial variables such as interest rates and stock indices.31 The CFTC was given “exclusive jurisdiction” over all contracts that had the “character” of options or futures. and these instruments should only be traded on exchanges regulated by the CFTC. In practice, it was not possible to impose exclusive jurisdiction as OTC derivative contracts, such as swaps that were not traded on an exchange, increased. The Commodity Futures Modernization Act, 2000 (P.L. 106-554), Congress exempted swaps from CFTC regulation, but this exemption was repealed by the Dodd-Frank Act after problems with derivatives in the financial crisis, including large losses at American International Group (AIG) that led to their rescue at the federal level.

Banks are required to keep their capital in reserve against the possibility of a loss in value of loan portfolios or other risky assets. Banks also need to be liquid enough to deal with unexpected outflows. Federal financial regulators consider compensation assets, risk-based capital requirements, asset quality, internal controls and other regulatory standards when auditing the balance sheets of affected lenders. While the FSOC does not directly supervise a financial institution, it plays an important role in regulation by designating firms and capital market providers as systemically important. Designated entities are subject to a consolidated safety and soundness oversight regime, administered by the Fed, which may be more stringent than the standards that apply to non-systemic entities. (The FSOC is also responsible for making recommendations to the Fed on standards for this regime.) In a limited number of other cases, regulators must seek the advice or approval of the FSOC before exercising new powers under the Dodd-Frank Act. Deposit insurance is the IDF administered by the FDIC and funded by risk-based assessments collected from deposit-taking institutions. The fund is mainly used for the resolution of failing or failing institutions. To protect the DIF, the FDIC uses its power to audit individual institutions and issue regulations for all insured deposit-taking institutions to monitor and enforce security and soundness. Under the principles of “immediate remedies” and “most cost-effective solution,” the FDIC has the power to resolve troubled banks rather than allow failing banks to enter the bankruptcy process.