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1 1 (January 5, 2023)

handle is hein.crs/govekbr0001 and id is 1 raw text is: Congre &conaI Resedrch Sen/ce hnorning Ah eg iltive debate sine 114 Updated January 5, 2023 Introduction to Financial Services: Banking Banks serve an important role in the financial system and broader economy. They aggregate the savings of households and businesses and lend to individuals, businesses, and federal and local governments. Economic output would be lower if, instead of banks, businesses had to finance investments themselves or individuals had to rely on their savings alone to make expenditures (e.g., home and car purchases). Banks also provide other important financial services, such as payment processing. This In Focus reviews key concepts in banking, provides an overview of banking-related regulations and recent banking regulation, and highlights emerging policy issues. Key Concepts in Banking The term bank generally refers to a depository institution, such as a commercial bank or thrift, that primarily accepts deposits, makes loans, and processes payments. To accept deposits, an institution must have a federal or state charter, and deposits are generally insured by the federal government, subject to certain limits. Using customer deposits and other funding, banks generally make loans and acquire certain other assets. (Credit unions are similar to banks in these ways but are distinct from banks in their ownership structure and regulation. This In Focus generally covers banks but notes information related to credit unions where pertinent.) Balance Sheet. An understanding of a bank's balance sheet-its assets, liabilities, and capital (equity)-provides the foundation for analyzing many banking issues. Loans made and securities owned by a bank typically comprise the majority of assets on a bank's balance sheet. To get the funding to make loans and acquire assets, banks use liabilities and capital. Customer deposits (e.g., checking and savings account deposits) and any debt that a bank issues (e.g., bonds, repurchase agreements) are liabilities of the bank, as the bank owes these funds to its customers and creditors. The difference between the assets and liabilities equals the bank's equity (assets - liabilities = equity). Equity can be thought of as stockholders' ownership stake. Deposit Insurance. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to a $250,000 account limit. (The National Credit Union Administration insures credit union deposits-sometimes referred to as shares.) By guaranteeing deposits, federal deposit insurance is intended to prevent bank runs and promote financial stability to the financial markets. Although the deposit insurance is funded by the industry, it is backed by the full faith and credit of the United States (and thus, ultimately by the taxpayers). Overview of Regukttion Two major components of bank regulation are prudential and consumer compliance regulation. Prudential. Prudential regulation (or safety and soundness regulation) is designed to promote bank profitability and avoid bank failures, thereby protecting taxpayers and the stability of the financial system. A bank's charter type and corporate structure determine its primary federal prudential regulator (see Table 1). Banks are chartered and regulated as national banks under the authority of the Office of the Comptroller of the Currency (OCC) or as state banks under the authority of a state regulator. The Federal Reserve (Fed) and the FDIC regulate state banks in conjunction with state bank regulators. Most banks are owned by a parent company-called a bank holding company (BHC). Some BHCs have subsidiaries that engage in nonbank financial activities, such as underwriting and dealing in certain types of securities. The Fed is the primary regulator of BHCs. Table I. Primary Federal Depository Regulators Regulator Oversees Office of the Comptroller Nationally chartered banks and of the Currency (OCC) national thrifts Federal Reserve (Fed) Bank holding companies and Fed member state banks and thrifts Federal Deposit Insurance Non-Fed member state banks Corporation (FDIC) and thrifts National Credit Union Federally chartered or insured Administration (NCUA) credit unions Source: CRS. Capital and liquidity rules are important prudential regulation tools. Holding a high level of capital can make a bank's failure less likely because capital can be written down to absorb losses. For this reason, banks are generally required to maintain sufficient levels of capital to ensure solvency and protect bank depositors and taxpayers. Banks need liquidity to meet short-term obligations. Thus, banks are generally required to hold liquid assets or use stable funding to ensure adequate liquidity. Consumer Compliance. Consumer compliance regulations seek to ensure that banks conform to applicable consumer protection and fair-lending laws. The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111- 203), is primarily responsible for issuing the rules that all banks must comply with. The CFPB is the primary supervisor for consumer compliance at banks with more than $10 billion in assets. Prudential regulators are the

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