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handle is hein.crs/govycu0001 and id is 1 raw text is: Conresoa Reeac Sevc 0 January 8, 2019 Introduction to Financial Services: The Regulatory Framework This In Focus provides a brief introduction to the federal agencies that regulate U.S. financial markets. For more detail, see CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework, by Marc Labonte. The Financial System Financial firms match the available funds of savers and investors with borrowers and others seeking to raise funds in exchange for future payouts. The products, instruments, and markets used to facilitate this matching are myriad, and they are overseen by a complex system of regulators. The financial system is often divided into banking, insurance, and securities markets. Securities are financial contracts that pledge to make payments from the issuer to the holder and are traded on markets. Contracts take the form of debt (a borrower and creditor relationship) and equity (an ownership relationship). Financial activity is inherently risky, but without risk- taking, businesses could not expand or innovate and households would be unable to purchase durable goods, education, and housing that could not be financed out of current income. Financial regulation aims to balance the benefits of finance with the risks that it poses. The Finanda Regulatory Framework Table 1 lists the federal financial regulators and whom they regulate. It categorizes those regulators as follows: * Depository regulators-regulate institutions (commercial banks, thrifts (savings associations), and credit unions) that accept customer deposits; * Securities markets regulators-regulate securities products, markets, and market participants. For regulatory purposes, securities markets can be divided into derivatives (whose value is based on an underlying commodity, financial indicator, or financial instrument) and other types of securities; * Government-sponsored enterprise (GSE) regulators-Congress created GSEs as privately owned institutions with limited missions and charters to support the mortgage and agricultural credit markets. It also created dedicated regulators exclusively to oversee the GSEs. * Consumer protection regulator-the Dodd- Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank Act; P.L. 111-203) consolidated and expanded jurisdiction over various consumer protection laws for certain financial products in a newly created agency, the Consumer Financial Protection Bureau. These regulators regulate financial institutions, markets, and products using licensing, registration, rulemaking, supervisory, enforcement, and resolution powers. Other entities that play a role in financial regulation are self-regulatory organizations, interagency bodies, state regulators, and international regulatory fora. Federal regulators generally play a secondary role in insurance markets, where state regulation predominates. Regulatory Fragmentation The financial regulatory system has been described as fragmented, with multiple overlapping regulators and a dual state-federal regulatory system. The system evolved piecemeal, as Congress responded to emerging issues, punctuated by major changes in response to historical financial crises. The most recent financial crisis also resulted in changes to the regulatory system through the Dodd-Frank Act and the Housing and Economic Recovery Act of 2008 (P.L. 110-289). To address the fragmented nature of the system, the Dodd-Frank Act created the Financial Stability Oversight Council (FSOC), a council of regulators and experts chaired by the Treasury Secretary. In practice, regulatory jurisdiction is typically based on charter type, not function. In other words, how and by whom a firm is regulated depends more on the firm's legal status than the types of activities that it is conducting. This means that a similar activity being conducted by two different types of firms can be regulated differently by different regulators. Financial firms may be subject to more than one regulator because they may engage in multiple financial activities. For example, a firm may be overseen by an institution regulator and by an activity regulator when it engages in a regulated activity and by a market regulator when it participates in a regulated market. Drawbacks to the fragmented regulatory system are the potential for jurisdictional gaps, which may cause regulatory myopia, and overlaps, which may cause redundant regulation. These gaps and overlaps could be exploited by financial firms to elude regulation or benefit from a race to the bottom in regulatory standards between competing regulators. Advantages to the fragmented system include more specialized regulators, with a deeper and more targeted knowledge of firms, products, and markets. In addition, overlapping regulators could reduce the likelihood of blind spots or group think in regulation. https://crsreports.congressge

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