Banks and the Economy

Banks and the Economy

Banks and bank-like financial institutions operating within the United States and within most other countries must deal with extensive regulation in the form of rules and laws enforced by federal and state agencies. These regulations cover and monitor all areas of their operations, service offerings, credit quality and quantity, and the manner in which they grow and expand their facilities. This is primarily designed to protect the public interest, to encourage savings and investment by establishing an environment of economic soundness and stability, and to provide the public adequate financial information and credit without discrimination.

In the United States, banks are regulated through a dual banking system; they are governed at both the state and federal level. This was designed to give the states significant control over banks, and also to ensure that banks would be treated fairly as they expanded their operations across state lines. Regulatory agencies are responsible for gathering and evaluating the information necessary to assess the true financial condition of banks to protect the public against loss due to mismanagement, embezzlement or fraud through periodic examinations and/or audits. The main regulatory agencies at the federal level are the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation. The Federal Reserve Board is responsible for regulating the activities of state banks that are members of the Federal Reserve System, bank holding companies, the U.S. operations of foreign banks, and Edge Act and Agreement corporations. The Board approves or denies applications for merger, acquisitions and changes in control by state member banks and bank holding companies and approves or denies applications for foreign operation of member banks. In addition, Congress selected the Federal Reserve to write regulations implementing a number of consumer protection laws such as truth in lending and equal credit opportunity. Significant regulatory constraints were also placed on the banks in consequence of the era of "social responsibility" in the 1960's through the 1980s.In 1968, Congress passed the Consumer Credit Protection Act, known as "Truth in Lending", requiring banks and lenders clearly spell out consumers rights and obligations in loan agreements. In 1974, Congress passed the Equal Credit Opportunity act which would ensure that bank services be provided to the public without discrimination due to a customer's age, sex, national origin or religion, or because they were welfare recipients. In 1977, the Community Reinvestment Act prohibited U.S. banks from discrimination against a customer based on their location of residence. The Competitive Equality in Banking Act (1987) and the Truth in Savings Act (1991), required banks to more fully disclose information on their deposit policies and true rates of return.

Economic Development initiatives assist communities in creating sustained approaches to economic viability. Regulations also require a bank be evaluated on its record of community development services. In 1999, Bank Boston was cited for corporate achievement in Employee and Community Relations and given the Ron Brown Award for Corporate Leadership, the only such presidential award. The social responsibility laws did much toward ensuring the rights of bank customers and the public, but each law passed had the effect of increasing bank-operating costs. On November 27, 1991, Congress passed a banking bill called the Federal